burger case involves unclean hands (ew) and literal falsity about beef amounts

In-N-Out Burgers v. Smashburger IP Holder LLC, 2018 WL
7891028, No. SACV 17-1474 JVS(DFMx)
(C.D. Cal. Dec. 21, 2018)
As relevant here, In-N-Out alleged that Smashburger falsely
advertised its Triple Double hamburger as containing “Double the Beef” because
the burger’s two patties together contain the same amount of beef as the single
patty in Smashburger’s regular burgers. The court here addressed Smashburger’s
unclean hands defense based on INO’s claims that its meat has “No Additives,
Fillers or Preservatives,” even though its meat contains antibiotics. INO’s
claims regarding its meat, as well as its claims regarding “freshness,” also
allegedly falsely suggested to prospective customers that its food was healthy,
or at least a healthier alternative to other fast food restaurants. 
Does Twiqbal apply to affirmative defenses? The court here
thought no: under Rule 8(a), factual plausibility is necessary to state a claim
because the pleader must “show” entitlement to relief, but under Rule 8(c), a
party pleading an affirmative defense only needs to “state” — not show
entitlement to — its defense. Also, “strong policy reasons exist for a
different standard. A plaintiff has unlimited time to compose a complaint, but
a defendant only has 21 days to respond and assert affirmative defenses.”  Thus, the court applied the fair notice
standard instead, and under that standard, the affirmative defense of unclean
hands was sufficiently pled in part and deficiently pled in part.
First, even if it was literally true that In-N-Out’s meat is
free from “additives, fillers, or preservatives,” “such a claim could be misleading
to consumers who treat is as a claim that the meat is free from any added
substances (such as antibiotics) or byproducts of those substances.”  The identification of specific statements in
INO advertising, and of reasons that was allegedly misleading, satisfied Rule
“Freshness” challenges were insufficiently pled because consumers
couldn’t plausibly equate “freshness” with “healthfulness” “in the context of a
quick-service restaurant serving burgers and fries.”
Unclean hands requires clear and convincing evidence (1)
“that the [non-asserting party’s] conduct is inequitable;” and (2) “that the
conduct relates to the subject matter of [the non-asserting party’s] claims.” On
relatedness, the court found that the defense was “premised on allegations that
In-N-Out misrepresents the nutritional characteristics and composition of its
burgers, while In-N-Out’s false advertising claim is premised on allegations
that Smashburger misrepresents the quantity of beef in its burgers. Therefore,
the unclean hands defense pertains to the same conduct, false advertising, as
related to the same competing products, the parties’ burgers.”   In addition, it was wrongful enough to
qualify for unclean hands. “Neither Supreme Court nor Ninth Circuit precedent
requires that defendants prove that a plaintiff’s conduct was ‘egregious,’ ”
and “a defendant can succeed on an unclean hands defense if it proves that a
plaintiff engaged in a ‘willful act concerning the cause of action which
rightfully can be said to transgress equitable standards of conduct.’ ”
In-N-Out Burgers v. Smashburger IP Holder LLC, 2019 WL
1431904, No. SACV 17-1474 JVS(DFMx) (C.D. Cal. Feb. 6, 2019)
Smashburger added the “Triple Double” burger to its national
menu. Its Triple Double, Bacon Triple Double, and Pub Triple Double each have
two beef patties that are supposed to weigh 2.5-ounces each prior to cooking,
using the patties also used for the “Kid Burger” and “Small Burger.”
Smashburger’s Classic Smash burger is made with a single patty that is supposed
to weighs 5.0 ounces prior to cooking. The Triple Double burger costs $0.30
more than the Classic Smash. INO’s counsel bought a Triple Double and a Classic
Smash in Culver City; the Triple Double’s two cooked patties weighed 1.5 ounces
each, while the Classic Smash had a single cooked patty weighing 2.8 ounces.
Smashburger used a number of slogans, including, but not
limited to: “Double the Beef,” “Triple the Cheese, Double the Beef,” “Triple
the Cheese, Double the Beef in Every Bite,” “Triple the Cheese, Double the
Beef, Triple the Options,” and “Classic Smash™ Beef Build with triple the
cheese & double the beef in every bite,” along with slogans that denote two
times the beef, including “2x Fresh Never-Frozen Beef.”  (Some locations seem to have changed
sizing—and increased pricing for the Triple Double—so that the Triple Double
Smashburger has twice the quantity of beef as the regular Classic Smash, and
INO didn’t argue falsity as to those locations with changed serving sizes.)
The court found that “Classic Smash™ Beef build with triple
the cheese & double the beef in every bite” was literally false.  Smashburger made some bad arguments about why
it wasn’t: double the beef in every bite doesn’t mean “two layers of beef in
every bite” but rather “unambiguously refers to the amount of beef in the
burger.” And it’s a direct reference to the Classic Smash, so Smashburger’s
attempt to create FUD using survey data regarding industry standards or
consumer expectations, such data was insufficient to create a genuine dispute
of fact as to literal falsity. Nor was it literally true because the Triple
Double had two times the amount of beef contained in a Classic Small
Smashburger, an option that was removed six months before the Triple Double
launched; the only single 2.5-ounce patty on the menu was the Kids Smash, which
the slogan at issue didn’t reference.
Similarly, Smashburger’s argument that its “double the beef”
claim was literally true because the Triple Double contains double, or more
than double, the beef of many other competing fast food single burgers,
including INO’s, failed because the slogan had no reference to competitors’
burgers, but unambiguously a comparison to Smashburger’s own. And its argument
that the Triple Double was smaller in diameter and taller than the Classic
Smash, making it possible that it would contain more beef per bite even with an
equal beef content, was “unpersuasive” in context. 
There was a genuine dispute of fact as to the falsity of the
other slogans that didn’t explicitly refer to the Classic Smash: “the remaining
slogans could plausibly be interpreted by consumers as a reference to products
offered by Smashburger’s competitors.” INO didn’t submit evidence on implicit
falsity at this stage.
“Statements that are literally or deliberately false create
a presumption of deception and reliance.”
Smashburger argued that it rebutted the presumption of
deception because the Triple Double and the Classic Smash were close in price,
and therefore no reasonable consumer could be deceived into believing they were
getting twice the amount of beef. The court didn’t agree that “a defendant can
rebut the presumption of deception by arguing that its false advertising is too
egregious to be believed.”
Materiality was also shown as a matter of law. Smashburger’s
false advertising pertained “to the very nature” of its product. “Consumers
rely on perceived value in deciding which products to purchase; therefore,
consumers are more likely to buy a product if they believe they are getting
twice as much of that product than they actually receive.”  No consumer surveys or testimonials were
required to find materiality as a matter of law.  Nor did it matter that “millions of people” bought
the Triple Double: “Smashburger does not present any evidence that there were
no returns or customer complaints regarding the Triple Double, and the fact
that millions of people purchased the Triple Double does not in and of itself
create a genuine dispute of fact for the jury.”
INO also moved for summary judgment on injury, but the court
found a genuine issue of material fact because of a dispute about how
competitive the parties were. A 2014 customer survey conducted by Smashburger showed
that 48% of Smashburger customers were extremely or very likely to go to
In-N-Out in the next month, and that 72% of Smashburger customers had visited
In-N-Out within the past three months. There was also evidence of geographic
overlap and a 2017 Marketing Update identifying In-N-Out as one of
Smashburger’s six competitors in the “U.S. Better Burger Landscape.”
But depositions from INO marketing folks suggested that INO
didn’t consider Smashburger a direct competitor or think its marketing mattered
to INO. And there were “significant” differences between the parties’
offerings. For example, INO only offers beef, while Smashburger offers four
types of protein; Smashburger offers varying patty sizes, while INO doesn’t;
Smashburger offers build-your-own burgers, pre-set burgers, and regional
“special” burgers, while INO only offers a hamburger and a cheeseburger.  (Hey, wasn’t there a whole thing about the secret
menu?)  And over four years elapsed since
Smashburger’s customer survey, weakening its evidentiary weight.

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