It’s false advertising, Charlie Brown!

Consider this story about “canned pumpkin” actually being squash.  False advertising, even if compliant with FDA regulations?

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Star Trek, fan films and transformative use

I have a conversation with Henry Jenkins on these topics up at his blog.

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Advertiser’s self-voting on positive reviews as “helpful” may be false advertising

Vitamins Online, Inc. v. HeartWise, Inc., 2016 WL 5106990, No.
13-CV-982 (D. Utah Sept. 19, 2016)
Following
up on its previous opinion
, the court rules again about the possible
falsity of reviews posted in exchange for undisclosed gifts of the reviewed
product.
Vitamins Online sells dietary supplements online, including
on Amazon under the brand name NutriGold.  Defendant (NatureWise) does the same, selling
competing garcinia cambogia and green coffee supplements. Vitamins Online sold
its versions before 2010, but then Dr. Oz made them famous and caused competitors
to enter the market.  NatureWise had its
employees vote on the helpfulness of some of the reviews on its product pages,
promoting positive reviews and demoting negative reviews. NatureWise also
encouraged customers to post or repost their positive reviews on Amazon by
offering them free products or gifts cards; “NatureWise would review and, in
some cases, make minor edits to the reviews before asking the customers to post
them on Amazon.”  The number of positive Amazon
reviews a product receives affects that product’s position in Amazon search
results.
NatureWise argued that it didn’t make any false or
misleading statements, which led the court to a scholarly and thorough discussion
of omissions under the Lanham Act. 
Because the language of the Lanham Act bars “any word, term, name,
symbol, or device, or any combination thereof, or any false designation of
origin, false or misleading description of fact, or false or misleading
representation of fact” that constitute infringement or false advertising, false
advertising doesn’t “necessarily require a false or misleading description or
representation of fact.”  In other words,
“the statute unambiguously allows for a false advertising claim to be based on
the ‘any word, term, name, symbol, or device’ language as long as the use of
that conduct ‘in commercial advertising or promotion’ results in the unlawful
effect of ‘misrepresent[ing] the nature, characteristics, qualities, or
geographic origin of his or her or another person’s goods, services, or
commercial activities.’”
The court thought that NatureWise’s Amazon-related conduct
could fall under the concept of a “device.” 
Offering free products was a mechanism to increase positive reviews;
NatureWise also used a mechanism provided by Amazon “for the special purpose of
increasing the visibility of positive reviews and decreasing the visibility of
negative reviews.” 
NatureWise also argued that its conduct wasn’t “commercial
advertising or promotion” because it wasn’t the source of the statements at
issue (an argument already rejected above) and because there was no evidence
that the statements at issue were viewed by a sufficient number of the relevant
purchasing public.  The court rejected an
actual viewing standard, and held that “the test only requires a showing that
the information was sufficiently disseminated to the relevant purchasing
public.” The information at issue—the reviews and helpfulness votes—was available
on the NatureWise Amazon product pages. 
NatureWise only sells the products at issue on Amazon, so that
information was disseminated to all
of NatureWise’s actual or potential customers, which was enough to satisfy the
test.
But was there a misrepresentation?  Offering free products in exchange for
positive reviews wasn’t enough to show that that NatureWise’s conduct gave a
false or misleading representation of the nature, characteristics, or qualities
of NatureWise’s goods or commercial activities. Vitamins Online failed to show
that the reviews posted by the customers were not genuine.  But what about disclosing that they were in
exchange for free products? The FTC
thinks this disclosure is material to consumers to judge the credibility of the
review and therefore required
.  I
agree—I do give less weight to positive reviews with the required disclosure,
though I don’t discount them entirely. 
The court doesn’t discuss whether the reviews failed to disclose the
quid pro quo, just says that Vitamins Online didn’t show that the reviews were
false or misleading.
However, manipulating the prominence of the reviews block
voting on the helpfulness of the reviews could constitute a false or misleading
representation.  (Note that the reason
for this is essentially the same reason that quid-pro-quo reviews ought to be
disclosed!)  “The representation being
made by the placement of these reviews on the product page is that customers
wrote, posted, and rated the reviews and that the reviews that appear first in
the list are the ones that customers found to be most helpful.”  Distorted ranking of helpfulness could clearly
deceive consumers about which reviews were most helpful.
NatureWise argued that, to be actionable, an omission has to
relate to an affirmative claim, and that therefore there can be no liability
when it didn’t make any affirmative
claims.  But the court’s reasoning above
disposes of that argument (and NatureWise did make affirmative claims about
helpfulness/lack thereof of particular reviews to consumers).  “Because Vitamins Online has demonstrated
that the reality, that some customers and a block of employees of the
manufacturer voted on the helpfulness of some of the review, may be different
than the implied representation, that a certain number of customers voted on
the helpfulness of some of the reviews, the court concludes that genuine issues
of material fact exist as to whether the statements are false by necessary
implication.”
Section 43(a) is not a “federal codification of the overall
law of unfair competition,” but the court concluded by noting that, even under its
broad interpretation, several “causes of action related to unfair competition”
would still not be covered by the Act, including “trade secret violations,” “[c]ontractual
disputes,” and “false claims of trademark rights.”

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Speech in study would be commercial if knowingly false, court rules

Crossfit, Inc. v. National Strength & Conditioning Ass’n,
2016 WL 5118530,  No. 14cv1191 (S.D. Cal.
Sept. 21, 2016)
CrossFit generates revenue by credentialing and certifying
fitness trainers for a fee and through licensing the CrossFit trademark and
other intellectual property to affiliate gyms. The NSCA is a nonprofit
corporation that is “dedicated to the educational and professional exchange of
ideas in the areas of strength development, athletic performance, and fitness.”
It offers educational publications and also certifies fitness professionals for
a fee. One of the NSCA’s publications is its “flagship journal,” the Journal of
Strength and Conditioning Research (JSCR).
In November 2013, the JSCR published “Crossfit-based high
intensity power training improves maximal aerobic fitness and body composition.”
Though much of the article praised CrossFit’s effectiveness, one passage says:
Out of the original 54
participants, a total of 43 (23 males, 20 females) fully completed the training
program and returned for follow up testing. Of the 11 subjects who dropped out
of the training program, two cited time concerns with the remaining nine
subjects (16% of total recruited subjects) citing overuse or injury for failing
to complete the program and finish follow up testing.
Revisiting the point, the article says, “[a] unique concern
with any high intensity training programs such as HIPT or other similar
programs is the risk of overuse injury. In spite of a deliberate periodization
and supervision of our Crossfit-based training program by certified fitness
professionals, a notable percentage of our subjects (16%) did not complete the
training program and return for follow-up testing.”  The study received attention in social media
outlets and from news media.
CrossFit identified the individuals who purportedly did not
complete the study because of “overuse or injury,” and many of these
individuals provided declarations explaining their actual reasons for not
completing the challenge, which weren’t based on overuse or injury. The initial
manuscript submitted to the JSCR did not include any injury data, and the study’s
author said that he only included them after “the peer reviewers and JSCR
editors requested information about why 11 participants failed to test out.”
CrossFit argued that the inclusion of these data at the JSCR editorial staff’s
direction was evidence of the NSCA’s desire to “manufacture a ‘scientific’
study concluding CrossFit training was unsafe.” JSCR’s Managing Editor wrote: “You
also need to caution readers as to the context of your findings due to the fact
many people do get injured doing these types of workouts,” directing the study’s
author to another study finding CrossFit to be dangerous, authored by the
Managing Editor himself.
The JSCR published an erratum stating:
After the article was published, 10
of the 11 participants who did not complete the study have provided their
reasons for not finishing, with only 2 mentioning injury or health conditions
that prevented them from completing follow-up testing. In light of this
information, injury rate should not be considered a factor in this study. This
change does not affect the overall conclusion of the article.
CrossFit submitted a consumer survey on materiality. Some
participants saw the original statement reporting a 16% injury rate and others saw
a modified version with the language “CrossFit’s programs injury rates are very
much in line with injury rates for the physical fitness industry as a whole.”
Respondents exposed to the former “[w[ere 2.4 times as likely to rate CrossFit
training as dangerous,” and were “twice as unlikely to say they would purchase
a 12 month trial membership for CrossFit training.”
The court granted summary judgment on literal falsity,
though other elements of CrossFit’s claims remained.  In particular, the NSCA argued that the
journal article was noncommercial speech fully protected by the First Amendment
and not subject to the Lanham Act.
The court noted that speech can be commercial even when it
contains “discussions of important public issues.” Further, courts must be
particularly careful when reviewing causes of action directed toward academic
works, “because academic freedom is ‘a special concern of the First Amendment.’
“ ONY, Inc. v. Cornerstone Therapeutics, Inc., 720 F.3d 490 (2d Cir. 2013).  However, ONY
was careful to limit its scope to cases in which “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.”  ONY
noted that “it is relevant that plaintiff does not allege that the data
presented in the article were fabricated or fraudulently created.”  Query: Why does falsity of data bear on the
classification of the article as commercial or noncommercial speech?  ONY actually
doesn’t present itself as a commercial speech case—defendants were allowed to
make their claims, as long as they were accurate descriptions of the data and
methodology, in classic ads too. 
Nonetheless, the court here held:
a reasonable fact finder could
conclude that the NSCA fabricated the injury data and published them in the
JSCR knowing they were false with the intention of protecting its market share
in the fitness industry and diminishing the burgeoning popularity of the
CrossFit program. If the trier of fact were to draw that conclusion from the
evidence, the injury data would be commercial speech.
Analytically speaking, this puts the cart before the horse—you
only know if it’s commercial speech once you know it’s false.  (Next query: what if this wasn’t knowing
falsity, just falsity, which is generally sufficient under the Lanham Act and
which the court has already found to exist? 
Why would state of mind be relevant to whether this is commercial
speech?)  It might be a reasonable
practical compromise, however, especially given that I’m no great fan of ONY.
The court here continued that the paper as a whole was far
more than a proposed commercial transaction, “but the excerpts based on
potentially fabricated data about a competitor’s product may nonetheless be
commercial speech.” A reasonable fact finder
could conclude that the NSCA
pressured the authors to include data disparaging CrossFit’s exercise regimen,
and the editor-in-chief’s admonition—“[r]emember the paper can still be
rejected if the reviewers are not impressed with the sophistication of the
revisions made”—could be construed as a veiled threat that the JSCR would not
be interested in publishing the Devor Study if it did not include information
showing “the fact many people do get injured doing these types of workouts,”
whether or not that “fact” was true in this qualitative study.
However, a reasonable factfinder could also conclude that “the
editor-in-chief was simply bringing his knowledge of the fitness industry to
bear and sincerely believed (or for that matter still believes) that CrossFit
has a high injury rate, as opposed to an attempt to denigrate CrossFit for the
NSCA’s benefit.”
Under the Bolger
factors, the study didn’t explicitly promote the NSCA’s products or services, and
wasn’t typical advertising content. The factor dealing with reference to a
specific product, though typically geared to self-promotion, could also apply
to disparagement of another’s product, especially given that the Lanham Act
explicitly reaches such disparagement. 
And NSCA had an economic motive for publishing the data.  Nor were the noncommercial elements of the
study inextricably intertwined with commercial speech:
[A]ssuming the injury data were
false and injected into the article to deride CrossFit’s product, it would have
been easy enough to publish an article with data that were not made up, and one
could easily imagine the Devor Study without the statements premised on these
false data. In fact, the Erratum shows that the parts of the article that may
constitute commercial speech are not inextricably intertwined with the
remainder of the article.

The court also allowed California FAL and trade libel claims
to proceed.  Though trade libel usually
requires a showing of special damages, some cases have allowed plaintiffs to
show instead a “general loss of custom[ers],” by “showing an established
business, the amount of sales for a substantial period preceding the
publication, the amount of sales subsequent to the publication, [and] facts
showing that such loss in sales were the natural and probable result of such
publication.”  CrossFit might be able to
satisfy that standard.

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FTC wins second appellate victory over 230 defense

FTC v. LeadClick Media, LLC, 151009cv
(2d Cir. Sept. 23, 2016)
The FTC and Connecticut sued LeadClick over its role in the
use of deceptive websites to market weight loss products. LeadClick managed a
network of aliates/publishers to advertise the products of LeadClick’s
merchant client, LeanSpa.  Some
affiliates created deceptive websites making false efficacy claims, including
claims about independent testing and testimonials.  The FTC also sued CoreLogic, LeadClick’s parent company, as a
relief defendant. The court of appeals rejected LeadClick’s §230 defense, but
did let CoreLogic off the hook for $4.1 million in relief.
Facts: Until it went out of business in 2011, LeadClick
operated an affiliatemarketing network, connecting
merchant clients to thirdparty publishers/affiliates who
advertised the merchant’s
products. The affiliates used email marketing, banner ads, searchengine
placement and websites they created. LeadClick managed the affiliate network
through tracking software, referred to as “HitPath,” that would “track the flow
of traffic from each individual affiliate’s marketing website to the merchant’s
website while remaining invisible to the consumer.”
LeadClick’s affiliate managers were responsible for scouting
and recruiting new affiliates, researching affiliates, and matching affiliates
with particular merchant offers. “LeadClick would review and control which
affiliates were selected to provide online advertising for each merchant’s
offer.”  LeadClick also was a media
buyer: it bought space for banner ads from well-known websites, then resold the
space, sometimes to affiliate marketers, at a markup.
LeanSpa hired LeadClick in September 2010.  LeanSpa paid a set amount, typically $35 to
$45, each time a publisher’s
ad led a consumer to LeanSpa’s
landing page and that consumer enrolled in LeanSpa’s freetrial
program.  LeadClick paid 80-90% of that
to the publisher and kept the rest. To track individual consumer actions,
LeadClick routed consumers through the HitPath server to the LeanSpa website
via publisher-unique links. 
LeadClick became LeanSpa’s primary marketing network, and
LeanSpa became LeadClick’s top customer, responsible for about 85% of all
eAdvertising division sales, or $22 million in billing.  LeanSpa was chronically behind on its
payments to LeadClick, but ultimately paid LeadClick $11.9 million.  Following industry practice, LeadClick paid
publishers before getting paid by LeanSpa, and ultimately terminated its
business arrangement with LeanSpa.
Some of LeadClick’s affiliates used fake news sites, which “looked
like genuine news sites: they had logos styled to look like news sites and
included pictures of supposed reporters next to their articles.” Theygenerally
represented that a reporter had performed independent tests that demonstrated
the efficacy of the weight loss products and included a “consumer comment”
section, where fake “consumers” praised the products.  The vast majority of LeadClick traffic to
LeanSpa’s websites came from fake news sites.
The evidence showed that LeadClick (1) knew that fake news
sites were common in the affiliate marketing industry and that some of its
affiliates were using fake news sites, (2) approved of the use of these sites,
and, (3) on occasion, provided affiliates with content to use on their fake
news pages. For example, one LeadClick employee told an affiliate interested in
marketing LeanSpa offers that “News Style landers are totally fine.” Another
employee told a potential new client that “[a]ll of our traffic would be
through display on fake article pages.” LeadClick’s standard contract with
affiliate marketers also required affiliate marketers to submit their proposed
marketing pages to LeadClick for approval before they were used. 
LeadClick employees also requested content edits to some
fake news sites.  For example, after
hearing of a state action against another network for false advertising, a
LeadClick employee reached out to an affiliate to “make sure all [his] pages
[were] set up good[,] like no crazy [misleading] info.” The affiliate responded
that he was removing references to his page being a “news site” and thinking of
“removing the reporter pics” from the site to be safe.  The LeadClick employee advised him not to
stop using the fake reporter’s picture, but to “just add [the term]
advertorial.” Another time, LeadClick employee advised the affiliate to delete
references to acai berry on his fake news site and instead use words like “special
[ingredient], formula, secret, bla, bla, bla” because “we noticed a huge
increase in [actions] with stuff that doesn’t [s]ay acai.”  Providing feedback on another page, another
employee stated that the site “looks good except you CANT say anything about a
free trial.. [sic] I need that removed,” and noted that “[i]t is much more
realistic if you say that someone lost 1012 lbs in 4 weeks rather than
saying anything more than that.”
LeadClick also sometimes purchased ad space on genuine news
sites for banner ads that would link to the fake news sites promoting LeanSpa’s
products as part of its media buying business. 
LeadClick sometimes identified fake news sites as destination pages for the
banner ads when negotiating with media sellers by emailing the media seller a
compressed version of an affiliate’s page or providing the web address for the
destination page.
LeadClick argued that it couldn’t be held liable under
Section 5(a) of the FTCA because it didn’t create the deceptive content, and
the content wasn’t attributable to it. 
The court of appeals responded that, “under the FTC Act, a defendant may
be held liable for engaging in deceptive practices or acts if, with knowledge
of the deception, it either directly participates in a deceptive scheme or has
the authority to control the deceptive content at issue.”  This is consistent with the case law in other
circuits, which also hold that “a deceptive scheme violating the FTC Act may
have more than one perpetrator.”  The
rule that a defendant who knows of another’s deceptive practices and has the
authority to control those deceptive 
acts or practices, but allows the deception to proceed, can be liable is
consistent with the longstanding rule that “an omission in certain
circumstances may constitute a deceptive or unfair practice.”  (Very nice equivocation on the meaning of “omission,”
which in this context usually refers to an omitted statement, not an omitted action.)
Though the FTCA doesn’t expressly provide for aiding and
abetting liability, that wasn’t the kind of liability being imposed.  A defendant with knowledge of deception who
directly participates or who has the authority to control the deceptive
practice, but doesn’t, is itself engaged in an deceptive practice.  
That standard was satisfied here, as the evidence showed.
Direct participation was shown by the facts that a LeadClick employee “scouted”
fake news websites to recruit potential affiliates for the LeanSpa account; LeadClick
employees required alterations to the content of its affiliates’ fake news
pages by instructing them to revise their pages to comply with explicit
directives from LeanSpa; a LeadClick employee instructed an affiliate to check
that his fake news site was not “crazy [misleading]” and advising him not to
remove the reporter photograph, but to “just add advertorial”; LeadClick
employees advised affiliates on the content to include in their pages to
increase consumer traffic (telling an affiliate “[i]t is much more realistic if
you say that someone lost 1012 lbs[.] in 4 weeks rather than
saying anything more than that”); and LeadClick purchased banner ad space on
genuine news sites to resell that space to affiliates running fake news pages
to “generat[e] quality traffic in very lucrative placements.”
Likewise, LeadClick had the authority to control the
deceptive practices of affiliates that joined its network, but didn’t.  Ultimately, “[a]s the manager of the
affiliate network, LeadClick had a responsibility to ensure that the
advertisements produced by its affiliate network were not deceptive or
misleading. By failing to do so and allowing the use of fake news sites on its
network, despite its knowledge of the deception, LeadClick engaged in a
deceptive practice for which it may be held directly liable under the FTC Act.”  Moreover, LeadClick was directly liable “regardless
of whether it intended to deceive consumers ‐‐ it is enough that it
orchestrated a scheme that was likely to mislead reasonable consumers.” 
What about the CDA? Under §230, a provider of an interactive
computer service won’t be held responsible “unless it assisted in the
development of what made the content unlawful.” 
See FTC v. Accusearch Inc.,
570 F.3d 1187 (10th Cir. 2009).  The
court here doubted whether LeadClick was even an interactive service provider,
because it didn’t provide “computer access in the sense of an internet service
provider, website exchange system, online message board, or search engine.”  Its routing of consumers from its affiliates’
webpages to LeanSpa’s websites via the HitPath server “was wholly unrelated to
its potential liability under the statute”—that is, none of the acts for which
it was being held liable depended on the fact that it provided that routing,
which was just done to keep track of who it was supposed to pay.  If it had contracted out that function, it
would still have been the actor responsible for all the acts the court
previously deemed to justify direct liability.
More disturbingly, the court reasoned that this “service”—access
to the HitPath server—wasn’t the kind of activity Congress intended to protect
in granting immunity, because the routing “was invisible to consumers and did
not benefit them in any way. Its purpose was not to encourage discourse but to
keep track of the business referred from its affiliate network.”
But none of this matters, because LeadClick was an
information content provider with respect to the content at issue. It
participated in the development of the deceptive content: it recruited
affiliates for the LeanSpa account that used false news sites; it paid those
affiliates to advertise LeanSpa products online, knowing that false news sites
were common in the industry (if this is participation, §230 protection is a
dead letter); it occasionally advised affiliates to edit content on affiliate
pages to avoid being “crazy [misleading],” and to make a report of alleged
weight loss appear more “realistic”; and it bought ad space from legitimate
news sites, “thereby increasing the likelihood that a consumer would be
deceived” by the fake news sites. 
LeanClick’s managerial role “far exceeded that of neutral assistance.”
Further, LeadClick wasn’t being held liable as a publisher
or speaker of another’s content, but for its own deceptive acts or
practices.  This is a version of the
agency argument I’ve made before, I think, but it means we have to be very
careful about when failure to act (omission) counts as a deceptive act or
practice. Here, the court reiterated that LeadClick’s own conduct was “providing
edits to affiliate webpages, … purchasing media space on real news sites with
the intent to resell that space to its affiliates using fake news sites, and [having]
the authority to control those affiliates and allow[ing] them to publish
deceptive statements.”  I imagine Eric Goldman
will be none too pleased, but it does seem significant that the editing
suggested was to increase deceptiveness, not just to increase the
attractiveness of the content.
Finally, relief defendant liability: In 2005, CoreLogic’s
predecessor bought LeadClick (as an indirect owner through its wholly owned
subsidiary CLUSI). In 2010, LeadClick became a direct subsidiary of CoreLogic,
and a sister company to CLUSI.  During
the restructuring, CoreLogic transitioned LeadClick and six of its sister
subsidiaries into a “shared services system” to streamline and enhance back
office functions across the subsidiaries. Shared services programs allow
related entities to consolidate some or all of their backoffice
functions, such as accounting, legal and compliance, human resources, and
information technology, into a single office.
When LeadClick accrued a payable expense, CoreLogic would
make the payment directly on its behalf, and track the payment as an advance to
LeadClick. Both LeadClick and CoreLogic intended that LeadClick would later
reimburse CoreLogic for those advances, and ultimately LeadClick repaid a total
of $8.2 million of its advance balance to CoreLogic.  Half of this amount was repaid in a single
cash transfer of $4.1 million in August 2011, the month before LeadClick ceased
business.  The district court treated
that transfer as gratuitous and held CoreLogic liable as a relief defendant.

The court of appeals found that CoreLogic was not an
appropriate relief defendant because CoreLogic had a legitimate claim to repayment
of its prior advances to LeadClick.  A
relief defendant needs a legitimate claim, which can be based on an outstanding
loan, but not on a gratuitious transfer. 
Though CoreLogic lacked a formal loan agreement, the transfer of $4.1
million was  the repayment of an outstanding
intercompany loan, implemented as part of its shared services agreement under
which CoreLogic had previously paid LeadClick’s accounts payable. Shared
services agreements generally don’t involve formal debtor-creditor
relationships, since such documentation “is incompatible with the very purpose
of shared services: streamlining operations and increasing efficiency by
reducing excess paperwork.” Because the companies were consolidated under
general accounting principles for public companies, an interest charge would be
inappropriate. “Under these circumstances, the lack of a formal loan agreement
does not create suspicion that the transactions were a sham.”

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43(a) question of the day

Actors who played doctors on TV evoke their roles for Cigna ad:  any false endorsement implications for Cigna? Tagline: “They’ve saved lives on TV, but now they’re helping save lives for real by teaming up with Cigna to encourage America to get an annual check-up. Get ready to go, know and take control of your health with the TV Doctors of America.”

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Advertising question of the day

Does the following pose any advertising issues?  Does it matter whether the business sells non-organic food?

Thanks to James Grimmelmann for the photo.

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