Rebecca Tushnet

When © trips courts up: Lack of access to standards makes false ad claim impossible to resolve

Posted on July 11, 2019 by rtushnet

Wing Enterprises, Inc. v. Tricam Industries, Inc., 2019 WL
2994465, No. 17-cv-1769 (ECT/ECW) (D. Minn. Jul. 9, 2019)

This false advertising case about multi-position ladders turns
out to involve an important copyright issue that the Supreme Court has taken
up: when a standard is incorporated into law, should it be readily accessible
to the public? Because an older ANSI standard incorporated into OSHA isn’t
available to the court, the court can’t resolve whether failure to meet the current
ANSI standard also violates OSHA. This matters because the defendant advertised
ANSI/OSHA compliance, but plaintiff’s evidence went to whether there was
compliance with current ANSI.

The thrust of the federal and state false advertising claims
claims is that Tricam represented that its Gorilla Ladders comply with ANSI ASC
A14.2, a voluntary industry standard for portable metal ladders that was
developed by the American Ladder Institute, but in fact the rungs of its
ladders are not sufficiently deep all the way across to satisfy that standard
as Wing understands it. The label
affixed to each ladder has an oval icon that says: “manufacturer certifies
conformance to OSHA ANSI A14.2 code for metal ladders” and there were similar
representations elsewhere.

The court admitted one expert on ANSI conformance and
excluded an expert report on materiality, the latter because of the access-to-code
problem. Wing’s survey expert, Hal
Poret, conducted materiality surveys: a labeling survey, intended to measure
consumer reaction to the allegedly false statement on the label, and an
importance survey, intended to assess the importance to consumers of compliance
with industry safety standards in general. First, the court rejected the
argument that the labeling survey was unreliable because it failed to replicate
market conditions; it highlighted the label and demanded consumers spend a certain
amount of time looking at it, which might not happen on the retail floor. “These might be fair points if the survey had
been intended to test what message the statements conveyed (as relevant to the
falsity element), or whether consumer confusion existed in a trademark case.”
But for a materiality study, how the consumers would see the image in the store
didn’t affect its relevance, although a jury could weigh divergence from the
retail context in its considerations.

The real problem is that Poret’s surveys tested ANSI and
OSHA conformance together by eliminating the entire challenged label (and his
importance survey referred only to conformance to unspecified “industry safety
standards,” not specifically to ANSI); Wing didn’t show that either a combined
OSHA/ANSI statement or industry safety standards writ large was relevant to the
issues a jury would need to decide in this litigation.

Wing argued that OSHA uses ANSI standards, so that a
violation of ANSI is necessarily a violation of OSHA. And here’s where the access part comes
in. OSHA regulations provide that
mandatory provisions (“shall” provisions) of standards incorporated by
reference are adopted as mandatory under OSHA and “have the same force and
effect” whether they are issued by federal agencies or by nongovernmental
organizations. Here, OSHA regulations incorporate by reference “ANSI A14.2-56
Safety Code for Portable Metal Ladders, Supplemented by ANSI A14.2a-77.”

Those last two digits are apparently pre-2000 year codes. Wing didn’t identify how -56 and -77
differed/overlapped with the 2007 version of ANSI A14.2 the parties were apparently
working from in this case. OSHA
regulations, in fact, incorporate by reference different versions of ANSI
A14.2. “For example, one regulation that pertains to the construction industry
incorporates the 1982 version; another, pertaining to shipyards, incorporates
the 1972 version; and others, relating to marine terminals and longshoring,
incorporate the 1990 version.” Wing didn’t
confirm whether there was any relevant variation, and “[e]ven if the Court were
inclined to do that legwork on Wing’s behalf, the Court cannot independently
verify the extent to which the 1956 version explicitly mentioned in the
regulations overlaps, if at all, with the 2007 version before the Court by
referencing publicly available sources because the ANSI standards are not
reproduced in the Code of Federal Regulations and are instead behind a paywall
or available for in-person review in another state.” [Apparently the “state” is
DC, at the National Archives.] Testimony
from Tricam witnesses was not sufficient to reach the legal conclusion that failure
to meet the current ANSI standard, in the manner identified, would also be
failure to meet the older standards that actually have the force of law.

Because Poret’s label survey was premised on the assumption
that ANSI falsity meant OSHA falsity, it couldn’t test ANSI falsity alone and
was not admissible. Likewise, his importance survey tested “[c]ompliance with
industry safety standards” in general, but given the multiple sources of
industry safety standards and the evidence in this case, that wasn’t relevant—“What
happens if, as contemplated above, a ladder that fails to conform to the 2007
version of ANSI nonetheless does meet the requirements of one or more OSHA
regulations that incorporate an older version of that standard?”

Without the survey, Wing couldn’t show materiality and
summary judgment was warranted. It argued that it could show materiality by
showing that “the false or misleading statement relates to an ‘inherent quality
or characteristic’ of the product,” and that “questions of safety and efficacy
are likely to satisfy automatically the materiality prong.” But the Eighth
Circuit has not endorsed the “inherent quality or characteristic” method of
showing materiality. And here, without further evidence on ANSI variation, “the
most Wing could show is a technical noncompliance with one of multiple
potentially applicable safety standards. That is not a compelling context in
which to adopt a new approach to showing materiality.”

Nor was the following adequate: (1) testimony from a
high-level Wing executive that, in his opinion, compliance statements on Home
Depot’s website are “important, otherwise, I don’t believe Home Depot would put
it on the website,” (2) testimony by Tricam’s president that an
ANSI-certification statement on Home Depot’s website “could be” helpful in
differentiating Tricam’s products from hypothetical competing ladders that do
not purport to conform to ANSI, and suggesting that an ANSI-certification
statement on the product label might be something a professional might want for
purposes of OSHA inspections of a job site, and (3) testimony from the chairman
of the ANSI labeling committee that “[i]t’s possible” that an ANSI-compliance
statement would help a consumer choose a ladder. But these statements were all
speculative on their face, and in each case the testimony was qualified by
reference to the speaker’s lack of direct knowledge about consumer behavior.

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

Posted on July 10, 2019 by rtushnet

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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Rogers still mostly works in 9th Circuit, despite Honey Badger’s best efforts

Posted on July 9, 2019 by rtushnet

Caiz v. Roberts, — F.Supp.3d —-, 2019 WL 1755421 (C.D.
Cal. Apr. 17, 2019)

In Gordon v. Drape Creative, 909 F.3d 257 (9th Cir.
2018), the Honey Badger case, the Ninth Circuit began a process that could make
Rogers v. Grimaldi as reticulated and difficult as nominative fair use
has often become. Fortunately, the court
here sees past the FUD enabled by Gordon and finds that the use of
“Mastermind” in connection with rap music is protected by Rogers.

Caiz has a registration for MASTERMIND for for audio and
video recordings featuring music (applied 2005, issued 2013). Roberts is a hip-hop artist known as Rick
Ross (who also, incidentally (?), won a First Amendment defense over his use of
that name). Rick Ross released an album entitled “Mastermind,” went on a
“Mastermind” tour, and allegedly adopted the persona of “Mastermind.” After the
court of appeals reversed the district court’s initial finding that the
registration was invalid for descriptiveness, the case returned for further
proceedings on the infringement and related claims.

Once a defendant shows that its challenged use is part of “an
expressive [nonadvertising] work protected by the First Amendment,” the burden
then shifts to the plaintiff claiming infringement, who must show “that the
mark is either not artistically relevant to the underlying work or explicitly
misleading as to the source or content of the work.” “If the plaintiff satisfies both elements, it
still must prove that its trademark has been infringed by showing that the
defendant’s use of the mark is likely to cause confusion.”

Caiz argued that Rogers doesn’t apply to reverse confusion
claims, relying on Masters Software, Inc. v. Discovery Communs., Inc., 725 F.
Supp. 2d 1294 (W.D. Wash. 2010), which so held because it reasoned that Rogers
required a referential use. Since the Empire
case rejected that underlying rationale, Rogers applied. Twentieth
Century Fox TV v. Empire Distrib., Inc., 875 F.3d 1192 (9th Cir. 2017).

The uses here were in connection with artistic works, so Rogers
applied. “Minimal” artistic relevance is enough. Six of the nineteen songs on the album make
direct use of “mastermind” in the lyrics, and one song referenced the overall
album itself by its title (“Mastermind, my 6th LP. Can’t believe we did it.
Man, I thank everybody that played a part of this.”), all of which linked the
title to its contents. Plus, there was
[completely unnecessary] evidence that other people use “mastermind” as “part
of a larger, abstract theme used by artists in hip-hop claiming to be
masterminds of music.” That was enough.

But was the use “explicitly” misleading? Here, courtesy of Gordon,
we descend into a theoretical wasteland in which the implicit can in theory be
explicit. Caiz argued that the title of
the album was explicitly misleading as to source because Caiz had a
registration for musical recordings. The
use of “Mastermind,” Caiz argued, was an explicit reference to him and thus
misleading. As the court noted, the
usual rule is that “mere use of a trademark alone cannot suffice to make such
use explicitly misleading,” but “each time it made that observation, the junior
user had employed the mark in a different context than the senior user.” [Gordon says this, but of course Rogers
derives from a case in which Ginger Rogers, movie star, sued over use of her
name in a movie; the Ninth Circuit rejected the Second Circuit’s exclusion of
title-v-title disputes from Rogers, but Gordon allows the same
argument to be resurrected in much broader, and worse, form.] Under Gordon,
“identical usage” could be [but is not always as a matter of law] explicitly
misleading.

Gordon added a mini-transformativeness inquiry
into explicit misleadingness. For
“identical usage,” it’s now relevant how much creativity the junior user has
added. Worries over confusion are
limited “when the mark is used as only one component of a junior user’s larger
expressive creation, such that the use of the mark at most ‘implicitly
suggest[s]’ that the product is associated with the mark’s owner.” By contrast, the use of a mark “as the
centerpiece of an expressive work itself, unadorned with any artistic
contribution by the junior user,” may qualify as explicitly misleading.

In contrast to the use in Gordon, where the allegedly
source-indicating catchphrase was being used as the “centerpiece” of greeting
cards [and thus not as a mark, sigh], Roberts used “Mastermind” as one album
title out of six albums throughout his career, where he was established as Rick
Ross. “Mastermind” appeared nine times
in the lyrics across nineteen tracks, and it was used “through” Roberts’ own
artistic expression. [This discussion
really highlights the ©/TM mashup Gordon achieved. Of course, neither party created the word
“mastermind.” The only way to use the
word creatively is to use it. Gordon
was worried about the creativity behind “Honey Badger Don’t Care” and used TM
to give the plaintiff a quasi-copyright in a short phrase; that concern is
obviously irrelevant here, as it should have been in Gordon.] The marketing of “Mastermind” the album
attached Rick Ross’s persona and history to it. For example, https://ift.tt/1hMjmEn,
is titled “Rick Ross The Boss” and introduces him as “Rick Ross AKA Ricky Rozay
AKA the Boss AKA The Mastermind.” “In short, Plaintiff’s music lists the artist
as ‘Mastermind,’ while Defendants titled one of Roberts’ albums and tours ‘Mastermind,’
while retaining some sort of reference to “Rick Ross” as the artist and
incorporating Roberts’ own artistic expression.” [There are two argumentative threads here:
the first one, forced by Gordon, is weird and about the fact that the
album has songs in it and is thus more than Roberts just repeating the word
“mastermind,” though that would also be a creative, albeit more boring, work
protected by copyright. The second,
which goes more to the original Rogers title-v-title exception, is that
the uses aren’t in fact the same. Thus the premise of Gordon isn’t even
satisfied here and we don’t need all this handwaving about creativity.]

Caiz had no evidence that the use was “explicitly” or even
“implicitly” misleading, only a declaration stating that his fans and fans of
Rick Ross started asking him if a new album was coming out, “misleadingly
thinking Defendant’s album was [his].” That wasn’t enough to avoid summary
judgment. There was no evidence of any
explicit statements of association etc. by defendants (citing Novalogic, Inc.
v. Activision Blizzard, 41 F. Supp. 3d 885, 901 (C.D. Cal. 2013) (“To be
‘explicitly misleading,’ a defendant’s work must make some affirmative
statement of the plaintiff’s sponsorship or endorsement, beyond the mere use of
the plaintiff’s name or other characteristic.”)).

It was not enough to argue that the use was explicitly
misleading because reverse confusion was likely. Likelihood of confusion
analysis isn’t part of Rogers prong two; indeed, avoiding a fullscale
likely confusion analysis is the point of Rogers and the only thing that
makes it protective of First Amendment interests rather than an additional
overlay on a complex and fact-intensive balancing test. Under Gordon, only after lack of
artistic relevance or explicit misleadingess has been shown is a likely
confusion analysis appropriate.

Finally, Caiz argued that even if Rogers protected
the album name, it didn’t protect use of the term for the tour name or for Roberts’
persona in interviews and other live performances. But these were protected “extensions
of the use of the mark in an effort to advertise and market the ‘Mastermind’
album,” just as in Empire appearances by cast members, radio play,
online advertising, and live events were protected advertising for the
expressive work.

The sensible reasoning of this opinion does a lot to
indicate that, though Gordon was badly reasoned, it has limited
application outside of the scenario in which the defendant basically just
reproduces the plaintiff’s mark on the goods for which the plaintiff claims a
mark.

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Amazon strictly liable for product defect but 230 preempts failure to warn claim

Posted on July 8, 2019 by rtushnet

Oberdorf v. Amazon.com Inc., No. 18-1041 (3d Cir. Jul. 3,
2019)

Oberdorf was injured by a retractable dog leash “sold” by
Amazon on behalf of a third-party vendor, who shipped the leash directly to
Oberdorf. The district court found that, under Pennsylvania law, Amazon was not
a “seller” who could be strictly liable for Oberdorf’s injuries, and that the
CDA barred her claims. The court of
appeals reversed the first finding and partially reversed the second.

As one might expect, the Amazon contract with vendors allows
Amazon almost total control of the relationship between the parties. The vendor chooses the products it sells and provides Amazon with a product description, digital
images, shipping and handling options, and other information it requests.
Amazon has sole control over the content, appearance, design, functionality,
and all other aspects of its website. The vendor can choose the price, but can’t
charge more on Amazon than in other sales channels. [Hmm.
I can think of at least one wooden jigsaw puzzle vendor that seems not
to follow this rule, but perhaps it’s actually some hidden-to-me arbitrage by a
third party.] Vendors must communicate through the Amazon platform. When there’s
a purchase, Amazon collects the payment and requires the vendor to send Amazon
shipping information for each order. Of course, it also charges commissions and
fees, and is the vendor’s agent for purposes of payments and refunds. Amazon can, among other things, require
vendors to stop or cancel orders of any product. It further requires that its
vendors release it and agree to indemnify, defend, and hold it harmless against
any claim, loss, damage, settlement, cost, expense, or other liability.

In Pennsylvania, strict products liability is limited to “sellers.” The Pennsylvania Supreme Court identified
four relevant factors in identifying a “seller”:

(1) Whether
the actor is the “only member of the marketing chain available to the injured plaintiff for redress”;

(2) Whether
“imposition of strict liability upon the [actor] serves as an incentive to
safety”;

(3) Whether
the actor is “in a better position than the consumer to prevent the circulation
of defective products”; and

(4) Whether
“[t]he [actor] can distribute the cost of compensating for injuries resulting
from defects by charging for it in his business, i.e., by adjustment of the
rental terms.”

Under this test, Amazon is a “seller.” First, Amazon isn’t like a brick-and-mortar
auctioneer. Even though every item on
Amazon’s website can be traced to a third-party vendor, the only way to
communicate with customers is through Amazon. “This enables third-party vendors
to conceal themselves from the customer, leaving customers injured by defective
products with no direct recourse to the third-party vendor. There are numerous
cases in which neither Amazon nor the party injured by a defective product,
sold by Amazon.com, were able to locate the product’s third-party vendor or
manufacturer.” Amazon’s VP of Marketing
Business “admitted that Amazon generally takes no precautions to ensure that
third-party vendors are in good standing under the laws of the country in which
their business is registered. In addition, Amazon had no vetting process in
place to ensure, for example, that third-party vendors were amenable to legal
process. After Oberdorf was injured by
the defective leash, neither she nor Amazon was able to locate
The Furry Gang [the vendor].” For
compensation, it’s Amazon or nothing, weighing in favor of strict liability.

The dissent argued that “[t]o assign liability for no reason
other than the ability to pay damages is inconsistent with our jurisprudence,” but
it wasn’t just ability to pay that was Amazon’s problem. “Amazon fails to vet third-party vendors for
amenability to legal process. The first factor weighs in favor of strict
liability not because The Furry Gang cannot be located and/or may be insolvent,
but rather because Amazon enables third-party vendors such as The Furry Gang to
structure and/or conceal themselves from liability altogether.”

Second, whether “imposition of strict liability upon the
[actor would] serve[] as an incentive to safety”: Imposing strict liability on
an auction house wouldn’t help because an auction house doesn’t design or make
any particular product; Amazon too argued that it didn’t have any relationship
with designers or manufacturers. However,
though Amazon didn’t directly control design and manufacture, it exerted “substantial
control” over third-party vendors by virtue of its comprehensive,
discretion-allocating agreement with them. “Amazon is fully capable, in its
sole discretion, of removing unsafe products from its website. Imposing strict
liability upon Amazon would be an incentive to do so.”

The dissent argued that this holding imposes a fundamentally
new business model on Amazon because it presently “does not undertake to curate
its selection of products, nor generally to police them for
dangerousness.” Echoing what I tell my
students (there is no divine entitlement to a specific business model), the
court said that Pennsylvania law does not shield a company from strict
liability just because it chose a business model that fails to prioritize
consumer safety. “The dissent’s reasoning would give an incentive to companies
to design business models, like that of Amazon, that do nothing to protect
consumers from defective products.”

Third, whether Amazon is “in a better position than the
consumer to prevent the circulation of defective products.” An auctioneer lacks an ongoing relationship
with a manufacturer, and financing agencies perform only a “tangential” role in
the sales process and ordinarily lacks a “continuity of transactions that would
provide a basis for indirect influence over the condition and the safety of the
product.” Here, by contrast, “while Amazon may at times lack continuous
relationships with a third-party vendor, the potential for continuing sales
encourages an on-going relationship between Amazon and the third-party vendors.” In addition, “Amazon is uniquely positioned
to receive reports of defective products, which in turn can lead to such
products being removed from circulation.”
Amazon’s website is the “public-facing forum” for listed products; it
collects customer feedback. Third-party
vendors are ill-equipped to do this precisely because Amazon controls the
channels of communication.

The dissent argued that Amazon wasn’t better positioned than
customers (!) to encourage product safety. But even the dissent noted one
aspect of Amazon’s power relative to the consumers: Amazon, but not consumers,
can eject sellers from the platform. “Imposing strict liability on Amazon will
ensure that the company uses this relative position of power to eject sellers
who have been determined to be selling defective goods.”

Fourth, whether Amazon can distribute the cost of
compensating for injuries resulting from defects: Actually, it already has
provided for indemnification in its agreements. And it can adjust the
commission-based fees that it charges to third-party vendors “based on the risk
that the third-party vendor presents.” By contrast, “Amazon’s customers are
particularly vulnerable in situations like the present case. Neither the
Oberdorfs nor Amazon has been able to locate the third-party vendor, The Furry
Gang. Conversely, had there been an incentive for Amazon to keep track of its
third-party vendors, it might have done so.”

This result was also consistent with other Pennsylvania
cases, which established that a “seller” need never take title to or possession
of the products at issue to be strictly liable. Amazon also argued that it wasn’t
a sales agent because it works on behalf of numerous third-party vendors, not a
single seller or manufacturer; this is not the law.

CDA §230: Bars some, but not all, of the claims. “The
question that we must answer is ‘Would such an addition to the content be part
of the editorial function of the Amazon website?’” Not all of the claims were precluded. “Amazon’s involvement in transactions extends
beyond a mere editorial function; it plays a large role in the actual sales
process. … Therefore, to the extent that Oberdorf’s negligence and strict
liability claims rely on Amazon’s role as an actor in the sales process, they
are not barred by the CDA. However, to the extent that Oberdorf allged that Amazon failed to provide
or to edit adequate warnings regarding the use of the dog collar, that activity
fell within its editorial function. “That is, Amazon failed to add necessary
information to content of the website.”
Such failure to warn claims were barred by the CDA. But the district
court didn’t parse the claims to distinguish between “failure to warn” claims
and claims premised on other actions or failures in the sales or distribution
processes, so remand was required.

Judge Scirica dissented on the Pennsylvania law issue, but
concurred in the “thoughtful” CDA analysis.

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Warhol wins on fair use of photo (but should’ve won on substantial similarity)

Posted on July 5, 2019 by rtushnet

Andy Warhol Foundation for the Visual Arts, Inc. v.
Goldsmith, No. 17-cv-2532 (JGK) (S.D.N.Y. Jul. 1, 2019)

In some sense, this fair use case is a foregone conclusion;
even the terrible Saderup decision made an exception for Andy Warhol,
because we all know that his touch (filtered through the actual human touch of
assistants) confers new meaning and value on an artwork. The other thing this case illustrates is that
courts are more comfortable with fair use than they are with a true
infringement inquiry (did the defendant copy too much protected material from
the plaintiff?) when the real problem with the claim is that the defendant
copied without taking very much, if any, protected material. The third factor analysis here even
implicitly admits that the plaintiff hasn’t identified any expression
that was taken from her photograph of Prince.
If we were really concerned that transformativeness has gone too far—I’m
not, but I also think we should be serious about requiring substantial
appropriation of protected expression—then one way to deal with that problem
would be to take infringement more seriously rather than using fair use as a
clean-up tool. The finding of
transformativeness here is in part the flip side of the lack of copying of
protected expression: Warhol’s prints were readily able to bear new meaning and message
because the expression in the original photo had been abstracted away, not
because of a Sherrie Levine-style appropriation.

Anyhow, “Lynn Goldsmith is a photographer who has
photographed numerous rock, jazz, and R&B performers,” and her work “centers
on helping others formulate their identities, which she aims to capture and
reveal through her photography.” She
uses both interpersonal techniques to establish rapport and photographic
techniques with respect to lighting, camera position, and other elements to
capture her subjects’ “true selves.” She photographed Prince in her studio on
assignment from Newsweek in 1981. He arrived wearing makeup, and she applied
more “to connect with Prince physically and in recognition of her feeling
[that] Prince was in touch with the female part of himself” while also being “very
much male.” He was photographed in his own clothes, except for a black sash
that he picked from Goldsmith’s clothing room and wore around his neck. Goldsmith
decided to use a plain white background and lit the shoot in a way that
emphasized Prince’s “chiseled bone structure.” Goldsmith believed that the
photographs from her shoot with Prince show that he is “not a comfortable
person” and that he is a “vulnerable human being.”

1984 Vanity Fair portrait

In 1984, Vanity Fair licensed one of these studio portraits
for use as an artist’s reference. Goldsmith’s photography agency submitted the
photo; Goldsmith herself did not know at the time that the photograph had been
licensed for use as an artist’s reference. Vanity Fair commissioned Warhol to
create an illustration of Prince for an article titled “Purple Fame,” which
stated that it featured “a special portrait for Vanity Fair by ANDY WARHOL.”
The credit included: “source photograph © 1984 by Lynn Goldsmith/LGI.” Warhol then
created the “Prince Series,” comprised of sixteen distinct works: twelve
silkscreens, two screen prints on paper, and two drawings. Although Goldsmith
alleged that Warhol bodily copied her photo as part of his creation process,
defendant AWF didn’t concede this and it doesn’t matter, because any exact
reproduction occurred 40 years ago, well beyond the limitations period.

color version of one of the images

Goldsmith first learned that Warhol created the Prince
illustration for Vanity Fair after Prince’s death, when it republished the
image online; initially, she told AWF that use infringed one of her colored
Prince portraits but, after further comparison, identified instead the black
and white photo at issue in this case. She then registered the photo as an
unpublished work. AWF makes the Prince Series available for licensing to third
parties for use in books, magazines, newspapers, and for other merchandizing
purposes. Goldsmith licenses single images of her photography, and has issued
10 or 11 licenses for other photos of Prince in concert and at other venues,
but hasn’t editioned or sold any prints of the photo here; she intends to start
in the future, when prices will be higher. In 2004, she sold a fine-art print
of Prince that she created in 1993 to a private collector who also owns three
Warhol works of art.

Fair use factor one: the Prince Series is commercial, but
public exhibition of art is in the public interest. Anyway, transformativeness
trumps commerciality. The question is whether new meaning/message may
reasonably be perceived and the answer is yes.
Goldsmith focused on revealing identity, and her photo illustrated that
Prince was “not a comfortable person” and that he is a “vulnerable human being.”

Warhol’s Prince Series, in
contrast, can reasonably be perceived to reflect the opposite. In all but one
of the works, Prince’s torso is removed and his face and a small portion of his
neckline are brought to the forefront. The details of Prince’s bone structure
that appear crisply in the photograph, which Goldsmith sought to emphasize, are
softened in several of the Prince Series works and outlined or shaded in the
others. Prince appears as a flat, two-dimensional figure in Warhol’s works,
rather than the detailed, three-dimensional being in Goldsmith’s photograph.
Moreover, many of Warhol’s Prince Series works contain loud, unnatural colors,
in stark contrast with the black-and-white original photograph. And Warhol’s
few colorless works appear as rough sketches in which Prince’s expression is
almost entirely lost from the original.

These alterations result in an
aesthetic and character different from the original. The Prince Series works
can reasonably be perceived to have transformed Prince from a vulnerable,
uncomfortable person to an iconic, larger-than-life figure. The humanity Prince
embodies in Goldsmith’s photograph is gone. Moreover, each Prince Series work
is immediately recognizable as a “Warhol” rather than as a photograph of Prince
– in the same way that Warhol’s famous representations of Marilyn Monroe and
Mao are recognizable as “Warhols,” not as realistic photographs of those
persons.

One could reasonably object to the last sentence as carving
out an Andy Warhol exception, but the rest of it is hard to dispute (and
provides some reason to think that Warholization is transformative, albeit not
a tactic limited to Warhol himself).

Factor two: unpublished status would ordinarily weigh in
Goldsmith’s favor, but “the reasons unpublished works enjoy additional
protection against fair use – including respect for the author’s choices of
when to make a work public and whether to withhold a work to shore up demand –
carry little force in this case, where Goldsmith’s photography agency licensed
the photograph for use as an artist’s reference.” Anyway, factor two is of
limited relevance for transformative works. Favors neither party.

Factor three: Goldsmith argued that the Prince Series works
contain the essence of the entire Goldsmith Prince photo. Her best argument for this was apparently
that Vanity Fair told him to use the photo, and thus must have required that he
include the expression in the photo. The
court compared this case to the Seventh Circuit case of Kienitz v. Sconnie
Nation LLC, and helpfully included the relevant images in the opinion to show
why the comparison was apt. The Kienitz court, while—as the district
court here specifically noted—criticizing Cariou, found fair use,
placing particular emphasis on the third factor. The Warholization-like process
employed “removed so much of the original that, as with the Cheshire Cat, only
the smile remains,” even though it weighed against the defendants the claim
that they didn’t need to use that particular photo “when so many noncopyrighted
[sigh] alternatives (including snapshots they could have taken themselves) were
available.” Here, by contrast, Warhol was required to use the photo.

Kienitz images

This case was Kienitz plus Cariou: Though the
Goldsmith photo had protectable elements, which could include “posing the
subjects, lighting, angle, selection of film and camera, evoking the desired
expression, and almost any other variant involved,” “these creative elements
are almost entirely absent from the Prince Series works.” The cropping was different; Goldsmith’s photo
included much of Prince’s torso. The
Prince Series softens, shades, or traces over the sharp contours of Prince’s
face that Goldsmith emphasized in her photo. The 3D effect of the photo, produced
by the background and lighting that Goldsmith chose, was replaced by “a flat,
two-dimensional and mask-like figure of Prince’s head,” and mostly on a loudly
colored background; the Warhol works that were in black and white “especially
crude and the creative features of the Goldsmith Prince Photograph are
especially absent.” Here you see the
flip side of transformativeness in the factor three analysis: “Ultimately,
Warhol’s alterations wash away the vulnerability and humanity Prince expresses
in Goldsmith’s photograph and Warhol instead presents Prince as a
larger-than-life icon.”

The pose and angle of Prince’s head were copied, but “such a
pose cannot be copyrighted” because copyright law “protect[s] only plaintiff’s
particular photographic expression of [a] pose[] and not the underlying ideas
therefor.” Several non-Goldsmith photographs also captured Prince in a similar
pose, “indicating that the pose is not particularly original.” The distinctive
way in which Goldsmith presented Prince’s uncopyrightable facial features was
absent from the Warhol works, which each contained “little, if any, of the copyrightable
elements” of Goldsmith’s photo (which is why this should be a non-substantial similarity case). Heavily favors fair use.

Factor four: Goldsmith argued that the Prince Series harmed
her licensing markets, which overlap with AWF’s licensing markets.” Her evidence
didn’t show market substitution.
Although her photos and Warhol’s works have appeared in magazines and on
album covers, “this does not suggest that a magazine or record company would
license a transformative Warhol work in lieu of a realistic Goldsmith
photograph.” The licensing market for
Warhol prints is for Warhols, not for portrait photos like Goldsmith’s. One
collector who owned three of Warhol’s works of art also bought a fine-art print
of Prince from her. “But as AWF persuasively argues, this does not suggest that
the collector bought the works for the same reason, perceives the works
similarly, or believes the works are substitutes for each other (the fact that
the collector owns both of them suggests the opposite).” The court declined to
rely on AWF’s expert report or on one of its fact witnesses on the market, and
didn’t rule on excluding Goldsmith’s expert; even taking his opinions into
account on licensing, the fourth factor favored AWF. “The evidence shows that
the Prince Series works are not market substitutes that have harmed – or have
the potential to harm Goldsmith.” And we’re done.

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Flange wars: material misrepresentations aren’t enough without causation

Posted on July 3, 2019 by rtushnet

Boltex Manufacturing Co. v. Ulma Piping USA Corp., No. 17-CV-1400,
2019 WL 2723253 (S.D. Tex. Jun. 28, 2019)

More flanges! Boltex alleged that defendants misrepresented
that they “normalized” their flanges. Normalization is a heat treatment process
that makes steel more durable; it’s more expensive than not normalizing the
flanges, and Boltex charges more for normalized than non-normalized flanges. ASTM
has a published set of standards and specifications applicable to carbon steel
flanges to ensure uniformity in the industry; some consumers only buy industry
standard-normalized flanges. “[C]ustomers cannot simply look at a flange to
determine whether it has been normalized,” but must rely on sellers.

Defendants allegedly misrepresent the normalization-status
of their flanges “in the catalogs, brochures, price lists and websites of
third-party distributors of Ulma flanges,” “in the MTRs [mill test reports,
described as a “birth certificate” for a flange] that accompany each flange,”
and by stamping A105N on each flange where N stands for normalized and A105 represents
the relevant ASTM standard.

Ignoring Justice Scalia’s instruction not to call the issue
in Lexmark “prudential standing,” the court found that plaintiffs did
have standing for purposes of avoiding summary judgment. Article III: There was
deposition testimony that “Ulma’s purported misrepresentations directly affect
the market in which the Plaintiffs participate and that customers compare Ulma
and Boltex prices,” and that had Ulma not advertised their flanges as
normalized, “a portion of [the market] definitely would have come to Boltex.” They
also provided a damages model as evidence of their purported losses.

Lanham Act “prudential” standing: Defendants argued that
because Boltex is a domestic manufacturer and Ulma is a foreign manufacturer,
the two companies weren’t competitors because customers usually choose either a
foreign or domestic brand of flange and stick to it. Plaintiffs’ evidence was
otherwise, creating a genuine fact issue. As competitors, they’d be within the Lanham
Act zone of interests. There was also evidence supporting proximate cause; losing
sales to a product of supposedly equivalent quality sold at a lower price is a
classic Lanham Act harm story.

For similar reasons, there was a genuine issue of material
fact on falsity. Defendants argued that their flanges were “normalized” via either
the ASTM approved method or their own “proprietary method,” but whether that
method counted as normalization was disputed, including by testimony from
defendants’ own representatives. Defendants also argued that representations
that appear on third-party websites or in third-party catalogs constitute
commercial speech that couldn’t be attributed to them. However, there was evidence,
including the inscriptions on flanges, that at a minimum supported a claim of
contributory false advertising.

Defendants argued that the inscriptions on flanges and
statements in MTRs weren’t commercial advertising or promotion because they
were only provided to a customer after purchase. However, “the stamping and
inclusion of MTRs confirm the assumption that consumers make when purchasing
the flanges, namely that the flanges are of the quality and specifications that
they purport to be.” There was evidence that “customers depend on the MTRs as
an accurate reflection of what they purchased,” and that an MTR is a “birth
certificate for a flange.”

As for deceptiveness, this is presumed for literal falsity. In
addition, plaintiffs provided evidence that customers sought reassurance from
Ulma that their flanges were in fact normalized in accordance with ASTM after
the filing of this suit. A reasonable juror could use this to conclude that customers
associated the “A105N” stamp with the ASTM normalization process specifically,
rather than including Ulma’s proprietary method.

Materiality: similarly, there was evidence that ASTM-compliant
normalization is an important standard upon which customers rely, and that
consumers might have decided differently had they known the truth.

There was also “very thin” evidence of injury. Plaintiffs
emphasized that Ulma specifically lists Boltex’s prices when responding to
Requests for Quotes (RFQs). There was evidence that at least one of defendants’
customers actually compared the parties’ prices.

Prior proceedings before the ITC didn’t matter because the
ITC had dealt with a claim that defendants were selling their flanges at an
unacceptably low price; the Lanham Act claim wasn’t actually litigated nor were
plaintiffs’ positions contradictory in a way calling for the application of
judicial estoppel.

Boltex Manufacturing Co. v. Ulma Piping USA Corp., No.
17-CV-1400, 2019 WL 2723272 (S.D. Tex. Jun. 28, 2019)

Flanges, it turns out, are formed from rough steel forgings.
Plaintiff “Weldbend buys forgings from domestic and foreign suppliers and
manufactures the forgings into flanges in its Illinois facility. Boltex makes
most of its own forgings domestically and performs its heat treating in one of
its two plants located in Houston. In its second Houston plant, Boltex
machines, finishes, and warehouses its flanges. Defendants produce their
flanges in Spain.” Defendants allege that plaintiffs falsely advertise/falsely
designate the origin of their flanges by falsely stamping/advertising flanges as
“Made in the USA” or “American Made” when at least some of the steel in the
flanges is internationally sourced. Weldbend’s packaging allegedly contains
pictures of Uncle Sam and the American flag and that its social media accounts
display representations such as, “This product [sic] Made in the USA with USA
Steel.” In addition, Weldbend allegedly falsely advertises that its goods are
made with “unquestionable traceablility.” Here, the court kicked out the false
advertising claims except for “traceability,” on which it sought more briefing.

Initially, the court declined to rely on the FTC’s Enforcement
Policy Statement on U.S. Origin Claims to define made in the USA. FTC standards
don’t control in Lanham Act cases, which require showing falsity or
misleadingness, not just a violation of the guidelines (although the guidelines
indicate what the FTC considers false or misleading). The falsity had two
aspects: (1) misrepresentation that flanges are “Made in the USA” when they are
in fact made with imported steel and (2) implying that all of their flanges are
“Made in the USA,” when in fact some are made using imported steel. The court
found no evidence of literal falsity on (2); instead, while Boltex uses some
internationally sourced steel, it didn’t mark those as “Made in the USA” and
there was no evidence of an overall Boltex advertising scheme to the contrary. However,
there was a genuine issue of material fact on falsity for Weldbend, which
claimed that its “American Made line uses only top-quality steel from US mills,
forged into fittings and flanges at Weldbend’s own plant in Argo, Illinois.” In
this context, Weldbend defined “American Made,” removing potential ambiguity. There
was testimony from a Weldbend executive that “American Made” flanges may use
steel from either a US or an offshore mill, creating a fact issue on falsity.
In addition, Weldbend admitted that it didn’t do any of its own forging.

Misleadingness: Defendants argued that there was a fact
issue “as to whether [Plaintiffs’] use of unqualified and express U.S. origin
claims, American iconography, and other statements leave a false and misleading
impression that all of their products are manufactured in the U.S. with
U.S.-sourced steel.” They provided deposition testimony from distributors who
ordered plaintiffs’ flanges, one of whom who interpreted “Made in the USA” and
similar statements as meaning “steel coming from the US” and two who didn’t. This
wasn’t enough for misleadingness; “the Court must look for signs that consumers
assume something incorrect about the product based on the language or imagery
in the advertisement.” Anyway, the deponents were asked different questions and
provided similar answers when they were asked similar questions.

The court also rejected screenshots of third-party social
media posts that “juxtapose Weldbend and Boltex’s names with American imagery”
and slogans such as “Buy American not dumped from China!” or “American Made
Matters” as evidence of misleadingness; defendants didn’t explain who the poster
was in relation to plaintiffs.

Finally, there was additional evidence about Weldbend
individually that did demonstrate a fact issue as to whether consumers were
confused by Weldbend’s use of the terms “Domestic” and “USA.” A distributor
requested a quote for flanges and specified that “[r]aw material is required to
be domestic.” A Weldbend customer service representative responded that
“[e]verything [ ] quoted is U.S.A.” The distributor then sought to clarify
whether “USA mean[t] the raw material as well,” to which Purpura responded
“U.S.A. means it is melted and manufactured in the U.S.A.—Domestic means material
from another country, manufactured here.” In a different email exchange, Weldbend
informed a customer that he could not “guarantee that all material will be
Melted and Manufactured in the USA” but that “[a]ll items which are not
Domestic are noted as Import.” These representations seemed to conflict—both
appear to define “Domestic” in different terms. Combined with evidence that Weldbend
internally defined “American Made” as including flanges made in the US with imported
steel but advertised the opposite, a reasonable fact-finder could find it
misleading to call products made from non-U.S. sourced steel “American Made,”
“Made in America,” or “Domestic” without clearly defining or qualifying those
terms for consumers.

Materiality as to Weldbend: literal falsity would mean
materiality, and at least one buyer insisted that the flanges sold to him be
made in America with U.S. sourced steel.

Nonetheless, there was no direct evidence of injury. A
damages model wasn’t enough. There was no evidence that plaintiffs’ profits
resulted from the allegedly false advertising. And on this record, the
customers misled by Weldbend’s “American Made” designation wouldn’t have
accepted flanges produced by Ulma—a foreign flange manufacturer—as substitutes.
One series of emails, for example, involved a bid that included a line stating
that the “starting material [was] non-China.” The other party responded to the
quote, stating: “I am concerned about the comment [regarding “non-China”
material]. The starting material for these fittings and flanges MUST [sic] be
from the USA not just non-China,” per her customer’s request; she did not “want
to lose a customer over something like this.” There was no evidence in the
record that this subset of customers would buy Ulma’s flanges as a substitute,
even if the parties generally compete in the market for normalized flanges. Summary
judgment granted (with the exception of “traceability”: plaintiffs didn’t
adequately move for sj on this issue, which required more briefing).

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Keurig unsuccessfully argues that false advertising law unconstitutionally compels speech

Posted on July 3, 2019 by rtushnet

Smith v. Keurig Green Mountain, Inc., No. 18-cv-06690-HSG, 2019
WL 2716552 (N.D. Cal. Jun. 28, 2019)

Smith brought a putative class action against Keurig,
alleging that its “recyclable” single-serve plastic coffee pods were mislabeled
as such because they are not in fact recyclable, due to their size,
composition, and a lack of a market to reuse the pods. Although the pods at
issue are made from Polypropylene (#5) plastic—a material currently accepted
for recycling in approximately 61% of U.S. communities—domestic municipal
recycling facilities (MRFs) are allegedly not equipped to capture materials as
small as the Pods and separate them from the general waste stream. Keurig’s
instructions allegedly further impede the Pods’ recyclability by advising users
that they need not remove the Pods’ paper filter, which ensures contamination. And
due to the Pods’ design, their foil lids are allegedly difficult to remove,
posing another risk of contamination.

Smith alleged reliance and that she wouldn’t have bought
them/paid what she did for them absent the false representations. She allegedly
desired to continue purchasing recyclable single-serve coffee pods and would
purchase such products properly manufactured and labeled by Keurig in the future.
She brought the usual constitutional claims.

The court declined to dismiss the complaint. Keurig argued
that, because advertising for the Pods contained the disclaimer “check locally”
regarding recyclability, Smith either ignored the qualifying statements or
bought the Pods knowing that they may not be recyclable at her local MRF. She
still alleged injury in fact. She
alleged that, in fact, the pods weren’t recyclable across the board, making a “check
locally” disclaimer misleading.

Keurig also argued that its recyclable and nonrecyclable
pods cost the same, so she couldn’t have been injured. This wrongly assumed
that her only choice was between Keurig pods, but other coffee products are
available and she allegedly would have sought them instead had she known the
truth.

As for standing for injunctive relief, Keurig argued that
there was no informational injury here, because the pods would have to be
enlarged to make them recyclable so Smith can’t be fooled again. But “Keurig could plausibly make recyclable
Pods without changing their size: MRFs could evolve to be able to capture small
plastics such as Pods, such that all Keurig would need to do is make it easier
to clean out the Pods and remove their foil lids.”

Keurig also argued that its labeling was truthful and
consistent with the FTC’s Green Guides.
Those say: “[i]f any component significantly limits the ability to
recycle the item, any recyclable claim would be deceptive. An item that is made
from recyclable material, but, because of its shape, size, or some other attribute,
is not accepted in recycling programs, should not be marketed as recyclable.” They
also state that when recycling facilities are available to less than 60% of
consumers where the item is sold, all recyclability claims should be properly
qualified. Keurig couldn’t rely on the
Green Guides at this stage of the proceedings.
“Setting aside the adequacy of Keurig’s qualifying statements, the Green
Guides state that if a product is rendered non-recyclable because of its size
or components—even if the product’s composite materials are recyclable—then
labeling the product as recyclable would constitute deceptive marketing. And,
among other things, the complaint alleges that the size and design of the Pods
render them non-recyclable. Thus, even following Keurig’s logic that the Green
Guides might operate as a liability shield, the allegations in the complaint
are not precluded based on the Green Guides’s plain text.”

Keurig argued that it was implausible that a reasonable
consumer under the circumstances—i.e. a consumer who wants to preserve the
environment—would not understand the recyclability of the Pods in light of the
disclaiming language that they are “[n]ot recyclable in all communities” and
the directive for consumers to “check locally” to determine recyclability at
their local MRFs. But, again, the complaint pled that the disputed Pods are not
recyclable at all. Cases where disclaimers were sufficient to render an
advertisement not false or misleading were thus irrelevant, and common sense “would
not so clearly lead a person to believe that a package labeled ‘recyclable’ is
not recyclable anywhere.”

Keurig also made an argument that we should expect more of:
that Smith’s citation of the Green Guides sought to unconstitutionally compel
Keurig’s speech by requiring a change in its labeling. (Citing National Institute of Family &
Life Advocates v. Becerra, 138 S. Ct. 2361 (2018), which is not a commercial
speech case.) Keurig contended that California doesn’t have a compelling
governmental interest in mandating the wording of Keurig’s qualifying
statements, and that it would be unduly burdensome to require Keurig to [avoid
deception and] monitor the number of MRFs at which the Pods are recyclable and
revise its labeling accordingly. Given
the allegations of the complaint, Smith wasn’t seeking to compel Keurig to
finetune its qualifying statement; she was seeking to stop Keurig from
mislabeling the pods as recyclable. “And Keurig cites to no persuasive case law
for the principle that a prohibition against deceiving consumers constitutes
compelled speech.” [This argument is a reminder that all the action is in what
constitutes “deceiving” consumers. Of
course a prohibition on deceiving consumers restricts speech! And if you want
to get deception-adjacent, then the law is likely to constrain exactly what you
can say. Courts retain the intuition
that there’s something different about saying “if you want to talk about X when
you’re selling a product, you have to do it with these words/rules because otherwise you deceive consumers” from saying
“salute the American flag or get expelled,” but given cases like NIFLA
we are definitely heading for more fights attempting to recharacterize deception
protections as unwarranted speech restrictions.]

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good faith defense to false advertising may waive attorney/client privilege

Posted on July 3, 2019 by rtushnet

In re Keurig Green Mountain Single Serve Coffee Antitrust
Litig., 2019 WL 2724269, No. 14 MD 2542 (VSB)(HBP) (S.D.N.Y. Jul. 1, 2019)

In this antitrust claim, Keurig counterclaimed against
plaintiff JBR for marketing its competing pods with allegedly false
representations that its cups contain “no plastic” and are “biodegradable,”
“compostable” and similar statements, in violation of the Lanham Act, Section
349 and 350 of New York’s General Business Law, and California’s Business and
Professional Code. JBR asserted a number of affirmative defenses including that
the counterclaims against it “are barred, in whole or in part, because JBR’s
actions, if any, respecting the subject matters alleged therein were undertaken
in good faith, with the absence of malicious intent, and constitute lawful,
proper and justified means.” As the court pointed out, “it is doubtful that
good faith is a defense to Keurig’s Lanham Act counterclaim,” but “it does
appear to be relevant to Keurig’s counterclaim alleging a violation of Section
349 of New York’s General Business Law” (citing Samiento v. World Yacht Inc.,
10 N.Y.3d 70, 81, 883 N.E.2d 990, 996, 854 N.Y.S.2d 83, 89 (2008) (“In order to
assert a prima facie cause of action under General Business Law § 349, a
plaintiff must be able to establish that a defendant intended to deceive its
customers to the customers’ detriment and was successful in doing so.”).

The court found that JBR had to withdraw its good faith
defense or hand over a bunch of otherwise privileged materials. During their
depositions, JBR principals were asked about events in 2011 or 2012, when JBR
was considering using the terms “biodegradable,” “compostable,” “ecofriendly”
and similar terms on its packaging. JBR lacked expertise in the use of these
terms and it hired an attorney — Abrahamson — for advice. JBR initially
marketed its packaging as “compostable,” but switched to “biodegradable” upon
the attorney’s advice, thinking “[it was] in the clear, because of the
extensive research [it] had done and the extensive communication with this
attorney.” JBR came to conclude that the advice was wrong (it was contacted by
the Alameda County DA and told that its use of the term violated California
law) and later asserted a claim against Abrahamson for malpractice that was
resolved in arbitration.

Keurig argued that there had been a subject-matter waiver of
the attorney-client privilege with respect to advice JBR received concerning
the marketing of its cups as environmentally friendly and sought documents and
testimony regarding that subject, as well as documents exchanged in the
malpractice arbitration against Abrahamson. Under United States v. Bilzerian,
926 F.2d 1285 (2d Cir. 1991), “the attorney-client privilege cannot at once be
used as a shield and a sword. A defendant may not use the privilege to
prejudice his opponent’s case or to disclose some selected communications for
self-serving purposes. Thus, the privilege may implicitly be waived when
defendant asserts a claim that in fairness requires examination of protected
communications.” Under that rule, “forfeiture
of the privilege may result where the proponent asserts a good faith belief in
the lawfulness of its actions, even without expressly invoking counsel’s
advice.” Here, the good-faith defense—if
maintained—would result in waiver with respect to advice JBR received
concerning whether it could advertise its products as “compostable” or
“biodegradable” or as having other similar characteristics. JBR’s only basis
for that defense seems to have been advice from the lawyer, rather than, for
example, its own testing, making communications with counsel essential to
evaluate its good faith.

JBR argued that there was no need for disclosure because the
nature of the lawyer’s advice could be inferred from the chronology of events
and the nature of its actions. But the existence of waiver doesn’t depend on
what other evidence is available or what inferences can be drawn from the other
evidence. Second, “[a] client does not always follow its lawyer’s advice.…
Finally, the accuracy of a lawyer’s advice depends on both the lawyer’s
knowledge and the accuracy and completeness of the information provided by the
client. If, for example, JBR deliberately or negligently provided Ms.
Abrahamson with material mis-information or omitted material information
concerning the physical characteristics of its products, her advice might
provide little support for a good faith defense.” To evalute good faith, a fact finder would
need to know both what JBR told the lawyer and what the lawyer told JBR>

Because JBR determined in 2015 to cease marketing its
compatible cups with language describing them as environmentally friendly, the
waiver applies to “all communications between JBR and any attorney concerning
the marketing of JBR’s compatible cups or packaging as environmentally friendly
that occurred prior to the date on which JBR made the determination to cease
marketing its cups in that manner.” JBR
couldn’t claim good faith after that date so there was no waiver thereafter,
and any advice it received in 2016 couldn’t bear on its good faith in 2015.

Finally, the court found that the waiver was revocable at
this stage of the proceedings. “Waiver of the attorney-client privilege is, of
course, a serious matter, and JBR may not have foreseen its waiver when it
served its reply.” If JBR withdrew the defense asserted in the answer to the counterclaims,
there’d be no waiver.

Finally, there was no waiver as a result of JBR principals’
deposition testimony. Rule 502(a)
provides that a waiver of the attorney-client privilege as a result of an
intentional disclosure extends to undisclosed communication only if the
disclosed and undisclosed communications “ought in fairness be considered
together.” JBR wasn’t, at this stage, making any use of the deposition
testimony; specifically, it wasn’t “attempting to use the testimony to tell
part of the story while preventing Keurig from telling the whole story.” Most
deposition testimony never goes before any decisionmaker. “Thus, the mere fact that a party makes a
partial disclosure of privileged or protected information in a deposition does
not result in a subject-matter waiver because there is no use of the testimony
by the party holding the privilege.”

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dueling fake “independent” websites leads to unclean hands finding, but some injunctive relief

Posted on July 3, 2019 by rtushnet

Grasshopper House, LLC v. Clean & Sober Media LLC, 2019
WL 2762936, No. 18-cv-00923-SVW-RAO (C.D. Cal. Jul. 1, 2019)

Previous
discussion. A jury found in plaintiff Passages’ favor on its claims under
the Lanham Act about false reviews of its addiction treatment services and on the
Lanham Act counterclaim asserted against it by defendants (Cliffside) about Passages’
advertisements representing the existence of a “cure” for addiction.

In 2013, Richard Taite, the former CEO of Cliffside Malibu,
created the entity Clean & Sober Media LLC, which purchased the website The
Fix at a bankruptcy auction. The Fix published a Mission Statement saying “The Fix
is the world’s leading website about addiction and recovery …. We also offer
rigorously reported Rehab Reviews, with input from thousands of alumni…. Our stated editorial mission – and
sole bias – is to destigmatize all forms of addiction and mental health
matters, support recovery, and assist toward humane policies and resources.” Its Process Statement said “To create our
reviews, we invite selected centers to solicit former clients to complete a
detailed, 20-question survey. The Fix requires at least five completed surveys
before a review is generated. The surveys include questions about
accommodations, meals, residents, staff, activities, and more. Alumni respond
anonymously and confidentially, and reviews are written based on their
responses and follow-up questions where applicable.”

When the acquisition occurred, there was a preexisting
review of Passages Malibu, written by the previous editorial staff of The Fix
in 2011. It included quotes from people
described as an “alum,” “former resident,” or “former client.” The review gave Passages an overall rating of 1 out of 5 stars. Over time, this rose to 2.5 stars. Passages
made unsuccessful attempts to get the page changed. In response to Passages’
complaints, The Fix tried to find records of the reviews on which the rating was based,
but couldn’t.

In addition, shortly after acquiring The Fix, Taite manually
changed the overall star rating for Cliffside Malibu from 4 to 5 stars, without
conducting any additional surveys of former Cliffside clients. Taite exercised
other types of control but didn’t want his fingerprints on anything.

The Fix also began to display banner ads for Cliffside
Malibu at the top of the Passages review page and displayed links to the
corresponding Rehab Review page for Cliffside Malibu. This review made the first page of Google
search results (at least for Passages’ CEO), and internal Cliffside emails
revealed that Cliffside urged prospective clients to read the Passages review
before making a decision as to whether to enroll with Passages or Cliffside; some
of these clients chose Cliffside Malibu after reading the Passages review. Cliffside
characterized other clients it received as “stolen” from Passages, including
one who had believed she was calling Passages Malibu but instead had called the
number for Cliffside Malibu.

Defendants concealed the relationship between Taite, Cliffside,
and The Fix, including from editors at The Fix. The EIC (who was later replaced) sent an email bemoaning Taite’s
“intention to manipulate the reviews” of addiction rehab centers on The Fix and
Taite’s efforts to “pick and choose who can advertise” on The Fix and warned, “the likelihood is it would permanently crash ad sales and may even
invite FTC investigation and lawsuits.” Taite successfully instructed the new EIC to remove an
entire paragraph of an article The Fix had written regarding Cliffside Malibu. That EIC admitted that The Fix intentionally did not disclose its affiliation with
Cliffside because “if people knew [The Fix] was associated with the rehab
[Cliffside Malibu], they might question our articles.”

In 2017, The Verge website exposed the financial connection
between Cliffside and The Fix. Shortly thereafter, The Fix added a disclaimer
to its websites.

Between 2014 and 2018, Cliffside paid C&S Media
approximately $5 million for banner ads throughout The Fix’s domain. During that period, there were
over 192,000 organic visitors to the Passages review (arriving via organic
search results, not ads). The number of visitors to the Passages review page
sharply increased following C&S Media’s acquisition of The Fix, as did Cliffside’s
net income. Only a few hundred people viewed both the Passages
review page and the Process Statement, the Terms and Conditions Page, or the Mission Statement.

Passages, meanwhile, ran its own unbranded website campaign. A principal expressed his intent to “overcome”
Cliffside’s alleged tactics and proposed that Passages “create our own referral
sites, and get Fix off our back.” In response, an employee proclaimed, “We’ll
beat them at their own game.” One of the unbranded websites Passages created
was “baltimorehealth.org,” a webpage purporting to be the Baltimore Health
Resource Center that included a picture of the seal of the City of Baltimore. Another
was “denverijournal.com,” which purported to be an independent newspaper and
published an article entitled “Passages Malibu – Revolutionizing Addiction
Treatment.” There were a number of others; some provided directories of phone
numbers to rehab centers and even included supposed referral services for
addiction treatment, which were actually phone numbers connected to Passages. One
such site received more organic traffic than Passages’
website for Passages Malibu as of October 2009.

Most of Passages’ unbranded websites didn’t mention
Cliffside at all, but one featured an article entitled “Top 5 Luxury Rehab
Centers in Malibu, California”; its list of treatment centers was
allegedly “[b]ased on reviews” but did not claim to rank the five centers from
best to worst. The only comparison was the assertion that Cliffside’s
facilities are “home-like and attractive without aspiring to the heights of
interior décor you’ll find at the super-smart Passages center.” After Cliffside filed
its counterclaims, Passages added disclaimers to their unbranded websites to
disclose Passages’ ownership.

In the post-trial briefs, the parties argued four equitable
issues: (1) whether laches applies to bar any of Passages’ claims on timeliness
grounds; (2) whether Passages is precluded from relief due to unclean hands;
(3) whether and to what extent Passages is entitled to injunctive relief; and
(4) whether Passages has provided sufficient evidence to recover equitable
monetary relief.

Laches: The analogous California statute of limitations
period, for claims of fraud, is three years. The central question was how much
information a plaintiff must “know” about the existence of a Lanham Act cause
of action to trigger the statute of limitations period. Generally, it is enough
for the plaintiff to know about the general “essence” of its claim.

Laches didn’t bar the claims based on the Passages review not
actually being based on alumni surveys; based on the review not complying with the
site’s Process Statement; or based on The Fix’s claim of editorial independence. Passages didn’t have actual or constructive knowledge
that Cliffside owned The Fix until 2017, and sued shortly thereafter. This is
important because it is key to whether The Fix’s statements were made “in
commercial advertising or promotion.” “[I]f The Fix maintained its status as an
independent journal, unaffiliated with Cliffside, it is unclear to the Court
how any false or misleading statements made by The Fix could ever be considered
actionable ‘wrongdoing’ under the Lanham Act.”
It might be true that Passages could have sued for defamation in 2011,
but “the focus is not on when the plaintiff knew that the defendant generally
engaged in some ‘wrongdoing’ in the abstract,” but rather on the wrongdoing “at
the heart of the particular cause of action to which the statute of limitations
period applies,” which is false advertising.

Cliffside took the position that
even an independent review could be “commercial speech,” but the court didn’t
agree. Demetriades v. Yelp, Inc., 228 Cal. App. 4th 294, 310 (2014), held that
the defendant’s representations about a review filter software, used to ensure
that webpages for restaurants and other public establishments only showed
customers “the most trusted reviews,” constituted commercial speech for
purposes of an exception to California’s anti-SLAPP law because the statements were
designed to get customers to use the defendant’s website and businesses to buy
ads on the website. That wasn’t a Lanham Act case, and not all “commercial
speech” is “commercial advertising or promotion.” [Even if The Fix’s statements
about its own editorial policies were in some relevant sense commercial speech,
that wouldn’t have made the statements about Passages—the key source of harm—commercial
speech.]

And “even if Passages could have
been more diligent in its investigation, Cliffside’s fraudulent intent in its
efforts to conceal its affiliation with The Fix constituted clear and
convincing evidence of unclean hands in reference to Cliffside’s laches defense.”
Even though Passages suspected that there was something fishy about The Fix before
2017, “[h]ad Passages hastily sued The Fix under the Lanham Act and named many
Doe defendants in the hopes of identifying The Fix’s ‘co-conspirator’ through
discovery, a federal court rightfully would have dismissed Passages’ case on a
motion under Rule 12(b)(6), because The Fix would not be a proper defendant to
a Lanham Act cause of action as merely an independent journal not engaging in
commercial advertising or promotion.”

Anyway, Cliffside didn’t show
prejudice from the delay; had Passages sued in October 2017—three years from
the publication of the Process Statement—no evidence would have been lost
compared to when it did file, in February 2018, given that the core problem was
that defendants couldn’t remember anything about/had no records of the surveys on
which they claimed the review had been based.

Unclean hands: For a false advertising claim, “the defendant
must demonstrate that the plaintiff’s conduct is inequitable and that the
conduct relates to the subject matter of its claims.” A finding of
“inequitable” conduct requires clear and convincing evidence that the plaintiff
engaged in “wrongfulness, willfulness, bad faith, or gross negligence.” The
defendant must also show that the plaintiff’s inequitable conduct caused injury
to the defendant; harm to the public interest isn’t enough, but may be
considered. “Factual similarity between the misconduct that forms the basis for
an unclean hands defense and the plaintiff’s allegations in the lawsuit is not
sufficient.” Instead, the plaintiff’s misconduct must be “directly related to
plaintiff’s use or acquisition of the right in suit.”

Passages was indeed, by clear and convincing evidence,
guilty of unclean hands as to the third Lanham Act theory (misrepresentations
of independence) because of its own manipulation of internet sites. “Passages
willfully intended for its websites to accomplish the same thing as what
Passages correctly perceived The Fix to be—a purportedly independent website
providing addiction treatment resources that was actually owned and operated by
a competitor in the addiction treatment industry.” [I think the court overweighted the fact that Passages hid the ownership of the domain names rather than using its own or the names of people associated with Passages; even if it had done that, it would have fooled ordinary consumers who don’t check things like that.] The success of these
techniques—outstripping visits to Passages’ branded website in some months—was enough
to establish some injury to Cliffside; no quantification was required. The
late-added disclaimers weren’t enough to solve the problem.

However, unclean hands didn’t apply to the claims related to
the review of Passages’ facility on The Fix and the representations in the
Process Statement about how reviews were written. Nothing Passages said about
Cliffside, or about how its sites created their reviews, was sufficiently similar
to those misrepresentations. Although Passages behaved badly, it didn’t engage
in the same level of culpable conduct as Cliffside. In addition, there was no evidence that there were even any
visitors to the particular pages that actually mentioned the names of both
Passages and Cliffside.

Injunctive relief was justified; the court found that the
harm to Passages was irreparable, without further discussion. Cliffside invoked the First Amendment, but
there’s no First Amendment right to advertise falsely. Passages’ unclean hands didn’t defeat the
equitable considerations in favor of injunctive relief.

Scope of relief: Cliffside was enjoined from continuing to
publish the review of Passages’ facility on The Fix and all Cliffside-owned
sources, but not enjoined to ensure that the review is not posted anywhere on
the internet, which might be infeasible or outside of Cliffside’s control. In
addition, the URL formerly associated with the review should contain no
substantive content and instead should display a 404 error message “to
communicate unequivocally to visitors that The Fix does not maintain any review
of Passages Malibu whatsoever.” However,
Cliffside should be able to publish a future review that didn’t otherwise
violate the representations it made in the Process Statement. [What if it disavows the Process
Statement? Can it make stuff up then?] Nor was Passages entitled to
an injunction about Cliffside’s use of metadata keywords, which wasn’t part of
the jury’s findings.

Passages sought to recover its damages in the form of lost
profits and to force Cliffside to disgorge its profits and pay attorneys’ fees. But its damages expert had been
excluded. The only issue was disgorgement of
Cliffside’s profits. Passages showed
willful violation of the Lanham Act as to journalistic independence but, because
Passages acted with unclean hands with respect to that claim, it would be
inequitable to award Passages any disgorgement for such a violation.

Also, Passages didn’t show the amount of Cliffside’s sales
or profits that were attributable to Cliffside’s Lanham Act violations with
respect to the Process Statement/the Passages review. And it didn’t show that
Cliffside’s violation with respect to the Passages review was willful—Cliffside
didn’t author the original review, which was written before Cliffside acquired The
Fix. True, Cliffside actively maintained the Passages review and affirmatively
changed Passages’ star rating in the review on several occasions, indicating that
Cliffside deliberately intended to keep the Passages review on the website as a
bona fide, factually-supported review. But that didn’t mean that Cliffside
intended to deceive; “willfulness is measured in terms of whether Cliffside
deliberately published a negative review of Passages’ facility without having a
factual basis to support the statements made in the review, with the intent to
cause harm to Passages’ brand.” In
response to Passages’ repeated requests for The Fix to remove the review, the
then-EIC attempted to look for the original surveys but couldn’t find evidence
they existed. “The fact that [she]
actually performed a search for surveys supports the conclusion that The Fix did
not simply maintain the Passages review without caring about whether surveys
were actually conducted, weighing against a finding that Cliffside deliberately
intended to publish false statements in connection with the Passages review.”
At most, leaving the review up was negligence, perhaps even gross negligence,
but didn’t rise to the level of deliberateness required to find willfulness.

The strongest evidence was the email from Taite stating that
he knew that Cliffside’s competitors “are trained to simply talk shit about
Cliffside and why Cliffside is a piece of shit why they are better, … because
before I had a commercial, I did the same thing, to promises and passages, that’s
how I filled Cliffside!” This email was admission that Taite may have disparaged Passages in order to promote Cliffside, but the timeframe
of Taite’s actions was unknown and couldn’t be attributed to the review. Although
The Fix had actual knowledge that the Passages review didn’t conform to the
Process Statement, its refusal to take down the Passages review after Passages’
repeated requests to do so wasn’t shown to have the deliberate intent to harm
Passages and deceive visitors to The Fix as to the nature of the Passages
review; it wasn’t required to believe Passages’ claims about who to ask for a
review.

For now anyway (pending Supreme Court guidance), without willfulness, disgorgement wasn’t an
available remedy. For extra certainty/guidance if there’s an appeal, the court went
on to discuss causation. Although a plaintiff need only show defendant’s
profits from the false advertising, shifting the burden to the defendant to show
what wasn’t caused by the false advertising, a disgorgement award is limited to
“the financial benefit [the defendant] received because of the advertising”
constituting a Lanham Act violation.

Passages argued for a presumption of causation, arguing that
the Passages review was comparative. The court didn’t agree, which I think is
exceedingly strange. It’s true that “the
review itself did not juxtapose Passages’ services against those of Cliffside
to conclude that Cliffside’s services are comparably better,” but it did
directly disparage Passages’ services, and the webpage also included ads for
Cliffside and links to (better) reviews of Cliffside—I can’t see why you wouldn’t
analyze the webpage as a whole, at a minimum. To do otherwise rewards Cliffside for feigning The Fix’s independence.
Not every comparative ad succeeds—and yet the Ninth Circuit presumes
causation in comparative advertising cases, even though it’s theoretically
possible that the consumer would decide to go to a third party, or patronize
the defendant for independent reasons.
The court pointed out that The Fix also reviewed other addiction
treatment centers in its Rehab Reviews section aside from Passages and
Cliffside, which is certainly worth considering, but I would say that’s what
burden shifting is for. The court also rejected Passages’ argument that they
were “functionally” the only two competitors in the local addiction treatment
market; the parties repeatedly
elicited testimony from witnesses during trial about Promises Malibu, a third
treatment center.

Anyway, even if this were a comparative advertising case,
Passages still had an obligation “to establish some causal link between the
conduct underlying Cliffside’s Lanham Act violations and Cliffside’s profits
for which Passages seeks disgorgement.” [I would think the testimony about reps
using the review to convince customers to choose Cliffside should probably
suffice to establish some causal link.] It wasn’t enough to show a sharp
increase in Cliffside’s net income after the acquisition, since that was
attributable at most to the overall acquisition, not specifically to the
Passages review and the Process Statement. There was no evidence showing how
much of Cliffside’s net income was derived in any way from The Fix compared to
other sources of acquiring clients, and Cliffside advertised in other media and
mostly got clients from sources other than The Fix. Nor was it enough to point
to Cliffside’s ad expenses on The Fix (again, for the website as a whole rather
than for the false parts).

The court also rejected a theory based on how much it would
theoretically have cost in advertising to reach the same number of consumers as
there were visitors to the Passages review. There was testimony that the
average cost per click Passages paid for the keywords “Passages Malibu” since
March 2017 was $40.00 per click. But it wasn’t correct to conclude
that every visitor to the review was a consumer of an ad for Cliffside; there
was no evidence suggesting how many people who read the review would have clicked
on an advertisement for Cliffside Malibu had the viewer instead searched for “Passages
Malibu” on Google. And this calculation had nothing to do with falsity; even if
the review was truthful, it would still rely on the same assumption that
Cliffside was benefitting from the Passages review the same as if a viewer had
clicked on a link for a Cliffside advertisement. Separately, the range of bids for a “top tier”
advertising placement for “Passages Malibu” was between $7.99 and $35, and a
bidder might be able to receive a lesser advertising placement for “a couple of
dollars,” so the $40 amount wasn’t fair.

What about adjusting the award, if the amount of recovery
otherwise would be excessive or inadequate, to reflect “such sum as the court
shall find to be just, according to the circumstances of the case”? Well, “Cliffside
undoubtedly profited from its Lanham Act violations regarding the Passages
review posted on The Fix in some manner.” Its expert testified that The Fix’s
average revenue from a visitor to The Fix was always below $0.30 per click from
2014 to 2018. [This seems to be based on The Fix’s ad revenues rather than Cliffside’s revenues, but I’m not clear on that.] Multiplying that figure by the 192,434 organic visitors to the
Passages review between 2014 and 2018, “The Fix could not have benefitted more
than $60,000.” This was a sensible number: if Cliffside hadn’t violated the
Lanham Act, “the Passages review would not have been posted at all during that
time period, so any visitors to that website were unjustly benefitting The Fix.”
Thus, the court awarded Passages $60,000 in disgorgement of The Fix’s profits.

No attorneys’ fees, though.
Cliffside’s defense wasn’t frivolous and its legal arguments weren’t
objectively unreasonable. Nor were its (non-unclean hands-barred) violations
willful. (The court also noted that
Passages had its own unclean hands and also didn’t litigate in the most
pristine of ways, which further supported denying attorneys’ fees.)

Disturbingly, the court commented that “the public’s
interest implicated in this case is less significant than a typical false
advertising case” because the ads weren’t presented in a way that consumers
couldn’t avoid, but instead could only be found by internet searches or
deliberately clicking on links to the article.
This has to be wrong, since consumers performing searches are likely to be
particularly interested in the subject matter rather than passively exposed to
things they don’t care much about and thus more vulnerable to material deception; moreover, addiction treatment is a pretty
significant topic. The court concluded
that “very few visitors to the Passages review on The Fix were exposed to a
false advertising statement against their will,” but that’s silly—given the
factual findings, they neither knew it was advertising, which is itself a
problem, nor did they know that the review was false. Both those problems violated consumers’
autonomy by interfering with their ability to decide for themselves what weight
to give factual claims, and the fact that they could have not searched for
addiction treatment should be no defense.
The court’s ultimate conclusion—that injunctive relief adequately
protects the public—is sounder, but makes even clearer that the weird
statements about the public interest were unnecessary.

I was a bit surprised that there were remaining, un-tried state
law claims for libel per se, false advertising under Cal. Bus. & Prof. Code
§ 17500, and unfair competition under Cal. Bus. & Prof. Code § 17200; the
court remanded those claims to state court, which means that the parties can
apparently go again if they want to.

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Third Circuit requires showing irreparable harm in (c) case, rejects “compelled speech” argument

Posted on July 2, 2019 by rtushnet

TD Bank N.A. v. Hill, No. 16-2897 (3d Cir. Jul. 1, 2019)

Commerce Bank, which merged with TD Bank, has been in a
“bitter feud” with its former CEO, Vernon Hill II. TD Bank sued Hill, alleging
that a portion of his 2012 book infringes a neglected manuscript that Hill
co-authored while CEO of Commerce Bank. The trial court agreed, and granted a
permanent injunction because there was irreparable harm inherent in violating
the Bank’s “right to not use the copyright.” The court of appeals agreed that
the bank owned the copyright (with a highly employer-friendly ruling that a
failed WFH agreement evinced an intent to assign the copyright) and that Hill
infringed, but found that the trial court abused its discretion in relying on a
theory of irreparable harm that would apply to any infringement, in the process
pointing out that infringers don’t compel copyright owners to speak in any way
that implicates a First Amendment interest.

Hill was, according to American Banker, “the closest thing
that the staid banking industry has to a rock star,” and in 2006 he decided to
write a book about his business philosophy and more than 30-year tenure at the
Bank. Commerce Bank supported him by hiring a business book author to
collaborate with Hill in drafting the manuscript. Hill mostly worked on it
during evenings and weekends; other Commerce Bank employees sometimes assisted
by answering inquiries and providing feedback. “Resembling both an
autobiography and a marketing tool, the 2007 manuscript included both a
personal dedication to Hill’s wife and ‘the entire Commerce team,’ and a $20
gift certificate to open an account at Commerce Bank.” Commerce entered into an
agreement with a division of Penguin Books as the “Author,” representing and
warranting that it was the exclusive owner of all rights in the manuscript: “The
Author [i.e., Commerce Bank] hereby represents and warrants . . . that Vernon
Hill is the sole author of the Work; that the Work is or will be Vernon Hill’s next
book length work . . . ; that the Author is the sole and exclusive owner of all
rights granted to the Publisher … ; . . . that the Author has full power to
enter into this Agreement and to make the grants herein contained.” Hill also signed a guarantee that this was a
WFH.

Hill and Commerce Bank broke up and, the 2007 manuscript was
never published. Commerce Bank terminated
the publishing agreement. Eventually,
Hill sought to use portions of the manuscript in a 2012 book describing “Hill’s
experiences founding Metro Bank UK, the British banking system, and Hill’s pet
insurance company, Petplan USA.” [This
list is an example of how the Oxford comma does not in fact remove all
ambiguity and you might be better off rewriting than relying on the comma for
help; I’m guessing Hill did not actually found the British banking system.] TD Bank admitted that, at most, 16% of the
book infringed the 2007 manuscript, and that it has never published the 2007
manuscript or any competing work and has no interest in doing so. Still, the
district court granted a permanent injunction when Hill apparently kept
promoting the 2012 book.

First, the Copyright Act’s three-year statute of limitations
doesn’t apply to Hill’s defense that he’s the co-owner of the copyright,
regardless of whether it applied to his counterclaim for ownership; a statute
of limitations precludes claims, not defenses.

Second, the WFH agreement failed as a WFH but succeeded as a
written transfer of ownership. The book manuscript didn’t fall within the
listed statutory categories that could be WFH by written agreement, so using
the magic words was no help. “Had
Congress intended to permit parties to ‘deem’ works by employees as ‘for hire,’
it would have so specified in subsection 101(1), just as it did for independent
contractors in subsection 101(2).” It might be a WFH as the work of an
employee within the scope of his employment, but the district court did not so
find; the parties could litigate the matter on remand if they cared to figure
out the term of the copyright or whether Hill owned termination rights.

However, the Bank still won the issue because the agreement
“operated as an assignment.” Hill “unconditionally guarantee[d] that the Work
is a work made for hire within the meaning of the United States Copyright Law
and that the Author is the owner of copyright in the Work and has full power
and authority to enter into the Agreement.” His agreements “convey[ed] an
unmistakable intent to effect a present transfer of any interest he possessed
in the manuscript. Hill’s assurance that the manuscript ‘is a work made for hire,’
though insufficient to actually render it for hire, denotes an intent to
relinquish his interest in the copyright.”
This strikes me as a reasonable, albeit not mandatory, interpretation of
the parties’ intent. A regime that would
provide more protection to natural persons as authors would be a penalty for
overreach: a failed WFH agreement would just disappear, not get reconceived of
as an intent to transfer (the partial dissent seems to lean in this direction).
To avoid just this problem, some contracts I’ve seen express the intent to (1)
deem a work a WFH but (2) in the alternative, if it’s not, express the intent
to transfer to the corporate owner.
Given that the Bank could’ve written that contract, I have some sympathy
for the dissent.

Next, the court of appeals quickly disposed of merger/fair
use arguments. There were numerous ways
for Hill to express his life story and business philosophy, and the 2012 book
wasn’t transformative— “it did not imbue the prior work with ‘new expression,
meaning, or message’—so the permissible scope of fair use is more
circumscribed. Given this, as well as Hill’s commercial sales of the 2012 work,
the unpublished nature of the 2007 manuscript, and the potential harm to the
market for the original manuscript if TD Bank ever elected to publish it, the
District Court correctly granted summary judgment to TD Bank on Hill’s fair-use
defense.”

Nonetheless, the district court abused its discretion in
granting a permanent injunction. First, eBay abrogated any presumption
of irreparable harm in copyright cases. The district court found irreparable
harm because the Bank was deprived of the “right to not use the copyright.” We
get a very clear statement: “Neither the prospect of continued infringement nor
the ‘right to not use’ a copyright establish irreparable harm.” Continuing
infringement doesn’t itself make future injury irreparable. And “[h]olding
that a violation of ‘the right to not use the copyright’ necessarily amounts to
irreparable harm would not only resurrect the presumption of irreparable harm,
but make it irrebuttable, even where, as here, the infringement bears only a
tangential relation to the copyright holder’s business.” Copyright protects incentives to create and
publish, not privacy, reputation, or other interests.

The district court relied on dicta in the Second Circuit Salinger
case, which mused that “a copyright holder might . . . have a First Amendment
interest in not speaking” and later asserted that “‘[t]he loss of First Amendment
freedoms,’ and hence infringement of the right not to speak, ‘for even minimal
periods of time, unquestionably constitutes irreparable injury.’” The Third
Circuit declined to take this musing seriously.
First, Salinger vacated a preliminary injunction and
required a showing of irreparable harm.
“Equating copyright infringement with compelled speech would justify an
injunction whenever, as in Salinger, an author chooses not to distribute
a work.” Salinger also reiterated that copyright law aims to protect
“the commercial interest of the artist/author” and “not to coddle artistic
vanity or to protect secrecy.” The Third Circuit noted that “secrecy is exactly
what would be protected if the unauthorized distribution of a work were deemed
an irreparable violation of the original author’s right not to speak.”

A footnote pointed out that the “compelled speech” argument
doesn’t make sense. “Most obviously,
copyright infringement generally lacks the state action needed to implicate the
First Amendment.” And even if there was
state action, infringement wouldn’t be compelled speech because “regardless of
whether the author takes offense, the infringer’s use does not coerce the
copyright owner to ‘personally speak the government’s message’ or ‘to host or
accommodate another speaker’s message’ so that ‘the complaining speaker’s own
message was affected.’” Indeed, fair use provides special protection to uses
like parodies, and the Copyright Act also provides for compulsory licensing; as
the court of appeals pointed out, neither of these have ever been (or should
ever be) seriously challenged as compelled speech for First Amendment purposes.

It was abuse of discretion to rely on a “right not to use”
for irreparable harm.

Likewise, the district court was mistaken to conclude that
there was no adequate remedy at law because Hill was handing out the 2012 book
for free. Actual damages would permit a
reasonable royalty remedy, and statutory damages might also be available. TD
Bank argued that it abandoned its request for statutory damages, so it lacks an
adequate remedy at law. But where an adequate remedy at law exists, “the party
seeking redress must pursue it.”

There’s no categorical rule that all infringement can be
adequately remedied through damages. “But, at a minimum, where the copyright
holder presents no evidence of actual harm and relies solely on the exclusive
nature of the rights conferred by the Copyright Act, a district court abuses
its discretion by concluding that the copyright holder lacks an adequate remedy
at law.”

The balance of equities analysis was also flawed: It relied
solely on TD Bank’s “property interest in its copyrighted material”—the right
to exclude—and dismissed any interest that Hill might have because he had a
property interest in the 2012 book only to the extent that it wasn’t
infringing. “But by that measure, the balance of hardships would always favor the
copyright holder.” At least three
factors go into a defendant’s claimed hardship: (1) whether the defendant’s own
financial investment, effort, or expressive contribution eclipses the infringing
aspect, (2) how easily the infringing content could be separated from the
defendant’s product, and (3) the degree to which the defendant reasonably
believed his conduct was non-infringing. (Footnote: (2) differs from merger; merger is
an ex ante issue about whether there was a different way to say the thing. Separability for hardship purposes is about
how hard it would be to extricate the infringing content, given obstacles such
as sunk costs and path dependence.)
Here, the balance of equities favored neither party. There was no
evidence of actual harm to the Bank and no more than 16% of the 2012 book
infringed, while Hill’s unsuccessful ownership defense had “considerable
merit,” but there was not much favoring Hill either. Late in the appeal process,
the Bank conceded that a 2016 version of the book didn’t infringe, which
suggested that the book could be noninfringingly rewritten in about a month
(with the benefit of hindsight).

The public interest, however, favored access to the
book. “Copyright leaves a narrow but
important role for weighing the public’s right to access expressive works, at
least where a copyright owner pursues an injunction not to safeguard the
commercial marketability of a work but merely to suppress unwelcome speech.” Copyright isn’t “categorically immune from
challenges under the First Amendment,” given its “built-in free speech
safeguards.” Still, “in exercising its
remedial discretion, a court [need not] ignore whether an injunction would
indefinitely preclude the public from accessing a work.” In fact, the Supreme Court has suggested that
injunction isn’t always consistent with copyright’s speech-generative
functions; it and other courts of appeal “have emphasized the right of access
to works of public interest.”

None of this was to “countenance blatant piracy or indulge
in second-guessing of a copyright holder’s business model.” Even with the public interest in access,
injunctive relief might be appropriate. “But, at least where a copyright holder
wields its exclusive rights to suppress unwelcome speech, a district court’s
public-interest analysis should consider a work’s continued availability.” Hill may not be a great author, but he had
something to say and an audience that wanted to hear him. Meanwhile, the Bank
wasn’t protecting the commercial value of its manuscript with this litigation:
“By its own admission, TD Bank has no real intention of ever publishing or
licensing that work.”

And the injunction—which was granted before the Bank
conceded that the 2016 version didn’t infringe— “also inflicted a far more
subtle and insidious harm on the public by placing Hill in jeopardy of a
contempt finding for sharing anything that ‘sound[s] too much like himself in
the 2007 manuscript.’” [Citing an amicus I worked on.] “In this manner, a
copyright injunction can limit the public’s access to expressive content well
beyond the work at issue in a lawsuit. Far from hypothetical, that danger came
true here when TD Bank threatened to bring a contempt motion against Hill for
the 2016 book, which it did not retract until its appellate response brief. A less
financially secure defendant may well have given up.”

Ultimately, “no invocation of abstract principles can
obscure that TD Bank suffered no actual harm from Hill’s infringement and the
Bank had adequate remedies at law.”

A partial dissent by Judge Cowen would have found that the
Bank waived any argument that there was an assignment. In addition, Hill’s commitments failed to
“convey an unmistakable intent to effect a present transfer of any interest he
possessed in the manuscript”—the letter, written to a third party and using the
language of “guarantee,” was “doubtful and ambiguous.” There was no
manifestation of an intent to make a present transfer of rights. WFH and assignment are very different things,
with different consequences.

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Posted in Uncategorized | Tagged rejects "compelled speech" argument copyright, remedies, Third Circuit requires showing irreparable harm in (c) case | Leave a comment

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Rebecca Tushnet

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