Competitor’s false advertising case against MLM income claims can proceed

Youngevity Int’l v. Smith, No. 16-CV-704-BTM-JLB, 2019 WL
2918161 (S.D. Cal. Jul. 5, 2019)
This Lanham Act case involves, among other things, alleged
misrepresentations relating to the MLM aspects of defendants’ business pitched
to potential “affiliates.” 
First, defendants argued that plaintiffs failed to establish
any damages, justifying summary judgment. But there was some evidence of
decreased Youngevity sales during defendants’ false advertising and an expert
willing to link that with defendants’ sales generated by ex-Youngevity distributors;
also, “an inability to show actual damages does not alone preclude a recovery
under section 1117 [of the Lanham Act],” and plaintiffs were also seeking
injunctive relief. 
Second, defendants argued that they couldn’t be held liable
for statements made by their distributors. There was sufficient evidence for a
jury to find that these people (known as Wakaya Ambassadors) were agents for
Lanham Act purposes, making defendants vicariously liable.  Their classification as independent
contractors in Wakaya’s own Policies and Procedures wasn’t enough to avoid a
material issue of fact.  Moreover, defendants
didn’t dispute that the Ambassadors “engaged in the allegedly false advertising
for the purpose of attracting distributors and increasing sales,” squarely
within the scope of their roles. And defendants reserve the right to terminate Ambassadors’
accounts for unapproved conduct. That was enough to go to the jury.
The false advertising claims included allegedly false claims
about the potential income of a typical Wakaya distributor, e.g., Wakaya
Ambassadors can earn “$6,200 bucks residually in the next three to six months” and
“[w]e plan to build several leaders to 10K a month in the next 6 months.” [Ugh.
It’s so clear that the US lacks sufficient protections against pyramid schemes.
We shouldn’t be relying on competitors to do this, especially not competitors
that are themselves
MLMs with their own dubious claims
.] 
One individual defendant (Vaughn) claimed, on behalf of the company, that “when—you
get a thousand people joining [Wakaya] a day, that’s $85,000 in a day. If you
wanna do it in a week, that’s $85,000 in a week. [Etc.]”  Smith, Wakaya’s owner, observed in deposition
that the statement is “inaccurate” because “it claims that Wakaya Perfection
pays income for the joining of new people, for new people joining the
organization.” Smith also testified that he could not recall any distributor in
Wakaya ever making $85,000 in a month and that Vaughn himself does not make
$8,500 in a week based on his work as a Wakaya distributor. There was evidence
that Vaughn repeatedly asserted that Wakaya Ambassadors could earn a million
dollars in their first year. Smith himself stated, “I’m telling you right now
you’re going to earn a lot of money….[T]he amount[s] of money you’re going to
earn in this program…right now you won’t even be able to imagine. They’re
almost incalculable.” There was evidence that other Wakaya distributors also made
false statements: one claimed that he was making up to $1700 in one day, then testified
that, in fact, he made less than $550 in any single month. Expert evidence
showed that, in reality, about 1% of Wakaya’s active associates earn $1000 per
month in commissions and less than 3% even earn $500 per month.  There was [at a minimum] a genuine issue of material fact on falsity.
Defendants argued that these claims didn’t relate to Lanham
Act-covered “commercial activities,” but of course they did. As the Tenth
Circuit has said, “[i]t is [ ] apparent, in the context of the Act’s broad
purpose of proscribing unfair competition and the 1988 amendment of § 43(a),
that Congress did not intend to narrowly limit the term ‘commercial activities,’
but rather intended to encompass those activities which do not solely involve
the provision of services or the production of goods. Proctor & Gamble Co.
v. Haugen, 222 F.3d 1262 (10th Cir. 2000). Here, “[a]ttracting distributors is
at the core of Defendants’ business model and is a practice with a substantial
impact affecting commerce.”
The income claims here were literally false, either on their
face or by necessary implication; materiality and misleadingness could be
presumed:
The claims are specific, conclusive
assertions that a Wakaya distributor will make at least the income that in
reality, only 1% of distributors make. Even Defendant Smith’s statement, while
not stating a particular dollar value, implies that earning a large amount of
income as a Wakaya distributor is an inevitability. Moreover, because the
claims are highly specific and present the likelihood of earning unrealistic
amounts of money as a foregone conclusion when becoming a Wakaya distributor,
the income claims are far outside the scope of mere puffery or opinion.
The relevant consumers were “anyone who might be convinced
to become a Wakaya Ambassador based on claims of earning potential above a
certain threshold,” and the relevant purchasing decision was to become an
Ambassador—which after all, is how defendants make their money.
However, Youngevity’s [rather chutzpadik] argument that
Wakaya is an unlawful pyramid scheme was not separately actionable under the
Lanham Act, even if operating a pyramid scheme fraud under federal antifraud law. False income claims
alone didn’t show that the “rewards” or income that Wakaya Ambassadors received
were unrelated to the sale of Wakaya products.
Another alleged falsehood involved the role of alleged
billionaire/Fiji Water founder David Gilmour, who Wakaya advertising touted as the
founder, owner, and CEO.  The ownership/CEO
claims were concededly literally false, and the depositions indicated that
Smith was the founder.  Yet “Defendants
persist in claiming that Mr. Gilmour founded Wakaya Perfection,” including by
claiming that he was an investor (though apparently not in the company itself,
but in the island named Wakaya from which some Wakaya ingredients come). The
court found that Wakaya’s [implausible] colloquial or symbolic use of “founder” “to
refer to one who acts as a kind of figurehead of a venture or project” could be
literally false, and there was also evidence that it was likely to mislead
consumers, making summary judgment for defendants inappropriate.
However, Youngevity’s claim that Wakaya and its Ambassadors
made false claims about the status of Youngevity’s finances failed for want of
sufficient evidence; one email written as personal correspondence between
associates wasn’t enough to be commercial advertising or promotion.  Two other emails didn’t themselves make
negative statements “but rather discuss disparaging communication that the
authors allegedly heard about or were on the receiving end of,” which also
failed to show sufficient dissemination.
One social media post by “Dave and Barb Pitcock with Wakaya”
“certainly disparages Youngevity” but didn’t falsely advertise Youngevity’s
financial status. Instead, it described issues the Pitcocks claim they
experienced with Youngevity and attempts to explain Youngevity’s alleged
behavior by stating, “perhaps [Youngevity] desperately need[s] money.” “While
the post does operate to promote Wakaya, it is personal in nature as griping by
disgruntled former employees and does not amount to an advertisement about
Youngevity’s finances.”
Finally, a former distributor declared that, “[A]fter I
joined Wakaya, Barb Pitcock told me in approximately June 2016 on the telephone
that Youngevity was struggling financially and would go out of business.” But
the distributor had already ended her involvement with Youngevity and became a
Wakaya distributor, so that wasn’t a commercial advertisement.
False claims of the origin of Wakaya products: Wakaya’s
YouTube page claimed that “Wakaya Perfection is a suite of wellness products by
David H. Gilmour, the founder of Fiji water. The uniquely organic products are
hand cultivated on the pristine island of Wakaya and made of 100 percent
certified organic ginger powder and Dilo oil.” 
Smith testified that while this description was accurate when it was
first written, it became “untrue” or “not fully accurate” after Wakaya
Perfection, LLC acquired the YouTube page and introduced products that included
ingredients not sourced from the island of Wakaya. This was enough to create a genuine
issue of material fact on literal falsity.
False advertising with respect to safety and health benefits:
Wakaya claims that its clay product has “well known benefits,” “may remove
toxins from the body,” and is “known” to “neutralize and balance acidic
conditions,” “relieve digestion,” and “boost the immune system,” among other
benefits. Youngevity’s expert reports that “[t]here is no scientific evidence
that would support any therapeutic effects or claims of the consumption of
bentonite clays” and that the clay may pose a health hazard because “use of
unapproved chelating agents is dangerous and pose a serious risk to human
health” and because those who consume the clay may be exposed to unsafe levels
of lead and arsenic. This was enough to create a genuine issue of material
fact.
Wakaya also advertised that its turmeric product contains
six times more curcumin (5.96%) that traditional turmeric (0.92%), but
Youngevity’s expert reports identified 2.45% and 3.10% instead via testing,
creating a triable issue of fact.  In
addition, the only quantitative data supporting the claim to have “a whopping
five times more curcumin, the therapeutic agent in turmeric, above all
conventional turmeric powders” was based on a test comparing Wakaya’s product
with one other brand. Youngevity’s expert tested five other products with
ranges from 1.72% to 3.92%.  Wakaya’s
rebuttal expert opined that, because levels of organic compounds naturally vary
in spices, test results of the percentage of certain compounds in products will
also vary, so the testing wasn’t definitive; Wakaya argued that its claims were
therefore at best unsubstantiated. [I disagree with this interpretation. There
are two facts in evidence, not just one: (1) the percentage in the sample it
tested, and (2) that there’s variation, whose range/average deviation is not
established—the best understanding of the truth, based on those two facts, is
that there is not the claimed percentage in the other lots being sold.  Part of this is an attempt to create epistemological
uncertainty: how do we know what’s in any given bottle of a supplement, really?
I think the best answer is that you shouldn’t advertise consistency if your own
claim is that there’s variation.] 
Anyway, the court agreed that the claims were unsubstantiated, but maybe
they weren’t false, so Youngevity didn’t get summary judgment on falsity here.
Youngevity also didn’t create a genuine dispute on weight loss:
“while the evidence includes testimonials of weight loss during specific
periods of time, no promotions or advertising presented by Youngevity promise
that users would or will lose weight.” 
It’s notable that the FTC would consider these claims to promise that
these claims are representative and thus they’d be at least implicitly false,
e.g., “So far 100% of People have lost weight on our #Keto #BulaFIT Program” and
“While we can’t say that 100% of the people will get results, so far we do have
20 out of 20 that have lost weight.” But Youngevity’s expert report just opined
that the claim was “unrealistic, unsubstantiated, and very misleading,” which
wasn’t enough under the Lanham Act. 
Among other things, the ad claimed weight loss, not that the weight loss
would be maintained for any period, and “[c]laims about weight loss are not
inherently misleading just because they fail to include data about weight loss
maintenance.”

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