restitution unavailable in fed ct when damages are adequate, no matter what Cal state cts say

Posted on September 24, 2020 by rtushnet

Sonner v. Premier Nutrition Corp., 971 F.3d 834 (9th Cir.
2020)

In this amended opinion (original
summarized here), the court elaborates on its reasoning that Sonner couldn’t
abandon her damages claim on the eve of trial in this false advertising case
and seek only restitution, because equity requires that legal remedies be
inadequate and she abandoned her legal damages claim:

At bottom, “[t]hat a State may
authorize its courts to give equitable relief unhampered by” the “restriction[
]” that an adequate remedy at law be unavailable “cannot remove th[at] fetter[
] from the federal courts.” Guided by that instruction, we hold that the
traditional principles governing equitable remedies in federal courts,
including the requisite inadequacy of legal remedies, apply when a party
requests restitution under the UCL and CLRA in a diversity action.

Side note: I wonder how federal courts treat the “traditional
principles governing equitable remedies in federal courts” when it comes to
disgorgement in trademark cases. Disgorgement supposedly just became much
easier to get, and if courts continue to believe that trademark goodwill is a
mysterious entity, distinct from all the other parts of a business, then
perhaps they will routinely find damages inadequate. But that’s always been a
slogan rather than a reasoned decision, and plaintiffs pressing disgorgement
demands in marginal cases may lead courts to see that.

Anyway, “Sonner must establish that she lacks an adequate
remedy at law before securing equitable restitution for past harm under the UCL
and CLRA.” But she conceded that she sought the same sum in equitable
restitution as “a full refund of the purchase price”—$32,000,000—as she
requested in damages to compensate her for the same past harm. There was no
reason damages couldn’t be adequate, even if California state courts wouldn’t impose
the same rule.

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“upcycling” isn’t infringement/counterfeiting when full disclosure is present

Posted on September 22, 2020 by rtushnet

Hamilton International Ltd. v. Vortic LLC, No. 17-CV-5575
(AJN)(OTW) (S.D.N.Y. Sept. 11, 2020)

Champion Spark Plug still matters sometimes!
Hamilton, a Swiss watchmaker, sued Vortic for making watches incorporating
vintage Hamilton parts, alleging that this constituted trademark infringement,
counterfeiting, dilution, and unfair competition. After a bench trial, the
court found Vortic’s conduct unlikely to cause confusion and entered judgment
for defendants.

“Vortic is a watchmaker that specializes in restoring
antique pocket watches and converting them into wristwatches.”  It sold a watch called “The Lancaster,” named
after Lancaster, PA, where the Hamilton Watch Co. was originally located, that
was made with a historic, restored movement (here, internal mechanism with
hands and face attached) produced by the Hamilton Watch Company.

The “Hamilton” mark remains visible
on the antique face of the watch. The Lancaster has a Gorilla Glass back which
makes the internal workings visible, and “Hamilton” can also be seen on one
part of the movement. Around the ring in the rear of the watch is engraved
“Vortic,” along with “The Lancaster” and a serial number. In total, 58 watches
were either sold or gifted.

From Vortic’s website

Infringement: The Polaroid factors shouldn’t be
applied mechanically. “In cases such as this one, involving modified genuine
products, the Supreme Court has found whether the defendant adequately
disclosed the origins of the product to be dispositive.” In Champion, as
long as the repaired sparkplugs had “Repaired” or “Used” conspicuously stamped
on them and their packaging indicated that the defendant had done the
restoration, “[f]ull disclosure” of the products’ origins was “all the
protection to which [the plaintiff] was entitled.”

Since the sparkplugs were second-hand
goods and consumers would naturally expect a used or repaired good to be
inferior, conspicuously labeling the goods as used or repaired constituted full
disclosure. It was otherwise permissible for the goods to retain the Champion
trademark even if it means that the defendant benefits from plaintiff’s
goodwill or “gets some advantage from” plaintiff’s mark.  The Court cautioned that it would be possible
to imagine a case “where the reconditioning or repair would be so extensive or
so basic that it would be a misnomer to call the article by its original name,
even though the words ‘used’ or ‘repair’ were added.” Outside those rare
circumstances, however, a refurbished product may bear the original maker’s
mark.

Thus, the court focused on “adequacy of disclosure,”
treating the Champion rule “as a substitute or crucial supplemental
factor to a traditional Polaroid likelihood of confusion analysis.”
Subtle twist, though: “Full disclosure” matters if it prevents “numerous
ordinary prudent purchasers” from being “misled or confused as to the source of
the product.” That’s a twist because Champion didn’t suggest that
evidence of confusion was relevant; it was a rule about what the defendant
should do, not a rule about what consumers perceive. Is it now a presumption?
Is it only rebuttable with evidence of substantial consumer confusion?
Smuggling the rule into the definition of “ordinary prudent purchasers” is one
way to resolve these tensions—but then it’s hard to see why any evidence could
rebut the presumption, if reasonable consumer is a normative concept rather
than an empirical one.

Anyhow, the court gave “strong weight” to the “full
disclosure” factor while also running through the Polaroid factors, as
guided by the Second Circuit’s awful treatment of nominative fair use, sigh.

First, there was “full disclosure” per Champion, in
the ads and marketing materials, as well as the watch itself. All of the
advertising and marketing in the record “would accurately convey to the
ordinary prudent purchaser that the only connection of any kind between
Hamilton and Vortic is that Vortic used antique Hamilton watch movements and
parts for its Lancaster watch.” E.g, the website “clearly stated that the
Lancaster was one of ‘Vortic’s flagship line of watches’ and that ‘[a]ll of the
components (movement, dial, hands) between the two Gorilla Glass crystals ~100
years old and started their life in a Railroad-era pocket watch made by the
Hamilton Watch Company.’” The website stated that Vortic “meticulously restores
the inner workings in order to build a completely custom watch around” vintage
elements. “While the Hamilton mark is visible in a picture, Vortic’s logos
predominate.”  

A magazine ad likewise stated that “[e]ach piece is custom
fabricated using railroad era, American made pocket watch movements to create a
timeless one of a kind wristwatches.” “Any viewer of this advertisement would
come away with an accurate understanding of the relationship between Vortic and
Hamilton.”

The watch itself, “in isolation,” also provided full
disclosure. “[T]he watch obviously presents to a viewer as restored antique
pocket watch movement, face, and hands that have been reincorporated into a new
wristwatch. This would be true even if the watch was viewed only from the  front or only from the back, and even if the
viewer did not have any prior knowledge about the watch.” [Shades of what
happened after the initial reversal in the LV v. Dooney & Bourke case,
which prompted Judge Scheindlin on remand
to find no confusion even when “viewed ‘in public from a distance, in a store
window, from across a room, from a passing car, [ ] while walking in the
street,’ in an advertisement, or hanging off of a woman’s shoulder, by way of
examples.”]

The court ponted out that “the watch is much larger than the
typical wristwatch and that there is a large knob at the 12 o’clock position
which is immediately recognizable as being from a pocket watch, rather than a
wristwatch which usually has the movement at 3 o’clock.  Additionally, the hands, face, and movement
have a patina, style, and look that convey that they are restored antiques.”
Plus, the placement of the respective marks “would convey to any ordinary
prudent purchaser that the watch was made by Vortic and that the Hamilton mark
is only displayed because Hamilton created the original movement, face, and
hands that have subsequently been restored.” 
“Vortic,” “Lancaster,” and the serial number were all prominently
engraved on the case while the Hamilton mark is only visible inside the glass
case, “on a movement and face that appear obviously antique.”

Nicely, the court pointed out that complete disclosure about
the production process on the product itself isn’t required by Champion.
“ It was sufficient in that case that the sparkplugs clearly conveyed that they
were ‘used’ or ‘repaired.’  While the
watches in this case have been modified to a greater extent than the sparkplugs
in Champion, the Court finds that the Lancaster itself provides more disclosure
as to the extent of the modification and restoration.”

Since the Hamilton components had been restored, it was not
a misnomer to call the components bearing the Hamilton trademark by their
original name, and the disclosure “prevents undue interference with the ability
of Plaintiff to control its reputation.” Stamping “used” or “repaired” on the
watch wasn’t required as long as there was “full disclosure with sufficient
clarity and conspicuousness,” which was done here by overall design and the
engravings. (Citing Ford Motor Co. v. Ultra Coachbuilders, Inc., Case No. EDCV
00-00243-VAP, 2000 U.S. Dist. LEXIS 20173 (C.D. Cal. July 11, 2000) (stretch
limousine version of Ford automobile did not infringe on Ford’s trademark
because the modifications were “apparent”).)

Hamilton argued that the burden was on Vortic to show that
the disclosure worked. First, Vortic’s principal’s testimony “to the effect
that neither he nor his company encountered individuals who were confused about
the relationship or lack thereof between Vortic and Hamilton would seem to meet
this burden, particularly given Vortic’s small size.” But second, the case law
Hamilton cited wasn’t about modified genuine products. (Citing Home Box Office,
Inc. v. Showtime/The Movie Channel, Inc., 832 F.2d 1311, 1316 (2d Cir. 1987).)
“Champion, which did involve a modified genuine product, did not place
such a burden on the defendants and neither have courts in this circuit that
have applied Champion.”

Second, Hamilton argued that the disclosure was insufficient
“because it fails to disclose particular modifications to the movement or that
Vortic sometimes uses parts from other antique Hamilton watch movements in its
restorations.” The uncontroverted evidence was that the modifications were
minor and didn’t alter the function of the movement; there was no reason to
believe that this was “particularly significant to consumers” or “somehow
material to a likelihood of confusion.” In terms of using parts from other
watches, “this is a technique that virtually anyone would expect in the
restoration of an antique watch movement.” (Citing Champion, 331 U.S. at 129
(“inferiority is expected in most second-hand articles.”).) Nor was it material
to likely confusion: “the watch still contains an antique Hamilton watch
movement with antique Hamilton watch parts.”

Third, Hamilton argued that post-sale confusion could occur.
A member of the general public, seeing a Lancaster on someone’s wrist, “would
not know that it was Vortic rather than Hamilton that had done the restoration
and modification.”  But third-party
confusion is “only relevant if their views are somehow related to the goodwill
of the aggrieved manufacturer.” There was no reason to conclude that the
appearance of the Hamilton mark “on the inner workings of the watch—visible
only upon close inspection—would result in initial interest confusion among
members of the public.” [Also, so what?]

With that out of the way, the Polaroid analysis
didn’t favor a finding of likely confusion. A number of the Polaroid factors weren’t
helpful: strength of mark and similarity doesn’t matter where there is a
modified genuine product with full disclosure. “Likewise, proximity of the
products, bridging the gap, and the quality of the product are all also
unhelpful, because application of these factors would penalize defendants who
have only lightly modified a genuine product. Yet, under Champion, these
are the defendants who have the lowest burden to meet the full disclosure
standard.”  Thus, only actual confusion,
the defendant’s good faith, and the sophistication of the buyers were relevant Polaroid
factors.

Even if the court considered all the Polaroid
factors, the result would be the same. The mark is relatively conceptually
strong (the court calls it “fanciful,” even though that’s clearly wrong), but
there was limited evidence of market strength, especially of such a kind as to
make the views of non-purchaser members of the public important to its
goodwill. Similarity, likewise, isn’t assessed in a vacuum, and so the context pointed
to dissimilarity. Proximity of the products was “a wash,” because of
presumptive variation within the watch market; Hamilton didn’t show that it
sold any watch similar to the Lancaster, “such as a wristwatch that looks like
a pocket watch or any kind of restored watches,” and bridging the gap was
irrelevant/Hamilton submitted no evidence. [Beautiful example of stampeding the
factors.] Product quality: There was no evidence about the quality of either
party’s actual watches.

Actual confusion: Hamilton relied on a single email sent to
a Canadian brand manager in 2015: “my friend is looking for a vintage hamilton
as per attached,” but Hamilton failed to establish that the attached was a
Vortic ad (as claimed), and anyway the email wasn’t clear about whether the
sender’s friend actually thought that Vortic’s product was made by/affiliated
with Hamilton.

The court found that Vortic acted in good faith, seeking to
“preserve American history” by salvaging and restoring the hearts of antique
pocket watches rather than to cause confusion. Its principal

viewed himself as “upcycling,”
restoring previously nonfunctional antique watch movements and parts, and
making them into something of “much greater value.” To be sure, Mr. Custer did
intend to gain some benefit from displaying the Hamilton mark, albeit more from
Hamilton’s historical significance rather than its modern-day reputation. But
the benefit Mr. Custer sought was no more than what he fairly believed he was
entitled to by including restored, genuine antique Hamilton movements, hands,
and faces. 

Finally, the customer base was highly sophisticated. The
Lancaster was “very expensive” and expensive-watch consumers are typically
discerning.

Counterfeiting: This requires that use of a counterfeit mark
is “likely to cause confusion, or to cause mistake, or to deceive.” That wasn’t
shown here. [Courts are of course super inconsistent about this. If there were
no genuine goods involved, even full disclosure “these are counterfeit” wouldn’t
work, but the ways that courts distinguish these situations are opaque at best.
Overall, we might be better off talking more openly about “unfair competition”
and what constitutes fairness.]

State dilution: Only blurring was claimed; the factors are
similar to the confusion factors; so Vortic wins.

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court refuses to dismiss TM claims against NRA’s former PR agency

Posted on September 22, 2020 by rtushnet

National Rifle Ass’n v. Ackerman McQueen, Inc., 2020 WL
5526548, No. 19-CV-2074-G (N.D. Tex. Sept. 14, 2020)

The NRA sued AMc, an advertising and PR agency, for various claims arising from the parties’ now-terminated relationship and
Ackerman’s statements about the relationship; the court granted in part and
denied in part a motion to dismiss. The temptation is to say “Go it, husband! Go it, bear!” but the NRA’s expansive claims are pretty worrisome from a “people are allowed to truthfully describe their own activities” perspective, so.

The NRA used AMc’s services from “at least the 1980s” until
2019, when the last of their agreements ended. AMc’s services included “public
relations and strategic marketing; planning and placement of media; management
of digital media and websites; and the management of NRATV, a digital-media
platform frequently perceived by the public as the ‘voice’ of the NRA.”

Despite the termination of the services agreement, AMc’s
website allegedly continues to “prominently feature[ ] unauthorized and
unlicensed NRA-owned photos and reference[ ]…the NRA with greater frequency
than any other AMc client.” The NRA alleged: (1) false association under the
Lanham Act (2) copyright infringement.; (3) conversion; (4) fraud; (5) breach
of fiduciary duties; (6) conspiracy to commit fraud and extortion; (7) breach
of the fiduciary duty of loyalty; and (8) breach of contract.

Defendants counterclaimed and moved to dismiss (though not
on the claim for breach of contract).

Consistent with the lack of weight that many courts give to
historical facts in trademark contexts, the court denied the motion as to the
false association claim.  “The crux of
the NRA’s false association claim is that AMc’s continued display of the name
NRA and the NRA’s ‘intellectual property on AMc’s website provides a strong
inference that wrongly suggests to the public—and creates consumer and customer
confusion—that the NRA presently endorses the services that AMc provides and
that the NRA is currently AMc[’s] client.’”

Rather than explicitly arguing Dastar and First
Amendment/nominative fair use, defendants argued that the NRA hadn’t alleged Lexmark
standing or identified any false or misleading content on AMc’s website. The
NRA properly alleged that it was within the Lanham Act’s zone of interests: its
alleged injuries fell within two of the Lanham Act’s enumerated purposes: the
purpose to “mak[e] actionable the deceptive and misleading use of marks in”
commerce within the control of Congress, and the purpose “to prevent fraud and
deception…by the use of reproductions…or colorable imitations of registered
marks.”

The complaint “provides a laundry list of instances in which
AMc’s website references or lists the marks NRA and NRATV, including a total of
fifteen references to the NRA and NRATV under headings entitled ‘Gallery’ and ‘Clients.’”
This allegedly confused the the public about whether the NRA remains an AMc
client and endorses the services provided by AMc.”

Likewise, the NRA properly alleged proximate cause. “This
perceived association between the NRA and AMc, the NRA argues, is harmful to
the NRA’s reputation, diminishes the value of the NRA’s trademarks, and causes
the NRA to lose out on royalties.” That was enough on a motion to dismiss.

And the NRA sufficiently pleaded misleadingness. It alleged
that “AMc continues to depict numerous photographs on AMc’s website that
contain the words ‘National Rifle Association’ written across the bottom.” AMc,
after suit was filed, altered the legends on these photographs such that they
now read “National Rifle Association (Legacy).” That might ultimately suffice,
but the NRA properly pled that the references to the NRA were misleading, since
misleadingness is a fact-specific inquiry “best left for decision after
discovery.”

Copyright infringement: The NRA failed to register the
photos before suing, so the claim was dismissed without leave to amend.

Conversion: This claim was based on defendants’ continued
use of and failure to remove various “creative works and intellectual property”
from AMc’s website, apparently meaning the same photos. Texas conversion law
covers only physical property, and even if Virginia law applied (as the NRA
argued because its HQ is in Virginia) its claim was preempted by the Copyright
Act.

Fraud/conspiracy: the allegations here aren’t IP-related;
the claims were dismissed for failure to plead with particularity. Breach of
fiduciary duty claims also weren’t sufficiently pled against the individual
defendants.

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Second Circuit affirms flushable wipes damages class certification, disallows injunctive class

Posted on September 21, 2020 by rtushnet

Kurtz v. Costco Wholesale Corporation, 818 Fed.Appx. 57,
Nos. 17-1856-cv, 17-1858-cv (2d Cir. Jun. 26, 2020)

This is a “flushable” wipes consumer protection class
action. The district court previously certified damages and injunctive relief
classes. On appeal, the Second Circuit required further clarification on the
predominance argument and remanded.  The
district court received additional evidence, including supplemental expert
reports, and conducted a hearing. On that basis, it reaffirmed its prior
certification decision, determining that Kurtz had demonstrated that he could
prove injury and causation with common evidence, satisfying Rule 23(b)(3)’s
predominance requirement. The court of appeals found no abuse of discretion,
though not on an injunctive relief class.

Kurtz showed adequacy and typicality, despite Kimberly-Clark’s
argument that he sacrificed potentially higher-value plumbing damages claims in
order to advance lower-value, but more easily certifiable, claims based on a
price premium theory. Given that the cost of litigating such plumbing damages
claims likely would have outweighed any recovery, the district court held that the
strategic decision to forgo plumbing damages and pursue statutory damages of
$50 per purchase under NY’s GBL §349 wasn’t a fundamental conflict of interest.
This was not an abuse of discretion. Nor was it a typicality problem that Kurtz
continued to buy the wipes after he learned that they were not flushable; his
theory of injury was predicated on the existence of a price premium, so the
harm he suffered occurred at the time of purchase. “Accordingly, his purchasing
history is largely irrelevant to typicality and does not warrant setting aside
the court’s certification order.”

Standing to represent an injunctive relief class: no,
because there was no likelihood of future injury. Kurtz made no assertion that
he intended to purchase additional flushable wipes products—from Costco,
Kimberly-Clark, or any other company.

Predominance: The court of appeals initial decision
expressed “specific concern with the Plaintiffs’ proof that they can establish
the injury and causation elements of their claims at trial with common
evidence.” On remand, plaintiff’s expert “developed and performed hedonic
regression analyses” indicating “that there is a marketwide price premium for
wipes labeled as flushable,” rather than merely speculating that such a
regression could be run. Though defendants’ experts critiqued this expert
report, the district court deemed the testimony and analysis admissible, and
found that his regression satisfied the obligation to demonstrate predominance.

The “litany” of purported failings in the methodology was
unpersuasive. For example, defendants argued that the model “fails to account
for major variables, including attributes that consumers value most.” Though
some regressions may be “so incomplete as to be inadmissible as irrelevant,” this
model accounted for “a wide range of variables, some of which are substantial
drivers of consumer purchases.” The omitted variables were “arguably
significant,” but that went to weight rather than admissibility. So too with
defendants’ argument that there was no price premium “if the time frame is
shifted or if additional products are included in the underlying dataset.” While
cherry-picking data can render a model so unreliable that it is inadmissible,
the expert here testified that changing the timeframe of his model while making
appropriate adjustments to other variables still yielded a price premium, and
the district court found that he used a sufficiently wide range of sources to
render the end-result “statistically reliable.” There was no abuse of
discretion in relying on his testimony.

Comcast Corp. v. Behrend, 569 U.S. 27 (2014), held that “a
model purporting to serve as evidence of damages in [a] class action must
measure only those damages attributable to that theory.” That’s exactly what this
model purports to measure: the price premium attributable to the “flushable”
label. Although plaintiffs’ claim might still fail, the model worked as “common
evidence of plaintiffs’ theory of injury.”

Ultimately, none of Defendants’ critiques demonstrates that
there exists “some fatal dissimilarity among class members that would make use
of the class-action device inefficient or unfair. Instead, what [Defendants] allege[
] is a fatal similarity—an alleged failure of proof as to an element of the
plaintiffs’ cause of action.” A factfinder might ultimately agree with
defendants’ critiques of the model, but that would make the class claims fail
as a unit.

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“Keratin Caring” doesn’t convey keratin content to reasonable consumers

Posted on September 21, 2020 by rtushnet

Devane v. L’Oréal USA, Inc., 2020 WL 5518484,  19 Civ. 4362 (GBD) (S.D.N.Y. Sept. 14, 2020)

Devane sued for breach of express warranty, breach of
implied warranty, fraud, and violations of the Florida Deceptive and Unfair
Trade Practices Act (FDUTPA), New York General Business Law (NYGBL), Florida
False Advertising Statute (FFAS), and Alabama Deceptive Trade Practices Act (ADTPA)
based on L’Oréal’s branding of its “EverSleek Keratin Caring” products that
allegedly misrepresented that they contained keratin, a protein naturally present
in human hair, skin, and nails. The court granted L’Oréal’s motion to dismiss. In
essence, it agreed with L’Oréal that it was unreasonable to assume that the products
themselves contained keratin, as they specifically stated that they “car[e] for
the essential protein and keratin that is found in hair.” The backs of the
bottles include ingredient lists—which do not include keratin; the front and
back indicate that the products are “Vegan,” and further the back says “[n]o
animal derived ingredients or by-products.” Under these circumstances, it wasn’t
reasonable to assume that a product contains a certain ingredient when it is
not listed in the ingredient list. The label said multiple times, including on
the center of the front labels, that they were “Keratin Caring” products, and
it was “reasonable to understand this to mean that it cares for the keratin
already found in the hair.” [This is the wrong framing: we need to know whether
it was unreasonable to read the label otherwise; there can be multiple
reasonable interpretations.] In conjunction with the “extremely clear” ingredient
list, that meant that plaintiff didn’t plausibly plead that a reasonable
consumer could understand that the product contained keratin.

The court rejected Devane’s argument that L’Oréal’s argument
wrongly “presupposes a higher level of knowledge on the part of the reasonable
consumer than is appropriate.” “Even if the average reasonable consumer is
unaware of what the word ‘vegan’ means, or did not previously know that keratin
is found in one’s hair, this nonetheless does not counter the number of times
that the label makes it clear that (1) keratin is not an ingredient, and (2)
the Products are intended to care for the keratin in one’s hair….
Reasonableness cannot be based solely on what the consumer might have known
prior to picking up the Products and examining the labels.”

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Fla district court rejects argument that “completely unsubstantiated advertising” is literally false on sj

Posted on September 21, 2020 by rtushnet

Diamond Resorts U.S. Collection Development, LLC v. US Consumer
Attorneys, P.A., 2020 WL 5514158, No. 18-80311-CIV-REINHART (S.D. Fla. Jul. 31,
2020)

Another timeshare case. (Student note topic alert!)

Defendant Newton Group Transfers sent a mailer to Samuel
Street in West Chester, Pennsylvania, believing him to be the owner of a
timeshare. The mailer said (in relevant part): “We are attempting to contact
you because our records suggest that you are an owner who may be affected by
new Timeshare Laws allowing developers to raise maintenance fees with no
restriction.” Diamond argued that this statement was literally false as to Mr.
Street, whose timeshare is in Florida, which allegedly has no such laws. The
court disagreed. (There’s an interesting, unexplored “targeted v. untargeted”
issue here—to the extent that this was an individualized pitch, I think literal
falsity should be an option, just as a salesperson who represents that a
mortgage is the right choice for a particular individual should be held to a
higher standard than a general ad touting “the right mortgage for you!” which,
in an ad directed to the world at large, is puffery.)

Anyway, literal falsity requires assessment in context. “As
the meaning of a statement becomes less clear … and it becomes susceptible to
multiple meanings, the statement is more likely to be merely misleading.”

Diamond moved for partial summary judgment on falsity,
arguing that, under Florida law and Diamond’s timeshare contracts, (1) no
timeshare managing entity can raise maintenance fees without restriction and
(alternatively) (2) even if some managing entity can do it, a developer cannot.

Housekeeping: no partial summary judgment was available for
the other defendants because the evidence didn’t establish their legal
responsibility for the mailer.

Merits: “[T]he parties agreed that the threshold question of
literal falsity depends only on the text of the Mailer.” The mailer didn’t say
that Street actually owned a timeshare, where that was located, or reference
Florida/Florida law. The mailer therefore—implicitly treating this as
nontargeted advertising, which seems appropriate on this record—couldn’t be
literally false unless “at least, in or about the fall of 2017 when the Mailer
was sent, there were no new timeshare laws anywhere in the United States that
allowed a timeshare developer to increase maintenance fees without restriction.”
There was no such evidence in the record.

Diamond attempted to rely on the testimony of the corporate
representative for Newton Group Exit, LLC, that the mailer’s mention of “new
Timeshare Laws” was referring to amendments to Florida law, but Diamond didn’t
show why that was binding on Newton Group Transfers, LLC, a separate entity,
and regardless that’s not what the mailer said. Nor did Diamond cite evidence
that Street’s timeshare fell under the terms of the contracts in the record,
even assuming that those contracts could render the mailer literally false.

Finally, Diamond tried to get the court to adopt the rule of
Novartis Consumer Health, Inc. v. Johnson & Johnson-Merck Consumer Pharm.
Co., 290 F.3d 578 (3d Cir. 2002), that “completely unsubstantiated advertising”
 is literally false, but the court declined.
Among other things, Novartis was an appeal from a grant of a preliminary
injunction; even though the movant had the burden of persuasion, a factfinder can
draw an adverse inference from the respondent’s failure to provide affirmative
evidence to refute the movant’s claim; that wouldn’t be appropriate here. I’m not sure I see the civil procedure distinction here–if anything accepting this inference for a PI seems like a bigger deal, but ok.

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FDA preemption/preclusion after Pom Wonderful: still powerful for drugs

Posted on September 21, 2020 by rtushnet

Exela Pharma Sciences, LLC v. Sandoz, Inc., 2020 WL 5535026,
No. 19-cv-00318-MR (W.D.N.C. Sept. 15, 2020)

Exela sued Sandoz for unfair and deceptive trade practices
in violation of North Carolina law; tortious interference with prospective
business advantage; and Lanham Act false advertising and unfair competition. It sought a TRO etc. forcing Sandoz to recall its L-Cysteine product.

Exela makes an FDA-approved L-Cysteine injection product,
used for high-risk patients, such as preterm or low-weight newborns and
patients with severe liver disease, as part of a nutritional supplement regimen
(aka “total parenteral nutrition” or TPN). “Aluminum is a known contaminant of
TPN solutions, and aluminum toxicity can cause serious health problems
including dementia and impaired neurologic development among others. High-risk
infants who receive TPN are particularly susceptible to harm from excessive,
toxic amounts of aluminum, as they have immature kidneys, which impairs the removal
of aluminum from the body.”

Sandoz makes an L-Cysteine product in Canada with a label
stating that it contains as much as 5,000 mcg/L of aluminum; it’s not FDA-approved.
But starting in 2014, there was an L-Cysteine shortage in the US, so the FDA
asked Sandoz to import its product under the FDA’s “shortage program,” without requiring
FDA approval. On April 12, 2016, the FDA stated that it would not bring an
enforcement action for importing the product for 6 months if Sandoz followed
certain conditions, including distributing a “Dear Healthcare Provider” letter
alongside its L-Cysteine product that explained the product, the drug shortage,
and the lack of other similar FDA-approved products. The letters had to be
reviewed by the FDA before distribution.

Sandoz sought several extensions, each of which was granted.
The last Dear Healthcare Provider letter was approved on June 21, 2019,
instructing Sandoz to ensure that the “previously reviewed Dear Healthcare
Provider letter continues to accompany [its] L-Cysteine in distribution.” Every
version of the letter stated that “there are currently no FDA-approved
L-Cysteine Hydrochloride Injection products in the United States.”

However, Exela developed an L-Cysteine product with low
aluminum levels. The FDA wanted no more than 145
mcg/L of aluminum for permanent approval. In April 2019, the FDA approved Exela’s NDA. By late May 2019, Exela had manufactured sufficient inventory to meet the
entire market demand for L-Cysteine.

Exela made “numerous efforts” to get Sandoz’s product off
the market, including repeatedly asking the FDA to act. The FDA declared
an end to the shortage in September 2019, and asked Sandoz to stop importing
its product; Sandoz complied but continued distributing its existing
inventory. Exela’s marketing team “claims to have observed customers
buying or committing to buy up to a year’s supply” even after its product received
FDA approval. In October 2019, the FDA told Sandoz to stop distribution, which
it did. However, even with Exela’s sole-approved-product status, it has less
than 20% of the L-Cysteine market while Sandoz “maintain[s] over” 80%.

The FDCA gives the FDA “complete discretion” to “decide how
and when [its power] should be exercised.” This can’t be evaded by putting a
state law label on what is really a complaint about FDCA violation. [Note that
this discussion applies only to drugs/devices; the situation for food/supplements
has more leeway for states, consistent with the lesser federal regulation to
which they are subject.]  “The test for
determining whether a state law claim is impliedly preempted is whether or not
the claim would exist in the absence of the FDCA.”

NC unfair/deceptive practices: the allegedly violative
action was selling the unapproved product and “stuff[ing]” the distribution
channels, including failing to update its 2018 Dear Healthcare Provider letter
after the FDA approved the Exela product, failing to warn its customers about
its product’s aluminum content, and misusing “its incumbent status in the
market and its huge market power and reach to block hospitals and distributors
from switching.”

The complaint fundamentally
challenged “the FDA’s decision not to bring enforcement proceedings against the
Defendant under the FDCA for importing and selling an unapproved and unsafe
drug.” That was preempted under conflict preemption, including claims about the
safety of Sandoz’s product. Even after Exela received FDA approval, the FDA
still had to account for the risk that it might not be able to meet the entire
market demand for L-Cysteine, the risk of supply chain issues during the
transition, other associated risks, and the parties’ interests (including
Sandoz’s interests in selling “inventory it created in response to the FDA’s
requests to help with the drug shortage.” Unlike failure-to-warn cases that escape
preemption, the only way to comply with state law would have been for Sandoz to
leave the market.

Similar analysis applied to the associated claims. The FDA regularly “weans unapproved products off the market once a
competing product has been approved.” In fact, it gave Sandoz only six months, not
the year it has suggested in the past; and Exela did not even allege that it had
sufficient production to satisfy the market for a significant portion of that
period.

Failing to update the “Dear Healthcare Provider” letter to
disclose the approved Exela product was also ok, even though it said “there are
currently no FDA-approved L-Cysteine Injection products in the United States.” The letters were “mandated, overseen, and preapproved
by the FDA,” and the last renewal was approved by the FDA after it approved
Exela’s product; the 2019 renewal “mandated (under threat of enforcement action)” the use of the
previously approved letter. Preemption was appropriate given that, “when a
party cannot satisfy its state duties without the Federal Government’s special
permission and assistance, which is dependent on the exercise of judgment by a
federal agency, that party cannot independently satisfy those state duties for
pre-emption purposes.” And state law likewise couldn’t require Sandoz to send
other letters “contradicting” the FDA-approved letters.

Failure to warn about aluminum content, even though the
aluminum content “far exceed[s]” the standard the FDA required Exela to meet: The
FDA didn’t set upper limits on the aluminum content of these products, and the
FDA later responded to Exela that Sandoz’s product had aluminum levels that
were “well within the standards agreed upon with FDA” and that “[i]t is thus
inappropriate to suggest that the Sandoz product is somehow unsafe.” And anyway,
“a merchant’s failure to inform its customers as to how its product compares
unfavorably to a competitor’s product” isn’t itself deceptive.

Ultimately, Sandoz “imported, marketed, and sold a product that it was
permitted by the FDA to import, market, and sell, and in quantities that did
not exceed that permission.”

Tortious interference claims fared similarly.

Lanham Act: The false/misleading representations were
similar to those discussed above. Unless an omission makes an affirmative
statement misleading, the Lanham Act doesn’t require disclosures. Although the
Dear Healthcare Provider letters were plausibly “commercial advertising or
promotion,” this was still a case where bringing a Lanham Act claim would
interfere too much with the FDCA, even after Pom Wonderful, which held
out the possibility of precluding a Lanham Act claim if “it turns on the
content” of something that has been “previously preapproved by the FDA” or
conflicts “with an affirmative policy judgment by the FDA.” Both scenarios
applied here.

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expert testimony isn’t always required for literal falsity or even misleadingness

Posted on September 16, 2020 by rtushnet

Ecore Int’l, Inc. v. Downey, No. 11-6843, 2020 WL 5501206
(E.D. Pa. Sept. 11, 2020)

The court denies Ecore’s motion in limine seeking to exclude
any evidence related to the falsity or misleading nature of its advertising for
purposes of defendant Pliteq’s Lanham Act/common law unfair competition
counterclaims. (There are about 20 claims and counterclaims “related to a hotly
contested commercial dispute between the parties.”) Ecore allegedly made false
and misleading statements about Pliteq’s “GenieMat” products and its own “QT”
products, which are competing sound dampening products: (1) claims of
equivalence as to quality, performance, and testing; (2) wrongly implying that
Pliteq’s products use a rubber cleaning and processing method involving sulfur,
and that the products accordingly have an unpleasant odor; and (3) claims that
Ecore “originated the new method of using two layers of floor underlayment,
when this is not the case.” That last sounds Dastar-problematic, but the
court doesn’t address that aspect of the claim.

Ecore argued that expert testimony was required on falsity
and likely confusion. The court agreed that lay witnesses might be able to do
so, including with the testimony of defendant Downey, “who has extensive
experience in the sound insulation field and can testify as to these issues
based on his personal knowledge and observations,” although he hadn’t been
identified as an expert on these issues.

The court noted that “[t]he type of proof needed to prove
literal falsity varies with the type of advertising claim being made,” and
further that whether expert testimony is necessary to a literal falsity claim
is also case specific, which seems all but self-evident.  Pliteq might be able to show literal falsity
of these particular claims without evidence that “requires scientific or
technical knowledge not appropriate for a lay witness.” The allegedly false statements
“do not refer to any scientific tests and do not otherwise contain such
technical implications that expert testimony would be needed to establish their
falsity. To the contrary, information regarding a product’s odor and who came
up with an idea is perfectly amenable to lay testimony.”

Second, even without literal falsity, an expert or consumer
survey isn’t absolutely required to prove deception. Courts have mentioned
“consumer surveys, market research, expert testimony, or other evidence,” even if
surveys are the “usual[]” method. [Imagine a very small market where all the
customers testify they were deceived—clearly no survey would be required.]
Without a full evidentiary record, the court wasn’t going to reject Pliteq’s
theories or prohibit Pliteq from attempting to prove its claims via lay
witnesses.

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5th Circuit reiterates stringent standard for injury in Lanham Act false advertising cases

Posted on September 16, 2020 by rtushnet

Boltex Mfg. Co. v. Galperti, Inc., — Fed.Appx. —-, 2020
WL 5506404, No. 19-20440 (5th Cir. Sept. 11, 2020)

Boltex and Weldbend sued Galperti and its Italian affiliate
for Lanham Act false advertising and state unfair competition. Galperti
counterclaimed for false advertising, false designation of origin, and unfair
competition. The court of appeals affirmed the grant
of summary judgment on all claims.

The parties make flanges used to connect equipment in the
oil and gas, petrochemical, and construction industries. ASTM standards may
require a heat treatment process to increase the carbon steel’s toughness and
ductility; normalization is one such process and it makes flanges costlier than
non-normalized flanges.

Boltex and Weldbend alleged that defendants adertise their
flanges as normalized, even though they are not. Galperti counterclaimed that
Boltex and Weldbend falsely advertised their products as American-made and
misrepresent their quality, characteristics, and technical standards. The
district court found that neither side had enough evidence of injury to survive
summary judgment.

Principles: “A claimant seeking actual damages must prove
that he has been injured in some way,” though actual losses need not
necessarily be shown. “A plaintiff must nevertheless put forth ‘competent
summary judgment evidence that indicates that consumers would have bought
[plaintiff’s] products instead of the [defendant’s products] in the absence of
the defendant[’]s[ ] allegedly false … statements.” Plaintiffs argued that
they also sought injunctive relief and disgorgement, and should have been
required only to prove likely injury. Their evidence: (1) they were direct
competitors; (2) deposition testimony from plaintiffs’ executives that defendants’
statements caused plaintiffs to lose sales; (3) customer statements the
district court deemed inadmissible hearsay; and (4) plaintiffs’ damages expert
report and testimony.

Initially, the court excluded consideration of two emails to
customers because they weren’t “advertising or promotion.” The “relevant
purchasing public” here consisted of as many as 81 customers, and there was no
evidence that the targeted two “wield outsized purchasing power.” This wasn’t sufficient
dissemination.

First, there was no precedent supporting the claim that,
because both sides were “among the market leaders … within a limited pool of
competitors, there should be a presumption that they were injured.” Second, the
deposition testimony from executives was speculative/inadmissible hearsay. One
witness speculated about losing a few customers before concluding, “I have no
idea the number of people.” Another named four customers that had allegedly
purchased defendants’ flange instead of plaintiffs’; when counsel asked how he
knew that, he responded, “I’m pretty sure we’ve been told that they placed
orders with Galperti or ULMA, because their—their customers are now requesting
it.” Statements made by customers to a Weldbend salesperson and then at some
point relayed to the executive by an unidentified source was “classic hearsay.”
Boltex’s sales manager testified that two customers told Boltex that it had
lost sales to defendants, which was also “plainly” hearsay, and the testimony
didn’t specify the reason for the lost sales/relate them to normalization. “[T]he
business records exception does not apply here because the evidence in question
is deposition testimony about supposed customer reports, not the actual
customer reports themselves.”

Testimony from a distributor who switched from Galperti to
Boltex didn’t indicate that it would have bought Boltex/Weldbend flanges
instead of Galperti’s in the absence of the allegedly false statements. An
executive at another distributor testified that they relied on Galperti’s
representations that it normalizes its flanges, and further that,
hypothetically, if they couldn’t get a flange from Galperti, they’d get it from
another core supplier. Puzzlingly, the court dismissed this as insufficiently
decisive about whether they would actually use it, and anyway there’s a fourth
“core”, nonparty supplier and some other suppliers to which any potential
diverted sales could have gone. This wasn’t enough for a “real and immediate
threat of future or continuing injury apart from any past injury.”

And plaintiffs didn’t rely on their expert report to show
causation in the district court, so they couldn’t do it now.

Counterclaims: “Because of the type of relief it sought,
Galperti was not required to prove actual injury, but had to at least prove the
likelihood of injury.” However, even that failed because Galperti didn’t offer any
evidence that would allow a factfinder to infer that the parties are
competitors in the market for U.S.-sourced flanges. Galperti doesn’t produce
flanges made in the USA; the court couldn’t see how it was likely to be injured
by not falsely advertising “made in the USA” while plaintiffs did. “[A]ny
profits Plaintiffs gain from their allegedly false advertising would not be at
Galperti’s expense unless Galperti too competes in the market for U.S.-sourced
flanges.” [Of course Galperti could be injured without participating in that
market! If some consumers trade off price/other characteristics with “made in
the USA,” then Galperti could offer an otherwise superior package and lose out in
the competition. Only if no amount of price/other feature superiority can
overwhelm “made in the USA” are the markets independent of each other. Maybe
that’s true—but that’s a different thing than what the court of appeals says.]
It also wasn’t enough to argue that some of the steel Galperti uses is of US origin.
  

There similarly wasn’t sufficient evidence on the other
alleged types of unfair competition.

 Comment: now do injury in trademark cases.

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consumer disillusionment with D isn’t evidence that deception injured P

Posted on September 16, 2020 by rtushnet

3B Medical, Inc. v. SoClean, Inc., No. 19 Civ. 3545 (KPF), 2020
WL 5440440 (S.D.N.Y. Sept. 8, 2020)

3B makes devices that automatically sanitize continuous
positive airway pressure (“CPAP”) machines using UV-C light. It sued SoClean,
which makes similar devices but use ozone as a sanitizing agent, for violating
the Lanahm Act, but failed to sufficiently plead injury. SoClean has 90% of the
market for CPAP machine cleaners, while 3B holds only 5%; the other 3
competitors also use ozone. The devices are sold as an alternative to
handwashing CPAP equipment.

The complaint alleges that ozone is a toxic gas that can
have a variety of serious health consequences to humans when inhaled, and that
defendant’s devices produce ozone at concentrations well above the limits
allowed by the FDA. Defendant’s marketing materials allegedly obscure SoClean’s
use of ozone as a sanitizing agent and mislead consumers about the health risks:

• statements that its devices use “activated oxygen,”
instead of ozone;

• statements that its devices do not use “chemicals” or
“harsh chemicals”;

• the terms “safe” and “healthy”;

• statements that its devices use the same sanitizing
process as that used in hospitals;

• statements that the charcoal filter cartridges that
accompany its devices are able to convert “activated oxygen” into “regular
oxygen”; and

• statements that its devices are closed-loop systems, out
of which no “activated oxygen” escapes.

Consumers have allegedly reported adverse experiences with SoClean’s
devices due to the devices’ use of ozone, and chose 3B’s product specifically
because it does not use ozone. 3B alleged that more consumers would learn of,
and purchase, its products if not for SoClean’s false advertising.

Under Lexmark, “a plaintiff in a false-advertising
case must demonstrate injury by way of lost sales or damage to business
reputation.” Injury can be presumed from false comparative statements. But where
the allegedly misleading advertisement “tout[s] the benefits of the products
advertised but ma[kes] no direct reference to any competitor’s products[,] …
some indication of actual injury and causation” is necessary “to ensure that a
plaintiff’s injury [is] not speculative.” This is because “injury in such cases
accrues equally to all competitors; none is more likely to suffer from the
offending broadcasts than any other.”

Although a plaintiff doesn’t need to name specific lost
customers, “some indication of actual injury” is needed to survive a motion to
dismiss. The allegations of injury here were merely conclusory and speculative.
The only specific statements from customers recommended the 3B product because
it doesn’t use ozone, which doesn’t show injury to 3B. E.g., “I owned a So
Clean cleaner and because of the ozone I developed a rash around my nose and
chin that would itch. I contacted So Clean and they told me to use wipes and I
did but the problem persisted. I also read that the ozone itself was very bad
for respiratory conditions such as COPD of which I have. Do the research. I
would no[t] recommend the So Clean device for these reasons. I decided to try [3B’s]
Lumin. No Ozone.”  [Compare the
hypothetical: “I bought the SoClean product because they promised me it was
safe and sealed so that no ozone would reach me. I’m so bummed!”]  “At most, the statements could be said to
support § 1125(a)’s causation requirement, but that requirement is distinct
from the need to show actual injury.”

What about a presumption of injury from the fact that 3B was
the only non-ozone product in the market? That wasn’t enough without implicit
reference to 3B’s products, and the market wasn’t a two-player market,
including other ozone users and handwashers. The Second Circuit has suggested,
without deciding, that the presumption might be applicable where the parties
“are direct competitors in a sparsely populated market,” but the court wasn’t
going to extend that here, where SoClean was the original market creator, and
thus wasn’t inherently diverting consumers from the plaintiff’s preestablished
market, and where there were alternatives. Given the other market players,
there was no reason to presume that the alleged misrepresentations were “targeted
at diverting consumers away from the Lumin or its associated devices. Indeed,
to allow the presumption in this context would incentivize any upstart
competitor in a market to claim, without proof, that a dominant player’s
long-time marketing statements are causing injury.”

NY state claims failed for the same reason.

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