There’s only one master of The Commodores: the group itself

Commodores Entertainment Corp. v. McClary, 2018 WL 327302, No.
16-15794 (11th Cir. Jan. 9, 2018)
McClary was an original member of the award-winning
Commodores, but, by his own admission, he “split from the band” in 1984 to
strike out on his own in the world of music. He later formed a musical group
that performed as “The 2014 Commodores” and “The Commodores Featuring Thomas
McClary.” CEC, a corporation run by two original Commodores who remain active
with the group, found out about McClary’s group, sued for trademark
infringement, trademark dilution, passing off, false advertising, and unfair
competition. The court of appeals affirmed a permanent injunction against
McClary, who left behind his common-law rights to the marks when he left the
band.
The original members of the Commodores “are generally
regarded as William King, Ronald LaPread, Thomas McClary, Walter Orange, Lionel
Richie, and Milan Williams,” who formed a general partnership with their
manager in 1978. The agreement said: “Upon the death or withdrawal of less than
a majority of the Partners, the remaining majority of the Partners shall
continue to have the right to use the name THE COMMODORES for any purpose.”  Its agreement with Motown Records also
restricted use of the name: band members could perform as “sidemen” for other
artists and groups, but “in no event” could they use the name “Commodores” in
connection with that engagement.  Richie
left the group and the manager passed away. 
A revised 1984 agreement stated: “Upon the death or withdrawal of less
than a majority of the Partners, the remaining majority of the Partners shall
continue to have the right to use the Group Name for any purpose.”  Later that year, McClary “split from the
band” to pursue his own solo career. J.D. Nicholas joined the group, while LaPread
and Williams departed from the group, leaving King and Orange as the only
remaining original members. At some point, King and Orange transferred their
common-law trademark rights in The Commodores’ name and logo to plaintiff CEC,
which registered four COMMODORES trademarks in 2001.
In 2009, McClary performed with Richie and LaPread at the
Superdome in New Orleans. McClary’s wife sent an email advertising the show as
a Commodores reunion, and CEC objected. In 2010, McClary was asked to fill in
as a guitar player when The Commodores’ regular guitar player became ill.
McClary appeared with The Commodores two or three times and signed autographs
with The Commodores’ members. In 2013, McClary formed the group “Commodores
Featuring Thomas McClary.” His group began performing under the names
“Commodores Featuring Thomas McClary” and “The 2014 Commodores,” and he
scheduled a performance at a New York venue on July 6, 2014. On June 5, 2014, a
friend called King to ask about the performance, thinking that it was an
official Commodores show. King and Orange’s manager contacted the executive
director of the venue, who said he thought he had booked the Grammy
Award–winning Commodores—not a tribute or cover band featuring a former member.  (McClary had no involvement in the single
that won the Grammy.)  A few days later,
McClary’s wife sent a C&D claiming that McClary’s band name constituted
fair use and asserted that CEC was interfering with McClary’s ongoing business
relationships.
The district court enjoined McClary from “using any of the
Marks at issue in a manner other than fair use, including performing under the
name ‘The Commodores featuring Thomas McClary’ or ‘The 2014 Commodores’ ” based
on the trademark infringement claim. The district court clarified that the injunction
covered upcoming extraterritorial performances in the United Kingdom and
Switzerland because use of the marks overseas would have a substantial and
negative impact on CEC.
The court of appeals agreed with the district court that
McClary walked away from his common law rights to the marks when he left the
band in 1984.  Those rights remained with
the group, then were validly assigned to CEC.
McClary offered the testimony of an attorney, Wolfe, on the
validity and value of the marks, the goodwill associated with the marks, the
validity of the assignment to CEC, the difference between statutory and
common-law trademarks, and whether CEC breached duties owed to its shareholders.  After reviewing Wolfe’s report and hearing
his testimony outside the presence of the jury, the district court excluded the
testimony entirely, and the court of appeals found no abuse of discretion.  Wolfe’s expert was “replete with legal
opinion,” offering the legal view that the original members “owned the
underlying marks jointly as tenants in common, owning an undivided interest in
the totality of the partnership assets” and similar legal conclusions, invading
the court’s exclusive prerogative to determine the law.  His proposed trial testimony was no better:
he said, inter alia, that a hiatus from a band is not enough to relinquish
ownership in the band; and that “[t]here are multiple ways in which an owner of
a mark can continue to participate and exploit that mark even though they may
not be standing up on stage and performing.” 
Opinions on music industry customs and norms weren’t offered in his
expert report and he was also properly excluded from discussing those
topics.  Although an attorney was allowed
to testify for CEC, he was offered as a fact witness who testified about
McClary’s interactions with the group, the letter he received from McClary, and
whether any group member had formally voided his shares in the corporation.
There were no contested facts that would lead a reasonable
juror to say that McClary should properly be termed the legal owner of the
trademarks and allowed to use them to identify the source of his separate services.  The court of appeals found two distinct but
reinforcing reasons for this: “First, the common-law trademark rights were
initially jointly owned, could not be divided for simultaneous use by multiple
independent parties, and remained in the group continually known as ‘The
Commodores.’” Second, the parties’ various contractual agreements “confirm the
group members contemplated that the marks were to be jointly but not severally
owned and, in addition, that a member leaving the group would cease using the
group’s name as an identifier.”
The court of appeals reasoned that, once trademark meaning
was established, the original group, including McClary, had common-law rights
to the marks.  But ownership was joint—leaving
was like dying in a joint tenancy; McClary carried no rights with him when he
left. “[O]wnership of the marks began in, remained in, and could not be divided
from the group, as opposed to its individual members.” King and Orange were the
only original members of “The Commodores” who maintained continuity with the
performing group since McClary’s departure, and that group continued to perform
as “The Commodores” in the years after he left. 
McClary lacked control over that group. 
Though he performed with The Commodores in 2010, there was no evidence
that at he was being invited to rejoin the group as a permanent or otherwise
ongoing member; instead he performed “with The Commodores.” “Even if the
evidence could support a finding that McClary rejoined the group—and in no way
does it afford that inference—it could not support the conclusion that McClary
should be able to use the group’s name while performing separately from the
group.”  Collecting royalties didn’t
indicate that McClary retained rights to the marks, because he only collected
royalties for the songs he wrote with the band before his departure; if
anything, that temporal distinction supported the contention that he no longer
had rights in the marks.
Even if McClary never formally left the partnership, none of
the relevant agreements allowed him the right to use the marks in connection
with his own musical performances.  That
isn’t meant to diminish his contribution or that of other founding
members.  Lionel Richie said that he
would “always be a Commodore,” but when asked if he “identif[ied] with being in
the group now,” he said he didn’t. “While an individual might identify with a
name, he still might not have the right to use that name to identify himself in
commerce.”
McClary argued that the injunction was overbroad because it
prevented him from “hold[ing] himself and his music out to the public in an
historically accurate way.” But CEC didn’t object to McClary billing himself as
“Thomas McClary, founder of The Commodores” and other fair uses.  They objected to names like “The 2014
Commodores” or “The Commodores featuring Thomas McClary.” Thus, McClary “could
either perform under a different band name without causing any confusion, or,
to uphold his notoriety as a Commodore, he could make fair use of the Marks.”  The court of appeals declined to further
enumerate which fair uses would be appropriate; that would be an advisory
opinion.
Nor was the injunction overbroad because of its
extraterritorial reach. The parties were citizens of the US; McClary’s booking
agent operated from the US; and “use of the marks extraterritorially w[ould]
have an effect on CEC, a United States corporation.” And “given the actual
confusion that was experienced in the United States in connection with the New
York performance, it is likely that McClary’s use of the marks abroad would
create confusion both abroad and in the United States.” Though this was a closer
question, there was no interference with the sovereignty of other countries
because McClary didn’t have final approval for registrations in other countries,
even though McClary’s corporation filed for a CTM in the EU, and OHIM denied
CEC’s opposition. CEC appealed the denial of its opposition, so the opposition hadn’t
yet been “rejected by a definitive decision,” and no CTM had yet issued.
McClary also argued the federal registrations of the marks
were fraudulent and defective. But this had no relevance to the common-law rights
to the marks. And it was wrong anyway: McClary’s claims of fraud failed for
want of any evidence that CEC knowingly made false representations of fact; his
burden was to show fraud by clear and convincing evidence.  Nor did challenges to the stated dates of
first use and first use in commerce matter. “A misstatement of the date of
first use in the application is not fatal to the securing of a valid
registration as long as there has been valid use of the mark prior to the
filing date.”

Finally, McClary’s laches defense failed. He claimed to have
used the marks with CEC’s knowledge since 1984, but offered no facts or details
about any use between 1984 and 2010.  In
May 2009, when McClary’s wife sent a blast email advertising a Commodores
reunion, CEC promptly sent a C&D to which McClary never responded. When CEC
learned about of McClary’s “The 2014 Commodores” or “The Commodores Featuring
Thomas McClary,” CEC promptly filed suit two months later. Moreover, McClary didn’t
show prejudice from any delay. 

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“I’m your lawyer” might be false advertising when lawyer’s firm won’t do the work

Rosenbaum & Assoc., P.C. v. Morgan & Morgan, 2018 WL
327167, No. 17-4250 (E.D. Pa. Jan. 8, 2018)
A Philadelphia personal injury law firm that advertises
extensively on TV and billboards alleged that a national personal injury law
firm’s expansion into Philadelphia caused it to lose potential personal injury
clients through TV and billboard ads when the national law firm didn’t, and
never intends to, represent Pennsylvania personal injury clients. Instead, it
allegedly referred all or a vast majority of potential local clients to other
law firms in exchange for a referral fee if the client eventually recovers.  The court allowed plaintiffs to proceed
against the national firm, its managing global partner and (for one statement)
the national firm’s senior partner for four possibly false, deceptive or
misleading statements in TV commercials.   In one TV ad, John Morgan, a founding Morgan
& Morgan attorney, states “I’m not just any lawyer, I’m your lawyer,”
though he’s not licensed in Pennsylvania. 
Another ad says “we’re all here for you,” and, “our family is here for
your family.” In addition, an ad says “you don’t pay us unless we’re
successful.” Although this is true, Rosenbaum argued that it could be deceptive
because it suggests Morgan & Morgan needs to be successful when, in fact,
Morgan & Morgan has no role in the success. 
Ads used to include a written disclaimer claiming not to be “a referral
service.” After the lawsuit was filed, Morgan & Morgan revised this
disclaimer to remove that statement and add “Cases may be referred to and
handled by another law firm as co-counsel.”
The complaint stated a plausible claim that “I’m your
lawyer” was misleading or literally false because it could deceive Pennsylvania
consumers into believing John Morgan would personally represent then when in
reality he wouldn’t represent, and arguably couldn’t represent, them in a
Pennsylvania personal injury matter. Unidentified members of the Morgan family also
appeared in a television ad and a voice states “We’re all here for you” and
“Our family is here for your family.” This also plausibly stated a claim for
misleading or literally false advertisingbecause Morgan & Morgan didn’t
employ attorneys licensed to practice in Pennsylvania and the members of the
Morgan family appearing in the advertisement allegedly weren’t licensed to
practice in Pennsylvania and didn’t intend to ever represent clients in the
Philadelphia area.
“You don’t pay us unless we’re successful”: Similarly, this
could be misleading or literally false insofar as Morgan & Morgan would
never represent the clients in the Philadelphia area, meaning a client could never
owe fees to Morgan & Morgan because Morgan & Morgan could never be
successful. [This seems to be necessary implication: the necessary implication of “unless” is that “we might be successful” and further “it will be ‘we’ representing you.”] “Not a referral service” and the revised disclaimer “may be
referred to and handled by another firm as co-counsel”: Morgan & Morgan
argued Rosenbaum couldn’t claim to be a “referral service” without implicating
Pennsylvania Rule of Professional Conduct 7.2(k), but there’s an absence of
authority defining referral service. The comments to Rule 7.2 (k) say that it’s
“misleading to the public for a lawyer or law firm, with knowledge that the
lawyer or law firm will not be handling a majority of the cases attracted by
advertising, to nonetheless advertise for those cases only to refer the cases
to another lawyer whom the client did not initially contact.”  Because this question “involves both a fact
investigation of the extent of these referrals as opposed to retained matters
and eventually a determination of whether telling potential clients of your
interest in being their lawyer when, in fact, you do not intend to be their
lawyer is unfair competition,” it couldn’t be resolved at the motion to dismiss
stage.

Rosenbaum also pled a claim against individual attorneys who
allegedly “authorized and approved the acts of unfair competition,” and as to
which he alleged “some specific role in the statements which equate to unfair
competition,” whereas merely being a senior officer of the advertiser wasn’t
enough.  Being a spokesperson in the ad,
unsurprisingly, was enough.  So was the
allegation that the global managing partner “approved” and “authorized” the
advertisements to be shown in the Philadelphia area.  Other named defendants, however, weren’t
sufficiently alleged to be personally involved, even if they were Morgan family
members who appeared in an ad; the “family” statements were made by voiceover
and it wasn’t clear who said it.  Appearing
in a commercial where an alleged misrepresentation is also stated “without more
detail is not sufficient to show they ‘actively participated in or personally
directed or actively supervised or approved of or sanctioned’” the allegedly
false ads.

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Finding of willful infringement still doesn’t merit injunction under Herb Reed

A.C.T. Prods., Inc. v. W.S. Indus., Inc., No. 16-0476, 2017
WL 4708152 (C.D. Cal. Jul. 14, 2017)
Herb Reed strikes
again.  The jury found that defendant had
engaged in willful trademark infringement and false advertising, but also that
the four-year statute of limitations had run. The court found that there was
sufficient evidence before the jury to so hold, because of evidence that the
defendant was infringing before the limitations period by being willfully blind
to infringement: it was aware that it was buying the products at issue from a
manufacturer that did not own the mark.
The plaintiff argued that the jury’s findings were
irreconcilably inconsistent, but that wasn’t the case. It was possible to
reconcile the jury’s conclusion as to liability with the factual finding
establishing the affirmative defense because there was evidence that willful
infringement and advertising occurred only from 2010 to 2011.  Once the jury found that the plaintiff knew
before the relevant timeframe, the court could conform the determination of
liability to the factual finding.

In addition, a permanent injunction was unwarranted, because
the plaintiff didn’t show irreparable injury. 
 The plaintiff argued that the
infringement (1) damaged its reputation and goodwill because its witness
testified during trial that its customers called to complain about the
defendant’s inferior goods that they thought were manufactured by the plaintiff;
and (2) caused the loss of business opportunities because the parties
competed.  Economic injury won’t suffice
to show irreparable harm, but intangible injury like loss of customers or
damage to a party’s goodwill can do so, as can lost control over a
business.  Here, the allegations of harm
to business, goodwill, and reputation were in the past tense, and there was no
evidence of continued infringement or an inclination to restart, nor any
evidence of continuing customer complaints, making continuing reputational harm
speculative. The jury’s finding of the affirmative defense of statute of
limitations also weighed against an injunction. 

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“pregnancy center” wasn’t commercial speaker and couldn’t be forced to disclose anti-abortion stance via mandatory label

Greater Baltimore Center for Pregnancy Concerns, Inc. v.
Mayor of Baltimore, 2018 WL 298142 (4th Cir. Jan. 5, 2018)
The court of appeals affirmed the invalidation of an
ordinance requiring pregnancy clinics that do not offer or refer for abortions
to disclose that fact through signs posted in their waiting rooms: “The City
has considerable latitude in regulating public health and deceptive
advertising. But Baltimore’s chosen means here are too loose a fit with those
ends, and in this case compel a politically and religiously motivated group to
convey a message fundamentally at odds with its core beliefs and mission.”
As applied to the Center at issue, the ordinance didn’t
regulate commercial speech.  Its speech
didn’t propose a commercial transaction, certainly not “in the waiting room
where the disclaimer would appear. Even if pregnancy-related services are
discussed there, the Center collects no remuneration of any kind, including
referral fees from physicians. A morally and religiously motivated offering of
free services cannot be described as a bare ‘commercial transaction.’” The fact
that the Center advertised its services, some of which had commercial value in
other context, didn’t itself transform the Center’s ideological and religious
advocacy into commercial activity.  This
distinguished the ordinance from the application of general false advertising
laws to actual advertising by similar clinics; the ordinance applied to
pregnancy centers regardless of whether they advertised at all. The record
didn’t show that the Center had an economic motivation for its speech; even if
its fundraising depended on the ability to attract clients, speculation about
that fact, without more, was too attenuated to be an economic motivation.
The court of appeals also rejected the attempt to defend the
ordinance as a regulation of professional speech.  Professional speech regulations are subject
to sliding-scale review, depending on where the speech is placed on the
continuum from public dialogue on one end to regulation of professional conduct
on the other.  This review “applies to
traditional occupations, such as medicine or accounting, which are subject to
comprehensive state licensing, accreditation, or disciplinary schemes,” and at
its core is when “the speaker is providing personalized advice in a private
setting to a paying client.”
The Center wasn’t like that. 
Maryland doesn’t require pregnancy centers to be licensed or otherwise
subject to a state regulatory scheme.There was no medical or professional board
that certified the Center’s employees, nor any disciplinary panel that
regulates their conduct. The Center had a volunteer “medical director” who was
a licensed physician, but she was “very rarely” on site and didn’t meet
directly with clients. Thus, no one in the Center practiced a “profession” “in
the traditional sense contemplated by our First Amendment jurisprudence.”
Although the Center “provid[es] personalized advice in a private setting,” its
clients weren’t paying.  [I take it that
the court of appeals isn’t saying that pro bono medical/legal services couldn’t
be regulated by professional licensing bodies—but now how do we decide what is
unauthorized practice of law/medicine in individual consultations?]
In a footnote, the court of appeals distinguished the Ninth
Circuit’s decision in Harris, 839 F.3d 823, cert. granted, No. 16-1140 (U.S.
Nov. 13, 2017). That law, which was upheld by the Ninth Circuit, required only licensed clinics to post a notice
informing women of the availability of state-sponsored services, including
abortion, and a phone number to call for more information.  That disclaimer was “markedly” different in
who it covered, and thus in the scrutiny that it received, as well as in
content.  Unlicensed clinics simply had to post a notice stating that their
facilities weren’t licensed by the state; because that compelled speech didn’t
mention abortion, “the burden on the speaker—and therefore the First Amendment
analysis—was different in kind.”
Anyway, because of this noncommercial/nonprofessional context,
the disclosure requirement was subject to strict scrutiny, and failed. Although
the compelled speech was “essentially factual,” that didn’t “divorce the speech
from its moral or ideological implications.” Here, the compelled speech was
particularly troubling because “the disclaimer portrays abortion as one among a
menu of morally equivalent choices. … The message conveyed is antithetical to
the very moral, religious, and ideological reasons the Center exists.”  [Of course, this reasoning will not regularly
be applied to mandatory disclosures of facts/non-facts by clinics that provide
abortion services, because abortion doesn’t get ordinary First Amendment
treatment.]  The court of appeals
cautioned that the Center’s anti-choice mission gave it “no license at all to
lie to women, … [b]ut it does provide some latitude in how to broach a
sensitive topic.”  
Baltimore’s interests in fighting deceptive advertising and
preventing the health risks that can accompany delays in abortions were
“plainly important.” However, the court of appeals agreed with the district
court that “there is insufficient evidence to demonstrate that deception
actually takes place and that health harms are in fact being caused by delays
resulting from deceptive advertising.”  After
seven years, Baltimore didn’t identify “a single example of a woman who entered
the Greater Baltimore Center’s waiting room under the misimpression that she
could obtain an abortion there.” [Note the implicit suggestion that the
evidence must be about the particular entity at issue.  Query whether the same logic could be applied
against a clinic just starting up?  What
about against the FTC’s Franchise Rules, which require a lot of disclosures
based on experience with franchises in general? 
Commercial speech doctrine presently should distinguish that last
example, though rumblings from the DC Circuit suggest otherwise.  My own opinion is that one could coherently say
“generalization from a record of bad behavior within this field is allowed
where the speech is commercial, but must be individualized where the speech is
noncommercial.”]
Plus, Baltimore wasn’t using the most narrow means:
It is scrutiny of means that helps
identify the point on the spectrum where valid disclosures slip silently into
the realm of impermissible compelled speech. Particularly troubling in this
regard is (1) that the ordinance applies solely to speakers who talk about
pregnancy-related services but not to speakers on any other topic; and (2) that
the ordinance compels speech from pro-life pregnancy centers, but not other
pregnancy clinics that offer or refer for abortion.
Thus, the regulation was neither content nor viewpoint
neutral.  [Compare: the Franchise Rules
apply solely to speakers who offer franchises, but not speakers on any other
topic, and the ordinance compels speech from franchisors, but not other
businesses that refuse to franchise/sell things that aren’t franchises.  Without commercial speech doctrine, these are
the same situations, and it seems that only generic fraud law would be constitutional,
even if there are specific industries in which prophylactic and
information-providing measures would be helpful.]
The court of appeals was also unpersuaded that less
restrictive means were unavailable. The government itself could inform citizens
about the scope of services offered at various facilities “through a public
advertising campaign,” and it could enforce laws against misleading
advertising. More fundamentally, there was “only a loose fit between the
compelled disclosure at issue and the purported ills identified by the
government.”  If the problems are deceptive
advertising and consequent delays in abortion services. In that respect the
ordinance is quite overinclusive, it’s overinclusive to apply to pregnancy
centers “without regard to whether their advertising is misleading, or indeed
whether they advertise at all.”

In what one might read on commentary on present matters
beyond abortion, the court of appeals concluded, “[w]eaponizing the means of
government against ideological foes risks a grave violation of one of our
nation’s dearest principles: ‘that no official, high or petty, can prescribe
what shall be orthodox in politics, nationalism, religion, or other matters of
opinion or force citizens to confess by word or act their faith therein.’” 

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Natural/organic cigarette claims might be deceptive (with bonus First Amendment talk)

In re Santa Fe Natural Tobacco Co. Mkting & Sales
Practices & Prods. Liab. Litig., 2017 WL 6550897, No. MD 16-2695 (D.N.M.
Dec. 21, 2017)
Lots of claims here against Natural American Cigarettes.
Ultimately, the court allows consumer protection claims to proceed against the
use of the terms “natural,” “organic,” and “additive-free” for cigarettes, on
the theories that they could mislead a reasonable consumer into believing that
the cigarettes were healthier or safer than other cigarettes, because decades
of marketing have equated those terms with healthy products; and that the menthol
cigarettes had no additives, because menthol is a substance that a reasonable
consumer would not know much about; the court rejected a deception theory based
on the processing of the cigarettes.  In
the process, it rejected some First Amendment defenses.

Natural American advertisements from 2013 through 2015
included images of water and plants, along with statements like: “When you work
with the best materials, you don’t need to add anything else. That’s why we use
only tobacco and water. We stick with premium quality, whole leaf natural
tobacco that’s 100% additive-free for a very simple reason — it’s all we
need.” Ads also stated in large bold writing, “100% ADDITIVE-FREE NATURAL
TOBACCO,” and included, in smaller writing, “No additives in our tobacco does
NOT mean a safer cigarette.” Natural American cigarettes are the most expensive
major brand of cigarette; despite this sales increased eighty-six percent from
2009 through 2014, while cigarette sales in the US declined overall by
seventeen percent. Its market share more than doubled, increasing over
twenty-one percent between 2014 and 2015 alone. 
Numerous studies have examined the popularity and consumer
perceptions of cigarettes branded as “natural,” and in 2015 the FDA sent a
letter to Santa Fe Tobacco asserting that some of its labeling practices
“explicitly and/or implicitly” represent that Natural American cigarettes pose
less of a risk than other tobacco products. Santa Fe Tobacco had previously
entered into a Consent Order with the FTC regarding its advertising practices, requiring
the display of the disclaimer: “No additives in our tobacco does NOT mean a
safer cigarette” “[i]n the same style and type size as that required for health
warnings for tobacco cigarettes.” A later “Assurance of Voluntary Compliance” added,
for organic products, “Organic tobacco does NOT mean a safer cigarette.”
Nobody contends that Natural American cigarettes are in any
way safer than other cigarettes. Santa Fe Tobacco also adds menthol to certain varieties; the cigarettes
are also “flue-cured,” meaning processed with heat to secure the sugars, which
synthetically lowers the cigarette smoke’s pH and makes it easier to inhale.
The tobacco is allegedly artificially blended and modified, much like other
cigarettes in the industry.
The court applied the reasonable consumer standard to the
consumer protection laws of fourteen states.  Defendants argued that it was implausible for
consumers to expect a safer cigarette, because a reasonable consumer would read
the disclaimer stating that “no additives does NOT mean a safer cigarette.” Likewise,
they argued that a reasonable consumer knows that menthol cigarettes contain
menthol, so would understand that the no-additive term didn’t cover menthol. Finally,
they argued that a reasonable consumer would know that Natural American
cigarettes are subjected to engineering processes.
The first theory (safer cigarettes) survived.  The court didn’t rely on the
plaintiffs’ submitted studies, though one concluded that “[n]early 1 million US
adult smokers prefer” Natural American cigarettes and they “are 22 times more
likely than other smokers to believe that their brand is less harmful than
other cigarette brands,” leading the study authors to conclude that Natural
American smokers may choose that brand because of the “descriptors organic,
natural, and additive free on product packaging and advertising.” “As surely as
a Ph.D. cannot be swapped for an Article III commission, an academic study
cannot take the place of the Court’s judgment on a rule 12(b)(6) motion.” Maybe
all of the consumers studied were unreasonable consumers, and “the subjective
beliefs of the consumers studied, even if those consumers are generally
reasonable, cannot blindly be swapped for the reasonable consumer’s beliefs.” (What
does that even mean?  If a substantial
number of reasonable consumers receive a message, that message is conveyed to a
substantial number of reasonable consumers—and if a substantial number of
consumers receive a message, that’s good evidence that it’s reasonable for them
to receive it.  Substituting one’s own
judgment about what consumers should
do, when confronted with evidence of what they actually do, is dangerous business.)
Still, the allegations made the safer cigarette theory
plausible. “The terms natural and organic have long been used across the
country to convey products’ health benefits” (citing, inter alia, a court
relying on its own “common sense,” so I guess an Article III commission can
indeed be swapped for a Ph.D. in some circumstances). Likewise, additives “have
also long been known to or believed to potentially increase health risks.” Under
these circumstances, “the reasonable consumer is not expected to defy decades
of marketing, which has conveyed that natural, organic, and additive-free
products are healthier.” Similarly, the FDA and the FTC both determined that
the defendants’ descriptors conveyed a message that their cigarettes were less
harmful than other cigarettes.
The defendants didn’t fight this conclusion, but argued that
the disclaimer cured any deception.  The
plaintiffs responded that the disclaimer was hidden from consumers and
unhelpful.  However, the disclosure wasn’t
buried in an ingredients list, and, “unlike an ambiguous ingredient term, the
disclosure is a clear statement that ‘no additives does NOT mean a safer
cigarette.’” A reasonable consumer would look on the packages’ sides and top for this
type of disclosure, since product packaging commonly has additional information
about the product on the back and sides. 
Even though a reasonable consumer isn’t expected to understand every
piece of information disclosed on a package’s sides, there was no ambiguity here.  The court partially agreed with plaintiffs
that the disclosure was hidden: though representative packages in the record
contained legible disclaimers, in appropriate colors, not buried in other text,
cigarettes are often sold in a way that prevents consumers from inspecting the
packaging in detail before purchase. However, reasonable consumers wouldn’t miss
the disclosures on the ads—in the ads, the disclaimer was in a prominent
location boxed over the Surgeon General’s Warning.
Despite that, the disclaimer only addressed the lack of additives;
it said nothing about “natural” or “organic,” which independently connoted
health/safety. The defendants argued that “the disclosure plainly disclaims any
notion that Natural American cigarettes are safer than alternatives,” but that
asked for “a hefty inference in light of the disclosure’s specificity…. Specific
language communicates a specific meaning and a reasonable consumer interprets
it with that specific meaning.”
“Additive-free” on menthol cigarettes also plausibly misled a
reasonable consumer. Defendants’ contrary argument assumed “that a reasonable
consumer is so secure in her knowledge that menthol is an additive that an
express representation to the contrary, on a heavily regulated product, does
not mislead her.”  But the evidence indicated
that “[m]enthol’s properties are not commonly known, even among cigarette
users.” Before this case, the judge didn’t know much about menthol, including
whether it was a natural substance or additive. 
It was plausible that consumers wouldn’t know whether it naturally
occurred in tobacco, especially given that many goods have “naturally occurring
qualities that are prominently labeled separately on the good,” such as
caffeine. Even if a reasonable consumer knew that menthol was an additive, it was
still plausible that an additive-free descriptor “undermine[d] her knowledge,”
because menthol is an uncommon substance, compared to products such as almond
milk (with no dairy milk) and veggie bacon (no pork). Menthol’s inherent
qualities weren’t well known; faced with defendants’ descriptors, a reasonable
consumer could conclude that menthol is a type of tobacco or tobacco grown in a
specific location. 
Nor did the ingredient list on the back, which listed
menthol separately, dispel the deception, because the package lacked an
unambiguous signal (like the FTC-mandated disclosure) that the ingredients list
contradicted another representation on the package.  “[T]he reasonable consumer is not
hyper-vigilant and does not expect the product’s packaging to deceive her.” Moreover,
a reasonable consumer could conclude that there was no contradiction in the
ingredients list: she might presume that the FDA requires separate labeling of
menthol.  “Moreover, faced with
conflicting representations, one clear and the other ambiguous, the reasonable
consumer follows the clear one.”
However, “natural” didn’t plausibly mislead a reasonable
consumer into believing that Natural American tobacco was less processed than
tobacco in other cigarettes.  “Natural”
has many meanings, dependent on context, and a reasonable consumer “comes to
the market with a degree of background knowledge,” here that “tobacco undergoes
engineering processes before it is sold in cigarettes. Such awareness is clear
from visually comparing a tobacco leaf to a cigarette.” “Natural” wasn’t enough
to undermine that knowledge or suggest that the tobacco went through less
processing than other cigarettes’ tobacco. Also, since it modified “tobacco,” the
natural descriptor “says little, if anything, about the engineering processes;
it says something about the type of tobacco.”
Finally, on trademarks: the use in the brand name Natural
American Spirit would “carry less persuasive impact on a reasonable consumer
than other product labeling.  The
underlying rationale is that reasonable consumers know that brand names are
often creative and that substantive information about the product is less
likely to be located there.”  I love how well courts understand the psychology of ordinary consumers without needing evidence other than citing other courts.  (I don’t.)
The defendants argued that the First Amendment precluded
liability.   First, as to plaintiffs’ contract-related
claims, consensual contractual relations didn’t count as state action (nor did
court enforcement thereof) and couldn’t trigger First Amendment scrutiny.  Although Shelley v. Kraemer “held that court
enforcement of an agreement between private parties can, in some circumstances,
be considered governmental action,” that’s been limited to the context of
racial discrimination.  The basic rule is that “state action exists if the dispute is tort-related or if
the rights arise from a state statute, but does not exist if the dispute arises
from a contractual relationship or involves common-law property rights, unless
a non-judicial state actor is involved or if racial discrimination is
implicated.”  [If you want a way to make Shelley seem less weird, Carol Rose has a great explanation of why enforcing some contracts implicates the state in unconstitutional positions, e.g., that racial discrimination is acceptable; this one wouldn’t have that problem.]
Thus, plaintiffs’ state statutory tort claims involved state
action, as did the unjust enrichment claims, which arise from the absence of a
consensual contractual relationship. But plaintiffs’ express warranty claim
arose from a consensual contractual relationship and the First Amendment could
provide no defense.
The court then said it applied Central Hudson scrutiny to the unjust enrichment and statutory
claims because they were based on defendants’ commercial speech, but the claims
survived because the descriptors were (plausibly) inherently or actually
misleading. 
The Central Hudson First
Amendment framework, with its distinction between outright bannable
false/misleading commercial speech and merely potentially misleading speech,
has little relationship to false advertising doctrine as it developed either in
the Lanham Act or consumer protection context. 
The court here framed Central Hudson as providing that states can regulate
speech that is merely potentially misleading
if the government (1) has a substantial state interest in regulating the
speech, (2) the regulation directly and materially advances that interest, and
(3) the regulation is no more extensive than necessary to serve the interest.  Perhaps because of the private action
context, the court didn’t point out that the other option states have with
potentially misleading speech is to mandate disclosure; the majority of circuit
judges to consider the issue have found that disclosure regulations don’t need
to survive this three-step scrutiny.
My commentary: The private cause of action, by its nature, targets an
existing practice that it argues is deceptive. 
The potentially/inherently deceptive distinction, however, asks whether
a complementary disclosure, instead of an outright ban on the deceptive speech,
can sufficiently cure the deceptiveness of the speech standing alone. In a
private cause of action, that is a question of remedy, not of the inherent
nature of the deceptiveness. 
Anyhow, inherently misleading speech is “incapable of being
presented in a way that is not deceptive.” If the speech could possibly be
truthful, the court reasoned, it could not be inherently misleading. Thus, the
“natural,” “organic,” and “additive-free” descriptors here weren’t inherently
misleading as to the safety theory, because none of them “inherently” meant
healthy or safe, and likewise the processing claims weren’t inherently
misleading.  (Insert distant anguished
screams of linguists about “inherent” meaning in language—even onomotopoeia
varies across languages.)  It would be
possible for another manufacturer to truthfully produce natural, organic, and
additive-free tobacco, by picking it, rolling it up, and selling it.  (Note the absence of any explanation about
how the advertising would make
different claims.)  But the menthol theory
involved inherent misleadingness, because “additive-free’s meaning exists in
direct conflict with the menthol’s presence in the cigarette.… It is not
possible for some other cigarette manufacturer to produce a menthol cigarette
that is additive free and truthfully
advertise it as such
” (emphasis added).
Defendants argued that the menthol was added to the
cigarette filters, and not the tobacco, so the additive-free natural tobacco
label was truthful, but when the cigarette is smoked, inevitably the menthol
intermingles with the tobacco, making the claim inherently misleading. “The
Defendants’ final argument that any misunderstanding could be dispelled through
a new disclosure misapprehends the inherently misleading test. The Court cannot
assume in new disclosures otherwise no speech would be inherently misleading.
Any assumed disclosure could cure deception with a simple explanation that the
inherently misleading speech is a lie.” 
[Again, both a good point about the unworkability of the current
“inherently” misleading test under First Amendment doctrine and a good demonstration that the test isn’t set
up to judge tort claims.]
However, the rest of the Central
Hudson
test can also be skipped, and the speech at issue banned outright,
if the speech is “in fact, misleading.” The standard here is not that of a
reasonable consumer, but a subjective standard. 
The plaintiffs alleged that the products’ labeling was uniform,
justifying the inference that they saw the claims, and they also alleged the
existence of a study showing that “smokers … frequently concluded that
‘natural’ cigarettes must be healthier or safer than cigarettes containing
chemicals.” Another study concluded that over sixty percent of Natural American
smokers believed their brand was less harmful than other cigarette brands. Thus,
it was plausible that consumers actually were deceived.  The disclosures didn’t correct this problem
for reasons discussed above.
[In the court’s formulation of the reasonable
consumer test as an objective one not based on actual consumers, state consumer
protection laws have apparently decided to allow some commercial speech that is
(1) completely unprotected by the First Amendment and (2) actually deceptive,
simply because (3) the court concludes that reasonable consumers shouldn’t be fooled by it.  I respectfully submit that this idea is
inconsistent with the history and logic of consumer protection law, which was
designed to remove many of the traps for the unwary of the old caveat emptor regime.  The better way to harmonize the idea of an
“objective” standard with the idea of what consumers actually believe (which
the court seems to think of as “subjective” on an individual basis) is the
venerable concept of a “substantial number of reasonable consumers.”  The fact that a substantial component of the
customer base is deceived is evidence that their conclusions are reasonable (as
opposed to idiosyncratic), and objective things can be said about the aggregate
of consumers.]
Likewise, even if the menthol representations weren’t
inherently misleading, they were plausibly in fact misleading. So too with the
unprocessed cigarette theory: it was plausible that these plaintiffs, though
not reasonable consumers, would believe that the term natural meant that
Natural American cigarettes were subjected to fewer engineering processes than
other cigarettes.
Even if the plaintiffs’ theories of deceptions didn’t
involve inherently or actually misleading speech, their theories satisfied Central Hudson’s remaining three
prongs.  Marching through: there’s a
substantial governmental interest in protecting consumers from misleading
speech.  Defendants argued that “natural”
had no ascertainable meaning, but “the government has an interest in regulating
a word with an underdeterminate meaning. Although perhaps less dangerous than
representations that are demonstrably false, words with many meanings or
unclear meanings have a capacity to mislead, because consumers can interpret
them in ways that do not reflect reality.” 
Does the speech restriction directly and materially advances
the asserted government interest?  This
step requires more than just “mere speculation or conjecture” that the speech
restriction will advance the interest: “[R]ather, a governmental body seeking to sustain a restriction on commercial
speech must demonstrate that the harms it recites are real and that its
restriction will in fact alleviate them to a material degree” (emphasis
added).  There doesn’t need to be a
“surfeit” of empirical background, however; studies and anecdotes can suffice,
as well as history, consensus, and “simple common sense.” The evidence of
deceptiveness alleged by plaintiffs was sufficient, meaning that enjoining use
of the challenged terms or awarding money damages, which would likely cause
defendants to remove or change their ads, would advance the government’s
interest in protecting consumers from deceptive speech.  Defendants argued that this wasn’t true
because of the already-existing disclosures, but see above; “in light of the
disclosures’ placement underneath the barcode and divorced from the Surgeon
General’s warning, money damages or an injunction would materially advance the
state’s interest even as to the ‘additive-free’ term, because a substantial number
of consumers would not think to look there for that disclosure, or would not
even see the disclaimer until after they were deceived into paying a premium
for Natural American cigarettes.”
Was the regulation no more extensive than necessary?  Money damages satisfied this requirement,
because they’d “encourage” defendants to improve disclosures; but moving or
adding disclosures might not be enough to protect consumers, so an injunction
might also meet this requirement. Certainly you can’t tell from the pleadings
alone.
The court also ruled on a slew of other state- and
claim-specific issues, which I will not go over.

Injunctive relief wasn’t moot, even though a Memorandum of
Agreement with the FDA required them to cease using those terms, except for the
natural term in their brand name. But the plaintiffs wanted to enjoin the
Natural American brand name, and the Memorandum of Agreement was subject to an
ongoing lawsuit in federal district court which could vacate the agreement.
Still, defendants represented that “Santa Fe is no longer utilizing the phrases
‘Additive Free’ and ‘Natural’ in the NAS cigarette product labels, labeling,
advertising, and promotional materials … and Santa Fe is in compliance with
the [Memorandum of] Agreement.”  Given
the ongoing challenge to the MOA, defendants’ promise to remove the terms was
only a promise, and they didn’t carry the “formidable burden of showing that it
is absolutely clear the allegedly wrongful behavior could not reasonably be
expected to recur.”  So injunctive relief
claims could proceed.

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Arbitral immunity doesn’t extend to arbitral advertising

Hopper v. American Arbitration Association, Inc., 2017 WL
6569571, No. 16-55573 (9th Cir. Dec. 7, 2017)

The district court dismissed Hopper’s false advertising
claim against AAA based on arbitral immunity, and the court of appeals
reversed.  “Arbitral immunity extends to
claims that arise out of a decisional act and exists to ‘protect the
decision-maker from undue influence and protect the decision-making process
from reprisals by dissatisfied litigants.’” But the false advertising claim was
“predicated on AAA’s descriptions of its arbitrators disseminated through its
website and direct mail. Commercial advertisement, designed to sway individuals
to choose AAA over its competitors … is distinct and distant from the
decisional act of an arbitrator.” 
Allowing the false advertising claim to proceed wouldn’t lead to undue
influence over the arbitration process or expose arbitral decisions to
reprisals.

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“prevailing price” consumer protection rule isn’t unconstitutionally vague

Haley v. Macy’s, Inc., 2017 WL 6539825, No. 15-cv-06033
(N.D. Cal. Dec. 21, 2017)
Haley brought a typical putative class action, with the
usual California claims, alleging that Macy’s mislabeled its merchandise with
false or inflated “original” or “regular” prices to induce customers to
purchase “on sale” merchandise based on a perceived bargain.  The court found that Haley had alleged Article
III injury in fact.
Macy’s argued that several named plaintiffs couldn’t have
been deceived because they had knowledge of Macy’s pricing practices before
they bought.  One plaintiff worked at a
Michael Kors boutique in Macy’s, and another had a close relationship with
her.  At the time of the first plaintiff’s
employment, Michael Kors was involved in an unrelated false advertising case. But
that employment history didn’t “establish or even suggest that she had
knowledge of any pricing practices.” Any inference of knowledge due to online
friendship was even more attenuated. 
Likewise, the fact that Haley bought an ornament from Macy’s four days
before suing was “suggestive,” but didn’t establish knowledge of Macy’s pricing
practices.  Nor did one plaintiff’s
documentation of her purchase suggest that she was anticipating litigation.  “Consumers may research and document their
purchases and compare with other items without anticipating litigation or
having knowledge of the pricing practices at issue in this case.”  [The judge must know someone like my spouse.]
Among other things, Macy’s also argued that plaintiffs didn’t
offer a factual basis for their allegations that Macy’s didn’t sell the
products at the original or regular prices and that other merchants did not
sell merchandise of like grade and quality at Macy’s advertised prices. The
court found that the complaint was sufficient. 
It cited “an exemplar coffee maker that was advertised with a regular
price of $149.99, but which all sellers on Amazon.com and the manufacturer’s
website offered for significantly lower prices.” Other named plaintiffs noted that
the products they purchased continued to be on sale at the discounted, rather
than original price, months after purchase. Macy’s pricing policy for its
online merchandise also stated that “regular” and “original” prices “may not be
based on actual sales of the item.” This was enough at this early stage of the
litigation.

Finally, Macy’s argued that California Business &
Professions Code § 17501 is unconstitutionally vague in stating: “No price
shall be advertised as a former price of any advertised thing, unless the
alleged former price was the prevailing market price …within three months
next immediately preceding the publication of the advertisement or unless the
date when the alleged former price did prevail is clearly, exactly and
conspicuously stated in the advertisement.” The statute defines “prevailing
market price” as the “worth or value” at “wholesale if the offer is at
wholesale, retail if the offer is at retail, at the time of publication of such
advertisement in the locality wherein the advertisement is published.” The
court found that this language was sufficient to provide fair warning of what
is proscribed, given the context of the FAL more generally and its aim of
preventing “unfair, deceptive, untrue, or misleading advertising.” The OED
defines “prevailing” as “[p]redominant in extent or amount” and “most widely
occurring or accepted.” That wasn’t unconstitutionally vague. 

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