Recommended podcast on multilevel marketing

Posted on May 2, 2019 by rtushnet

The Dream by Stitcher.

Excellent look at how multilevel marketing companies succeed
at avoiding regulation and at convincing enough people to try them—and convincing
them that their subsequent failure is their own fault and not intrinsic to the
model—to make the people at the top a lot of money.  Both gender and the collapse of real economic
opportunity for many people in the U.S. play big roles—the American mythos of
success being a matter of wanting it enough, combined with women’s desire for
flexible work that will allow them to support their families in both economic
and noneconomic ways, makes MLMs seem like a plausible response to rather than a
symptom of toxic inequality.  There are
many striking moments, including the justifications that people in the “upline”
use to explain why it’s ok to take money from losers—I mean, from people who
lack sufficient motivation to succeed.  (Interestingly, the industry mouthpiece who
appears in the last episode does not push that line, contrary to all the
individual MLMs trying to recruit “sellers”—instead, he would prefer to
characterize most “sellers” as people who sign up because they like the product
and want a discount, even though he admits that almost all of them want to be
understood as sellers/businesspeople.) One woman with 150 people in her
“downline” makes (just) $42,000 a year—which raises the question of how much
money is going to the MLM, since that’s a small fraction of the money it takes
to buy enough product to get that kind of commission.  The podcast also spends a fair amount of time
on the FTC’s largely lost battle to regulate MLMs like Amway, and on
MLM-friendly proposed legislation that will define most MLMs as not pyramid
schemes no matter how large a percentage of their “sellers” lose money.

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hijacking another’s webpage for competing service is bad

Posted on May 1, 2019 by rtushnet

Spy Dialer, Inc. v. Reya LLC, 2019 WL 1873296, No. ED CV
18-1178 FMO (SHKx) (C.D. Cal Mar. 18, 2019)
The parties compete in the market for reverse phone lookups.  When a user accessed plaintiff’s Spydialer.com,
malicious computer code allegedly inserted through ads placed by Reya would
cause the user’s browser to automatically scroll down to the bottom of the
webpage, where defendant’s ad was located. The user’s cursor would then be
placed in a search box located within the ad, instead of in the search box for
the Spy Dialer website. The ad’s search box was designed to look similar to Spy
Dialer’s search box. The malicious code allegedly prevented users from
scrolling back up the page to Spy Dialer’s search box. Users who typed a phone
number into the advertisement’s search box were redirected to defendant’s
website.
When Spy Dialer reached out to defendant, a manager claimed
that the malicious code was the result of a “coding error.” Spy Dialer
complained to Google, which conducted an investigation, concluded that
defendant’s ads “constituted a fraudulent business practice,” and banned the ads
from further use.  The ads allegedly
caused Spy Dialer’s website to lose “ranking in Google’s search engine results”
and led to lower traffic and resulting lower ad revenue.
CFAA: Defendant had limited authorization to access Spy Dialer’s
computers, because it submitted ads to platforms which would then place the
advertisements on Spy Dialer’s website. But it allegedly  exceeded the scope of this authorization by
causing the ads with malicious code to be placed on plaintiff’s site. However,
the complaint failed to plead that defendant obtained or altered information on
plaintiff’s computers that it wasn’t authorized to obtain or alter. For example,
there was no allegation that defendant continued to place ads on plaintiff’s
website even after permission had been revoked. “[M]erely submitting
advertisements through Google Ad Services[] does not state a CFAA violation.”
ECPA: 18 U.S.C. § 2511 provides a private right of action
against “any person who … intentionally intercepts, endeavors to intercept,
or procures any other person to intercept or endeavor to intercept, any wire,
oral, or electronic communication[.]” Here, when a visitor attempted to use Spy
Dialer’s website, defendant’s malicious ad would force the visitor’s browser to
automatically scroll to the bottom of the webpage. Even if the user realized
what was happening, the malicious code allegedly prevented them from scrolling
back up to the top of the webpage to use plaintiff’s own search box. This
“captured” and “redirected” traffic intended for Spy Dialer’s website (is that
the same as interception?).  And it was
plausibly alleged to be intentional, in that the code was sufficiently “sophisticated”
that it could not have come about through mistake or error.
California Penal Code § 502 creates liability against an
individual who “[k]nowingly accesses and without permission alters, damages,
deletes, destroys, or otherwise uses any data, computer, computer system, or
computer network in order to either (A) devise or execute any scheme or
artifice to defraud, deceive, or extort, or (B) wrongfully control or obtain
money, property, or data.” “Just as plaintiff’s CFAA claim fails … so too must
those aspects of plaintiff’s § 502 claim which depend on defendant having
accessed plaintiff’s computers.” But 502(c)(3) prohibits individuals from
“[k]nowingly and without permission us[ing] or caus[ing] to be used computer
services.” Subsection (c)(5) creates liability against a person who
“[k]nowingly and without permission disrupts or causes the disruption of computer
services or denies or causes the denial of computer services to an authorized
user of a computer, computer system, or computer network.” Subsection (c)(8)
bars “[k]nowingly introduc[ing] any computer contaminant into any computer,
computer system, or computer network.”
None of those provisions required access to Spy Dialer’s
computers, so those claims survived.
Lanham Act claim: based on defendant’s use of spydialer.org
(as opposed to plaintiff’s spydialer.com)—easily survives, as does an ACPA
claim.
However, a false advertising claim under California Business
& Professions Code § 17500 failed. That law makes it unlawful for any
person to “induce the public to enter into any obligation” by making “any
statement … which is untrue or misleading, and which is known, or which by
the exercise of reasonable care should be known, to be untrue or misleading.” The
use of the domain name “Spydialer.org” was not an actionable “statement” in connection
with the ad or the domain name.  This
seems inconsistent with the ordinary meaning of “statement”—when I wear a nametag
labeled “Prof. Tushnet,” I’m stating my name—but there are apparently cases so holding. Sensible Foods, LLC v. World Gourmet, Inc., 2012 WL
566304, *7 (N.D. Cal. 2012) (rejecting false advertising claim after concluding
that a heart symbol “is not a statement”); Parent v. MillerCoors LLC, 2015 WL
6455752, *7 (S.D. Cal. 2015) (“MillerCoors’ use of the BMBC trade name on the
label is not a ‘statement[.]’ ”).
But state law unfair competition claims survived under §
17200, since the “ultimate test for unfair competition is exactly the same as
for trademark infringement.”
However, there was no actionable conversion of web traffic.  In the Ninth Circuit, “First, there must be
an interest capable of precise definition; second, it must be capable of
exclusive possession or control; and third, the putative owner must have
established a legitimate claim to exclusivity.” Though web traffic is “an
interest capable of precise definition,” in that web traffic consists of the
number of Internet users who accessed a particular website within a given time
frame, it is not “capable of exclusive possession or control.” Unlike domain
names, “web traffic is distinctively ephemeral. Indeed, even the parties that
posted non-malicious banner advertisements on Spydialer.com were no doubt
hoping to redirect a portion of plaintiff’s web traffic from plaintiff’s
website to theirs.”
Fraud claims also failed because there was no allegation
that the plaintiff reasonably relied
on the ad, as opposed to third parties. 
A negligence claim survived, though, based on defendant’s denial of
intentional conduct.

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prisoner’s consumer protection claim against false advertising of music player should proceed

Posted on May 1, 2019 by rtushnet

Mendoza v. Inch, 2019 WL 1901811, No. 18cv66-RH/CAS (N.D.
Fla. Feb. 20, 2019) (report & recommendation)
Prisoners are an extremely vulnerable population; here a
consumer protection claim may offer some hope despite the usual barriers to
relief.  Mendoza alleged that the Florida
Department of Corrections and its vendors (Access, Trinity, and Keefe)
advertised an MP3 digital music player with various options and accessories. Buying
the player player supposedly included updates of the latest music releases and
the ability to own an unlimited amount of music. If the music player failed,
purchased music could be transferred to a new device and there was no “mortality”
date listed for the player. Mendoza bought a player and accessories, and as
well as music which, at the time the complaint was filed, totaled over six
hundred dollars.
Four years later, the DOC told inmates that it was ending
its contract with Keefe/Trinity/Access and was entering a new contract with
“JPay” to provide multimedia services. Inmates were told to mail out their
existing music players, and that they would be required to obtain a new tablet
to listen to music. Mendoza then learned that a “mortality timer” had been
installed on his music player and it would become non-operational on January
23, 2019.
The magistrate recommended rejecting most of the defendants’
motions to dismiss, including that “no degree of redressability within this
Court” because this “Court has no power to require a state agency to enter into
any specific contract or remain contractually obligated to a specific entity.” The
magistrate pointed out that it was far from clear that even injunctive relief
would interfere with a DOC contract—requiring Mendoza to surrender his own
property “appears to be a matter of DOC policy, not contract.” 
Eleventh Amendment immunity: Ex Parte Young allows injunctive relief, though not money damages,
against the DOC.  The defendants argued
that Mendoza wasn’t entitled “to any damages as he fails to state a physical
injury.”  But anti-prisoner laws reject claims
for mental or emotional injury; the relevant statute “does not specifically
preclude an inmate from seeking compensatory damages for an actual injury such
as the loss of property.”  A disparate
impact claim failed, though (based on the idea that requiring surrender of the
music player to someone outside the prison deprived inmates with longer/life
sentences of more property).
The Florida Deceptive and Unfair Trade Practices Act claim
was sufficiently pled, according to the magistrate. Defendants argued that
allegations of “bait and switch” alone, without pointing to any unfair or
deceptive practices, was insufficient to state a claim. But Mendoza alleged
that the defendants made false representations in their ads on which he relied,
including a promise that he could “own unlimited music” and Access Corrections
would store all purchased songs, including deleted songs, and “give them back”
to him whenever he desired “for free.” If the player ceased to function, the
music would “be transferable to a new device, and there was absolutely no
mortality (end) date advertised in advance.” This was sufficient.
The magistrate rejected Mendoza’s argument that he had a constitutional
right not to be defrauded by the government—the law establishes that law
enforcement is allowed to deceive people (though why that applies here, without
a law enforcement purpose in sight, is mysterious to me)—but fortunately for him,
he does have a statutory right not to
be defrauded of his money in a sale, even without a constitutional right to buy
a music player in the first place (as defendants argued).
Two of the private defendants argued that they weren’t
“state actors” for purposes of 42 U.S.C. § 1983. Mendoza argued that the State
“significantly encouraged the Defendant(s) to advertise and sell” him and other
prisoners mp3 players and music, and that the State and all defendants profited
from those sales; further, Florida allegedly “was a joint participant” with the
private companies and engaged in collusion to render his device
non-operational.  That was enough for “color
of state law” for now. “Plaintiff’s allegation of a conspiracy and joint action
distinguish this case from the cases cited by Defendants which hold that
private parties operating canteens or selling commissary items are not acting
under color of state law.”  [Again, the
law leaves prisoners very, very exposed here.]
The magistrate also recommended preserving Mendoza’s state-law
breach of contract claim.

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allegations of “use on a website” don’t plausibly allege TM confusion

Posted on May 1, 2019 by rtushnet

Blue Water Innovations, LLC v. Fettig, No.
18-60671-Civ-Scola, 2019 WL 1904589 (S.D. Fla. Mar. 8, 2019)
Quick reminder that the Eleventh Circuit hasn’t formally
recognized initial interest confusion. 
That said, at least in a complaint with fewer problems, simply alleging “consumer
confusion” might have been enough for some courts.
Blue Water makes a fat reducing device; it has related
patents and a trademark registration for Ultraslim, for use on fat reduction
and skin rejuvenation devices. Blue Water alleged that defendants stole its
patented technology to sell “knockoff” fat reducing devices and that they were
improperly using Ultraslim on their website “in a manner that falsely
associates the Fettig and Vevazz device with those of Blue Water.”
Patent infringement: failed to state a claim because the
complaint didn’t name a single claim in the Blue Water patents or explain how
the defendants’ product infringes on any of the elements of the claims.  Instead, it alleged that defendants’ devices
were “virtually identical” to Blue Waters’. 
That wasn’t enough.  
Initial interest confusion: The use of Ultraslim on
defendants’ website allegedly created a likelihood that when an internet user
searches “Ultraslim” they’ll get a “hit” for the defendants’ product. [That isn’t
even alleging that the user is confused!] 
The Eleventh Circuit has suggested that confusion that is remedied
before purchase isn’t actionable.  The
complaint also alleged that “several clients have complained that the Vevazz
device and system is substantially less expensive, and sells for approximately
10% less of the Blue Water device and system, as the Vevazz product is a cheaply
made ‘knock-off.’ ” Thus, the allegations of the complaint showed that
customers are able to identify the difference between the two products (the cheap one apparently sells for thousands
of dollars!), so there is no evidence of confusion. That was fatal to a likely
confusion claim.

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alcohol beverage maker has standing b/c D’s non-alcoholic label plausibly attracts alcohol drinkers too

Posted on April 30, 2019 by rtushnet

Tortilla Factory, LLC v. Makana Beverages, Inc., No. CV
18-2981-MWF (PLAx), 2018 WL 8130609 (C.D. Cal. Nov. 14, 2018)
Tortilla Factory makes kombucha beverages under the brand
name “Kombucha Dog.” Makana also makes kombucha drinks. Kombucha is “a
fermented beverage produced from a mixture of steeped tea and sugar, combined
with a culture of yeast strains and bacteria.” Many consumers allegedly choose kombucha
because it is natural, has low sugar content, and contains healthy probiotics.  Because of fermentation, kombucha may contain
alcohol in excess of 0.5% by volume. Because Tortilla Factory “does not dilute
the beverage like other manufacturers,” Kombucha Dog beverages allegedly contain
alcohol in excess of 0.5% by volume. Such beverages are deemed alcoholic and
must adhere to relevant federal laws and Alcohol and Tobacco Tax and Trade
Bureau (TTB) regulations, including displaying a health warning statement under
the Alcoholic Beverage Labeling Act of 1988.
Makana doesn’t label or market its beverages as alcoholic,
but Tortilla Factory alleged that they in fact contained “between 0.6% and 1.9%
alcohol,” as confirmed “by utilizing headspace gas chromatography combined with
mass spectrometry from a third party lab to test alcohol levels.”  This allegedly “confused and misled consumers
(and jeopardized their health and safety).” 
In addition, Tortilla Factory alleged that Makana “understate[s] the
sugar content of [its] drinks, to mislead consumers into believing the products
are healthier than other kombucha drinks on the market that properly advertise
their sugar content.” “Given the manufacturing process for a true kombucha
product, as [Makana’s] products purport to be, it is highly unlikely that the
sugar level is accurate.”
It sued for state and federal false advertising.  Makana argued that Tortilla Factory lacked
standing because it wasn’t targeting the nonalcoholic market, and Makana’s
flavors were completely different from Tortilla Factory’s “eccentric” flavors,
making it not plausible that any Makana drinkers would switch to Kombucha Dog.
“Construed in Tortilla Factory’s favor, as it must be, the
Complaint actually suggests that Tortilla Factory and Makana are both targeting
health-conscious kombucha drinkers, and that Tortilla Factory accurately
discloses the amount of alcohol in its beverages while Makana does not.” Different
flavors didn’t necessarily mean different markets.  It was plausible that, properly labeled,
Makana’s consumer base would shrink to exclude under-21s, and if, as the
complaint indicated, “kombucha drinkers are a relatively abstemious and
health-conscious bunch, such a labeling change could presumably reduce the number
of over-21 Makana drinkers…. With Makana and Kombucha Dog on equal (or more
equal) footing, alcohol-labeling-wise, it is entirely plausible that at least
some consumers who had historically purchased Makana based upon its lack of
alcohol content might elect to try Kombucha Dog.” Uncertainty about proving that
number was insufficient at the motion to dismiss stage.
Applying Rule 9(b), the court then found the alcohol
allegations sufficent but not the sugar allegations.  It wasn’t enough to invoke information and
belief is that, “[g]iven the manufacturing process for a true kombucha product,
as [Makana’s] products purport to be, it is highly unlikely that the sugar
level is accurate.” Tortilla Factory could test Makana’s sugar content just as
it tested alcohol content. Even if allegations on information and belief were
allowed because the information was uniquely under Makana’s control, a
plaintiff making a fraud claim upon information and belief “still must ‘state
the facts upon which [its] belief is founded.’ ” Tortilla Factory didn’t
explain the facts underling its belief that it is “highly unlikely that the
sugar level is accurate” “[g]iven the manufacturing process.”
Alcohol content was different; the facts were alleged and
allegedly supported by testing.  Makana
pointed to a TTB webpage about kombucha stating that: [P]roducers may use any
method that has been formally validated (e.g., that underwent a multi-laboratory
performance evaluation) or that is otherwise scientifically valid for purposes
of determining the alcohol content of beverages, including beverages that
contain less than 0.5% alcohol by volume. Makana didn’t argue that Tortilla
Factory’s method was not scientifically valid, nor could it at this stage. “Instead,
Makana argues, in essence, that Tortilla Factory cannot satisfy its pleading
burden unless it alleges that it has tested the alcohol content of Makana’s
kombucha drinks using the more permissive scientifically valid testing methods
(since the TTB does not specify a particular test) and that the alcohol content
registered above 0.5% in this test.”  The
court refused to draw inferences against Tortilla Factory at the pleading stage—specifically,
that there are other scientifically valid methods that would detect less
alcohol in Makana’s beverages.  If Makana
can show that other valid tests come out differently, “Makana should be in a
position to file a relatively quick and streamlined motion for summary
judgment.”
Makana also argued that Tortilla Factory failed to allege which
specific Makana kombucha beverages (of various flavors) were tested. The complaint
listed each of Makana’s flavors, defined them collectively as “Kombucha
Products,” and alleged that, based on third-party lab testing, the “Kombucha
Products contain between 0.6% and 1.9% alcohol.” “In this Court’s opinion, and
absent any authority suggesting otherwise (which Makana has not cited), these
allegations are sufficient to put Makana on notice which products were tested.”

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antitrust/false advertising claims against Keurig’s K-Cup conduct survive

Posted on April 30, 2019 by rtushnet

In re Keurig Green Mountain Single-Serve Coffee Antitrust
Litig., 2019 WL 1789789, No. 14-MD-2542 (VSB) (S.D.N.Y. Apr. 22, 2019)
Big antitrust litigation in which many claims survive; I’m only discussing the false advertising-relevant bits, but the basic antitrust claims under federal law and the law of a number of states survive.  Direct purchaser plaintiffs (DPPs) alleged
that Keurig’s anticompetitive practices caused the DPPs to be overcharged for
their purchases of cups or pods used in Keurig’s single-server brewer machines,
while indirect purchaser plaintiffs made similar claims.
Keurig’s K-Cup Brewer was the first commercially successful
Single Serve Brewer. To be usable with a particular Single Serve Brewer, a
Portion Pack must be compatible with that Single Serve Brewer. Keurig makes and
licenses Portion Packs compatible with K-Cup Brewers. Keurig’s competitors also
make their own compatible Competitor Cups. Keurig controls at least 89% of the
market for Single Serve Brewers, 73% of the market for Portion Packs, and 95%
of the market for K-Cup Compatible Cups.
In 2012, patents covering the K-Cup filtering technology
expired. (Shortly before that some competitors introduced nonfiltered cups,
resulting in litigation both by Keurig
and by consumers.)
Threatened by the rise of competition, Keurig responded by allegedly (i) filing
baseless lawsuits against new entrants; (ii) entering into non-competition,
tying, and exclusive dealing agreements and threatening companies who would do
business with Compatible Cup manufacturers,; (iii) redesigning K-Cup Brewers
and introducing the Keurig 2.0 K-Cup Brewer to lock out Competitor Cups and
misinforming customers about the motivation for, and the abilities of, this
lock-out technology, and (iv) maligning Competitor Cups and otherwise
interfering with competitors’ business relationships.
Although competitor Sturm has definitely engaged in bad behavior
(it put instant coffee in Portion Packs, leading consumers to believe they were
buying ground coffee—and it charged ground coffee prices in part to keep
consumers from getting suspicious), Keurig’s patent lawsuits against competitors
Sturm and Rogers were dismissed as (in one court’s words) an attempted
“end-run” around the patent laws with “a tactic that the Supreme Court has
explicitly admonished,” with Keurig attempting “to impermissibly restrict
purchasers of Keurig brewers from using non-Keurig [Competitor Cups] by
invoking patent law.”   
Keurig also entered into over 600 exclusive and restrictive
agreements with various entities involved in the line of manufacture and
distribution of Compatible Cups (suppliers of cups, lids, and filters, as well
as suppliers of the lock-out technology, a special taggant ink that is included
on the lid of the Compatible Cup), as well as with potential competitors. In
addition, Keurig allegedly locked up virtually all of the distributors who
provide Compatible Cups for use outside of the home in long-term exclusive
contracts. Keurig also has exclusive contracts with numerous major coffee
brands and eliminated potential competitors through acquisitions of competitors
and previous licensees.
Alleged false advertising: The packaging of the 2.0 Brewer
states “Works only with Keurig Brand Packs,” and the user manual warns
consumers that their “Keurig 2.0 brewer will not work with packs that don’t
have the Keurig logo,” among other alleged misrepresentations. The 2.0 Brewer
itself displays a misleading message, “[t]his pack wasn’t designed for this
brewer” when a consumer attempts to use a Competitive Cup in it. Plaintiffs
also alleged false and misleading messaging online regarding quality and safety
issues with respect to Competitor Cups; misstatements to consumers about
quality and safety issues with the use of non-Keurig cups in the 2.0 Brewer and
about how use of unlicensed Compatible Cups affects the brewer warranty; and
misrepresentations to both consumers and retailers about compatibility and
quality issues.
The 2.0 Brewer was allegedly solely intended to further lock
out competitors. Keurig developed a “taggant,” a special kind of ink, used to
authenticate that a Portion Pack was a Keurig or Keurig-licensed pack. Keurig
allegedly knowingly made false representations that its lockout technology had
consumer benefits, and disparaged all Competitor Cups. Nonetheless, some
competitors have reverse-engineered 2.0 Brewer-compatible Portion Packs.
Keurig’s anti-competitive conduct allegedly caused consumers
to pay supra-competitive prices for K-Cups. IPPs were not efficient antitrust
enforcers, but the DPPs adequately pled antitrust standing.
Competitor Rogers also pled sufficent anticompetitive
conduct—product design alone likely wouldn’t have been enough, but allegations
of exclusive dealing, tying agreements, sham lawsuits, and product disparagement
together were sufficient.
It’s hard to base an antitrust claim on false advertising.  Because courts don’t like antitrust claims, “a
plaintiff asserting a monopolization claim based on misleading advertising must
‘overcome a presumption that the effect on competition of such a practice was
de minimis.’ ” Factors include whether representations “were (1) clearly false,
(2) clearly material, (3) clearly likely to induce reasonable reliance, (4)
made to buyers without knowledge of the subject matter, (5) continued for
prolonged periods, and (6) not readily susceptible of neutralization or other
offset by rivals.” Here, there was enough to go forward with discovery. Though
Keurig argued that its statements were susceptible to neutralization, that
retailers are not buyers without knowledge of the subject matter, that statements
that non-approved products may void the warranty are true, and that its statements
about how the 2.0 Brewer operates weren’t clearly false, “these challenges are
more appropriately raised on summary judgment.” 
This isn’t the district court’s problem, but I’ve never seen
a coherent explanation of why these factors are important to whether false
advertising harmed competition, not just competitors.  (Time might be the best candidate, but even
that can be context-specific: false advertising just as competition threatens
might be enough to maintain a monopoly.) They are best understood as a
channeling doctrine: competitor false advertising claims should be brought as Lanham
Act claims unless there’s a good reason to think they harmed competition, not
just competitors.  I would think that harm
to the structure of competition would be more closely tied to whether the
defendant was advertising in ways that harmed all competitors—promoting its own
product or disparaging all the competition—than to the other factors listed.  The “clearly” factors might plausibly go to
whether the claims were likely to affect a more-than-substantial number of
consumers—20% deception might be enough for Lanham Act false advertising, but
we might want something more like 75% for antitrust, though that doesn’t really
help distinguish “literally” false from “clearly” false.  Relatedly, jumping off what Mark McKenna
& Mark Lemley have written,
if a false claim was material to some subset of consumers, those consumers
would arguably be a relevant submarket.
Anyway, plaintiffs were entitled to discovery in order to
substantiate their disparagement claims.
Unsurprisingly, Lanham Act claims by the competitor
plaintiffs also survived.  Keurig argued
that they only challenged subjective statements of quality, performance, and
safety. But claims about inferior quality are actionable under the Lanham Act,
which covers “more than blatant falsehoods. It embraces innuendo, indirect
intimations, and ambiguous suggestions evidenced by the consuming public’s
misapprehension of the hard facts underlying an advertisement.” Keurig argued
that its adjectives, such as “perfect,” were “puffery,” but not in context. For
example, alleged misrepresentations about the necessity of using Keurig brand
cups, as opposed to Competitor Cups, “involve more than the mere use of
qualifiers and cross the line into statements of direction or fact.” Anyway, a
determination on this wasn’t appropriate for summary judgment.
Keurig argued that its statements to consumers who called to
complain about the 2.0 Brewers weren’t “advertising,” nor were messages
displayed on the 2.0 Brewer and messages in the 2.0 Brewer warranty because
they were received by consumers who had already purchased the brewer and thus
were not made “for the purpose of influencing consumers to buy defendant’s
goods or services.” Keurig ignored that it also sells/licenses K-Cups; the
statements were “advertising or promotion” as to K-Cups. Also, “Keurig cites no
case law, and I have found none, in which a court has held that warranty
policies fall outside the scope of the Lanham Act as a matter of law.” And some
of the statements were made to consumers by using Facebook and Amazon.com. Even
assuming they were were all made to consumers who had already bought the
brewer, they were viewable by everyone.  “This
type of communication is materially different from a one-on-one communication
between a manufacturer and a consumer inquiring about the product owned by the
consumer. Therefore, such statements are appropriately viewed as being made for
consumption by a wider audience for the purpose of influencing other consumers
to buy defendant’s goods or services.” 
The coordinate state law claims also survived.

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Instagram hashtags aren’t nominative fair use because they’re visible to consumers

Posted on April 30, 2019 by rtushnet

Align Technol., Inc. v. Strauss Diamond Instruments, Inc., 2019
WL 1586776, No. 18-cv-06663-TSH (N.D. Cal. Apr. 12, 2019)
Nominative fair use purports to be a test, but cases like
this make me want to say that it’s a fairness judgment.  Here, defendant’s use of Instagram hashtags
wasn’t fair use because they’re visible to consumers, unlike keyword ads, and
thus “too much” (and also, the court thinks, used to refer to defendant’s
product, which doesn’t make very much sense to me, since defendant’s product is
for use with plaintiff’s product);
likewise, using a picture of plaintiff’s product (which has the plaintiff’s
mark on it) isn’t fair use, but there the court may think that using a
different drawing would be ok.
Align’s Invisalign straightens teeth. Align’s iTero Element scanner
takes scans of a patient’s mouth, teeth and gums, which helps in implementing the
Invisalign system. The scanner includes a computer system with an attached
“wand,” which uses a protective sleeve that slides over and covers the portion
of the scanning wand that is inserted into the patient’s mouth. Align’s sleeve
is disposable and single-use only, and has a number of other wonderful features
that Align touts and the court repeats; “[a]n inferior quality sleeve may
affect the performance of the iTero Element scanner system as a whole and may
also increase risk to patients in cross-contamination, fluid transfer,
discomfort and inconvenience.”  Align has
registrations for iTero, iTero Element, and Invisalign for dental services,
dental and oral healthcare devices, and computer-aided modeling.
Strauss sells dental instruments and related goods,
including is the MagicSleeve, a silicone sleeve that covers the wand portion of
intraoral scanners. It is reusable, and according to Align, inferior to Align’s
sleeve.
Three problems: (1) Hashtags containing Align’s marks.  For example, two pictures show the
MagicSleeve in use with a patient. The text says, “If you are a digital scanner
user, be prepared to cut your overhead down. Our brand new MagicSleeve is
autoclavable and allows for a faster scanning time. Shop now ->
https://straussdiamond.com/product/scanner-sleeve/.” The third hashtag says
“#invisalign,” and the fifth says “#itero.”

(2) One screenshot from a video says “Order Today.” To the
right is a picture of an Align iTero Element machine with a Strauss MagicSleeve
on the wand. A stylized image of a row of teeth is on the screen, and on the
upper left is an image of both rows of teeth, and on the bottom left is a
picture taken of someone’s mouth showing a couple of teeth. “[T]he machine
itself has the normal ‘iTero element’ logo in tiny letters on the front of it because
that’s how an iTero Element machine looks in real life.” Beneath the picture of
the machine is Strauss’s domain name. 
The problem is that the image of the iTero Element machine with the
stylized pictures on it “was actually created by Align, then copied by Strauss,
which superimposed an image of its MagicSleeve on top of the wand.”
 

screen shot with iTero image
iTero’s image
(3) False claims: Concededly false advertising of “25%
faster scanning time.” Allegedly false advertising that the MagicSleeve
produces scans that are just as sharp as the ones produced by using an iTero
Element sleeve.
The court found that the hashtags wasn’t nominative fair use
because in some cases “Strauss used the marks to refer to its own product,” and
“in all cases, Strauss used more of the marks than is reasonably necessary to
identify the product.”  The court
understood the hashtags to be references to Strauss’s own product, which doesn’t
make a lot of sense to me as a linguistic matter; hashtags do generally
contribute to one’s understanding of the topic under discussion.  But the court didn’t like the context. For
example, the illustrated nine-step instructions for using the MagicSleeve had several
hashtags listed, including #itero, #iteroscanner, #iteroelement and #invisalign,
along with #scannersleeve and #diamondprovider, and then hashtags about
dentistry (e.g., #dentist, #cosmeticdentistry) and attractive teeth (e.g.,
#straightsmiles, #beautifulsmiles). “These hashtags are all collectively being
used to promote and describe the MagicSleeve. It is not credible to view the
hashtags containing Align’s marks as referring to Align’s products (the
foundational assumption of nominative fair use) and the other hashtags as
referring to the MagicSleeve. They are all together references to the
MagicSleeve.”  Citation: Public Impact,
LLC v. Boston Consulting Group, Inc., 169 F. Supp. 3d 278 (D. Mass 2016) (use
of competitor’s mark in social media hashtag “likely” to confuse “even a
sophisticated consumer”).

What a mess.  Yes,
they’re references to something that can be done with the MagicSleeve—it can be
used with an iTero—but that doesn’t make them uses of the marks as marks for
Strauss, any more than the reference to “dentistry” is a trademark use of the
word dentistry.
Regardless, this was more use than necessary. The pictures
already show that the MagicSleeve is meant to be used on the wand of an iTero
scanner. “The hashtags themselves just indicate a vague association between the
term in the hashtag and the MagicSleeve. None of the hashtags are reasonably
necessary to identify Strauss’s product.” 
[Again, that’s not the test in the 9th Circuit, which is
whether you need to use the mark to identify the trademark owner/product once
you’ve decided to talk about it.]  Then,
bizarrely in context, the court says: “In fact, the hashtags do not perform an
identification function. For example, #straightsmiles and #beautifulsmiles are
not meant to identify the MagicSleeve but to imply that this product is
associated with having a beautiful or straight smile. Likewise, #dentist and
#cosmeticdentistry are too vague to serve as a useful identifier; rather, they
indicate that the MagicSleeve is associated with dentistry.”  Which seems true, but exactly why this isn’t
trademark use and why the court’s first reason was wrong.  But then:
In a similar fashion, the hashtags
with Align’s marks indicate an association with Align’s iTero and Invisalign
products. But they don’t identify the MagicSleeve – you can’t read the hashtags
and figure out that this product is the sleeve that goes on the wand of an
iTero scanner. All the reader can glean from the hashtags is an implied association.
OK.  If you replace “association”
with “subject matter,” this becomes somewhat more coherent, but I don’t
understand why the court ignores the rest of the post, which would explain why
and how the hashtags are being used.  This
reasoning does highlight just how often nominative fair use is really just a
quick and dirty confusion inquiry, with the court substituting its own judgment
for evidence about reasonable consumers.
What the court really wants is an unfair competition argument,
but it doesn’t really have much in the way of principles to get it.  The court described one image: a woman in a
dental chair who is having her mouth scanned by someone using an iTero scanner
with a MagicSleeve on the wand. “The textual sentences that use Align’s mark (‘If
you are an iTero user, be prepared to cut your overhead down. Our brand new
scanner sleeve is autoclavable and allows for faster scanning time.’) are a
classic case of nominative fair use.”  And
the hashtags #itero, #iteroscanner, #scannersleeve, #iteroelement and #orthodontics
were “less of a laundry list,” so that could in theory be a set of references
to Align’s products, references to Strauss’s, and reference to the overall product
category.

But it was still more than reasonably necessary to identify Strauss’s
product, because the hypothetical version of the ad without the hashtags was
just as good at identifying Strauss’s product [still the wrong test].  The identification came from the picture and
the textual sentences; “the use of the marks in the hashtags is never
reasonably necessary to identify the MagicSleeve. You would have to imagine a
pretty terrible ad for the hashtags to do any identifying – maybe just a picture
of the MagicSleeve with no illustration or text explaining what it is for,
leaving the viewer to wonder if he should put it on his finger to do the
dishes, wear it for protection when sewing, or what other use is contemplated.”
This at least clearly indicates the problem the court is
having: “too much” is not, as it more often has been in NFU cases, about using
the text mark and not the font/symbols in a discussion. Instead, as in the
early Playboy v. Welles case, the
problem is that Strauss is just repeating “itero” too often.  But hashtags aren’t wallpaper backgrounds:
they have a purpose both for the reader of the individual post (this is what
the post is about, if you had any doubts) and for searching.
But the court has thought of that!  Apparently NFU does not require that a competitor
is allowed to participate in hashtag searches. 
Although this is indeed a function of the hashtag, the court disagreed
that it was allowed by NFU; previous cases about metatags were not relevant
because metatags just work behind the scenes, whereas hashtags are visible to
consumers.  [So “necessary” here means “necessary
to physically speak the advertising message,” not “necessary to reach consumers.”] Anyway, many of these hashtags “are simply implausible as search
terms. Someone looking for information about how to get straight teeth might
search for ‘adult braces’ or ‘straight teeth,’ but it is unlikely they would
search for #beautifulsmiles or even #straightsmiles.”  Might they look for Invisalign?  If so, uses of those non-trademark terms seem not
particularly relevant.  Also, searches
aren’t the only thing hashtags are used for—trending/locally trending topics can
also be important.  Nonetheless, the
court concluded, the inclusion of #beautifulsmiles and “other implausible
search terms … confirms that the intended audience of the hashtags is, at least
in part, the viewer of the ad, implying association between the MagicSleeve and
the terms in the hashtags.”  [Again, the
court is equivocating about “association,” using the “talking about” meaning
with respect to the non-Align terms and “trademark meaning” for the Align
terms.]
Second, the iTero image was different. This was a reference to Align’s product. “This
is like a Volkswagen repair shop putting a picture of a Volkswagen (including
the VW logo on the car) in an ad to show what it repairs.”  The first and second prongs of nominative
fair use were satisfied—“the MagicSleeve is not readily identifiable without
some reference to an iTero scanner” [still the wrong test] and there’s no more
use than necessary because the only reason why the word “iTero” appears in the
ad is that Align stamped the word on the front of its iTero scanners. However, part
three is “the user must do nothing that would, in conjunction with the mark,
suggest sponsorship or endorsement by the trademark holder.” And a copy-paste
from Align’s website (with the MagicSleeve added on) was “something else”: “Align
created pictures for the screen of the scanner, so the overall image is distinctive.”  The use of the same distinctive image
suggests that the MagicSleeve is endorsed or authorized by Align. 
Note: That does not follow in the slightest.  The copyright analysis could well be
different (though that the actual teeth in the Strauss picture seem to be different, at least based on the quick searches I did), but the fact that Align made the picture doesn’t make the picture
distinctive as trade dress—indeed, as an image of the product design, it is
presumptively unprotected.  Without a
showing that the audience would recognize the picture as the same picture Align
uses, this reasoning is nonsense, but it’s at least nonsense that perhaps is
easier to avoid for future marketers. The court nearly says as much: Strauss
can “likely” put a MagicSleeve on an iTero scanner, take a picture of that, and
use that image in marketing.  
But the court has actually created a Dastar problem in its reasoning: “Align’s marketing people created
that image, and any reasonable observer would understand it was a picture created
for an ad. When it starts showing up in Strauss’s ads for the MagicSleeve, reasonable
people would infer sponsorship or endorsement by Align.”  This is just passing off without secondary
meaning, which doesn’t seem actionable after Dastar (consider Dastar’s
discussion of Wal-Mart).
With NFU out of the way, the court found likely confusion
using the ordinary multifactor test. 
Note how the reasoning on intent contradicts the court’s analysis of the
necessity of using a #trademark hashtag: When asked why Strauss “include[s] the
iTero, iTero Element, and Invisalign hashtags in its Instagram post,” Strauss’s
Vice President Lital Lizotte testified: “Most likely because it has a high
following.” This showed an intent to trade on Align’s goodwill—except that’s
also an intent to reach customers interested in Align products.
There was “some anecdotal evidence” of actual confusion. According
to Align, one dentist told an Align trainer that he “did not know that Align
did not approve of the use of Strauss Diamond’s MagicSleeves with Align’s iTero
system” and, in a second instance, that it was the trainer’s “understanding
that this dentist did not know that the MagicSleeves are not an Align sponsored
product.” [This is pretty weak tea even for association evidence: it’s a double negative rather than a claim that the dentists affirmatively thought there was an affiliation.] Another clinical trainer for Align declared her understanding that a
dentist who called Align to complain about the performance of an iTero Element
being used with a Strauss MagicSleeve believed the MagicSleeves “to be
Align-supported products.” Still, anecdotal evidence is entitled to little
weight; this factor was neutral.
Perhaps surprisingly, the cost of the products here was held
to be low/supporting a finding of confusion. 
The MagicSleeve is $360 for one pack (15 sleeves), or $24 a unit, a low
enough cost that “consumers are not expected to be taking great care in
analyzing the products’ packaging.”  Still, it’s for a dental practice, where the
customers should be sophisticated, making this factor neutral overall.
Result: likely confusion.  Here’s one question going forward: can another competitor use the same hashtags with text that makes clear that it’s an independent product not affiliated with Align?  What if it adds #independent #notaffiliatedwithalign?  Would that change the NFU analysis or the multifactor confusion analysis?
Counterfeiting: Not likely to succeed (though it is notable
that Align thought it worth claiming). First, as far as the court could tell,
none of Align’s registrations covered scanner sleeves. Second, “counterfeiting
is the ‘hard core’ or ‘first degree’ of trademark infringement that seeks to
trick the consumer into believing he or she is getting the genuine article,
rather than a ‘colorable imitation.’ ” There were substantial differences between
the parties’ sleeves in shape, color, and design.
False advertising: Strauss conceded that its 25% faster
claim was literally false.  As to “just
as sharp of a scan,” Align “submitted persuasive evidence that the MagicSleeve
will often produce a lower quality scan. The design of the MagicSleeve means
that the window is more likely to be out of place …. The complicated cleaning
instructions are likely to result in blurry screens. Align has submitted a
large number of customer complaints about the quality of the scans taken with
the MagicSleeve.” The court was persuaded that the MagicSleeve “often” results
in blurrier scans, but it didn’t know exactly how often.  It hadn’t been shown that “just as sharp of a
scan” was “always or even usually false.”
Irreparable harm: since dental professionals and patients
are likely to believe that the MagicSleeve is endorsed or approved by Align, “Strauss’s
continued use of Align’s marks will result in Align losing control over its
reputation and goodwill as a result.” 
This is irreparable harm. And Align showed that the MagicSleeve was
lower quality, which risked Align’s reputation if it was wrongly blamed for
that.
Perplexingly, the court found a higher risk of irreparable
harm because iTero is fanciful, and Invisalign is strong and famous, “so
Strauss’s use of them almost automatically tells a customer they refer to a
brand.” [Citing Qualitex, which is
about distinctiveness, not harm.] 
And 25% faster was a completely unjustified swipe at Align,
which would therefore suffer irreparable harm. 
[The court is standard in using intent to infer irreparability
(but even if we presume that intent to produce damage results in damage, why
would that be irreparable damage in
particular?); the two concepts lack much logical connection but certainly fit
an equitable conception of injunctive relief.]
The court declined Align’s request to enjoin sale of the
MagicSleeve, which was distinguishable from the particular ads at issue.  But a more limited injunction against the particular
conduct at issue wasn’t moot.

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competitor has standing to challenge use of certification mark

Posted on April 30, 2019 by rtushnet

Savvy Rest, Inc. v. Sleeping Organic, LLC, 2019 WL 1607585, No.
18CV00030 W.D. Va. Apr. 15, 2019)
The parties compete in the market for mattresses and other
bedding products. Savvy Rest alleged that Sleeping Organic violated the Lanham
Act by falsely advertising that Sleeping Organic’s mattresses are free of
chemicals and certified to meet the requirements of the Global Organic Textile
Standard (GOTS). Sleeping Organic challenged standing and argued that “Savvy
Rest does not own the GOTS trademark nor have any organizational interest that
would provide standing for Savvy Rest to assert a claim for false advertising
from alleged misuse of the GOTS trademark or of misstatements regarding the
organic makeup of Sleeping Organic’s products.”
The court disagreed. There are a couple of pre-Lexmark cases suggesting the contrary,
but Savvy Rest satisfied Lexmark’s
standing test. It alleged that Sleeping Organic “can sell its falsely
advertised mattresses for much lower prices” because it “does not incur
expenses which are required to manufacture and sell … genuine GOTS Certified
Mattresses,” causing Savvy Rest to lose sales and to get a reputation for being
overpriced. Lost sales and damage to business reputation “are injuries to
precisely the sorts of commercial interests the Act protects.”
Finally, citing Belmora,
“the plain language of § 43(a) does not require that a plaintiff possess … a
trademark in U.S. commerce as an element of the cause of action,” which is true
but not super responsive to the
argument that the person who does own the trademark would be the proper plaintiff in a 43(a)(1)(B) case.
I don’t think this is the wrong result, but query whether the certifier
should be impleaded/how if at all its rights may be affected by this
litigation/what happens if the certifier is cool with defendant’s use.

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“prevailing price” regs not unduly vague, but commercial speech doctrine may still defeat them

Posted on April 29, 2019 by rtushnet

People v. Superior Court, — Cal.Rptr.3d —-, 2019 WL
1615288, No. B292416 (Ct. App. Apr. 16, 2019)
The Los Angeles City Attorney asserted claims under
California consumer protection law against the real parties in interest,
including J.C. Penney, alleging that they sold products online by means of
misleading, deceptive or untrue statements about the former prices of those
products. The trial court found the statute void for vagueness as applied to
the parties; the court of appeals reverses, even though the price law at issue
applies to truthful as well as false commercial speech.
According to the complaints, real parties engaged in
misleading, deceptive, or false advertising by offering goods for sale online
at prices discounted from so-called “reference prices” that purported to
reflect real parties’ own former prices, but which did not do so. The complaints
asserted that each real party “deliberately and artificially sets the false
reference prices higher than its actual former sales prices so that customers
are deceived into believing that they are getting a bargain when purchasing
products.”
Section 17501 explains: “For the purpose of this article the
worth or value of anything advertised is the prevailing market price, wholesale
if the offer is at wholesale, retail if the offer is at retail, at the time of
publication of such advertisement in the locality wherein the advertisement is
published.” It then states: “No price shall be advertised as a former price of
any advertised thing, unless the alleged former price was the prevailing market
price as above defined within three months next immediately preceding the
publication of the advertisement or unless the date when the alleged former
price did prevail is clearly, exactly and conspicuously stated in the
advertisement.”  The court agreed with
the challengers that this governed both false and non-false speech—it was
additional to the other prohibition in the statute on false and misleading
speech—but that wasn’t the end of the story.
One note: the court thought that the existence of Section
17500 barring false and misleading advertising made clear that 17501 went
beyond falsity—but that’s not necessarily the case.  Many consumer protection laws list specific
examples of conduct that, through experience, have been shown to be predictably
deceptive, as well as having a catchall provision for the infinite variety of
possible falsities.  A key question is
whether the legislature can identify such practices in advance; I think the
legislature does have the power to do so and presume certain commercial
practices deceptive as a matter of law. The question, as always, is who gets to
decide.  Fake former prices seem to fit
very well into that model, but the court here determined that a considerable
number of “former price” claims would be truthful and nonmisleading if they
were truthful claims about the retailer’s
own former prices. “For example, if a retailer offered widely sold brands of
Halloween costumes, the prohibition would preclude the retailer from
advertising, ‘All Halloween costumes 50 percent off our former prices,’ on the
day after Halloween, unless those prices coincided with one of the two
requisite market prices.”
Viewed in context, the prohibition,
by its plain language, forbids any advertisement of the former price of an
“advertised thing” that does not express the market price information regarding
former worth or value, as specified in the statute. Simply put, the prohibition
bans any advertised claim regarding the former price of an item (1) unless the
advertised former price was “the prevailing market price as [ ] defined [in
section 17501] within the three months next immediately preceding the
publication of the advertisement” or (2) unless the advertised former price was
the prevailing market price—as defined in section 17501—on a clearly specified
date. So understood, the prohibition imposes standardized market-based meanings
on permissible former price claims, and proscribes all other former price
claims—including discount advertising that conveys the seller’s own former
price for an item, unless that advertised former price coincides with one of
the specified two market prices.
The City Attorney suggested an alternative interpretation—that
the retailer’s own former prices could provide the necessary “market price,”
but the court of appeals found that this interpretation “neither complies with
the canons of statutory interpretation nor restricts the prohibition to
nonprotected commercial speech” because it would regulate truthful “claims
regarding an item’s former market value (as based on the prices offered by
other sellers in the market) when that differed from the retailer’s own former
price.” [As noted, I’m skeptical of the latter argument; falsity and misleadingness
of course are separate standards.]
Under Village of Hoffman Estates v. Flipside, Hoffman
Estates, Inc., 455 U.S. 489 (1982), and Holder v. Humanitarian Law Project, 561
U.S. 1 (2010), “a facial challenge fails if the statute clearly applies to some
or all the challenger’s conduct.” That was the case here. “[T]he facial
challenge fails even if the statute’s impact on protected speech triggers a
higher standard for clarity, as the statute clearly applies to some of the
misconduct alleged in the complaints, and is not inherently unworkable or
devoid of guidance to retailers.” This also disposed of the as-applied
challenge for purposes of a demurrer.  As
Holder said, “[E]ven to the extent a
heightened vagueness standard applies, a plaintiff whose speech is clearly
proscribed cannot raise a successful vagueness claim under the Due Process
Clause of the Fifth Amendment for lack of notice.” And due to the limited constitutional
protection of commercial speech, the targets here couldn’t invoke the statute’s
impact on protected commercial speech, as per Hoffman Estates.  The court
concluded: “Here, the meager record permits no evaluation of the validity of
the section 17501 under the Central
Hudson test. In view of the broad sweep of the prohibition contained in the
statute, we question whether an adequate justification exists for the
prohibition. Nonetheless, the record before us does not establish that the
requisite justification does not exist.”
The complaints asserted that the retailers offered goods for
sale online at prices purportedly discounted from so-called “reference prices”
that are “deliberately and artificially” stated to be higher than real parties’
actual former prices. Some of the goods were exclusive “in-house” goods, and others
were sold by competing retailers.  According
to an investigation, from 19.38 percent to 51.29 percent of the daily offerings
were never offered at (or above) the reference price; 48.65 percent to 88.08
percent of the daily offerings were offered at (or above) the reference price
for only 14 days or fewer; and 83.76 percent to 98.55 percent of the daily
offerings were offered at (or above) the reference price for only 30 days or
fewer. Each complaint specifically alleges that with respect to the in-house
goods, the retailer is the only possible “market” regarding those goods.
The retailers and their amici argued that the statutory
definition of “prevailing market price” was unworkable. Section 17501, which
provides that the “prevailing market price” is that which obtains “at the time
of publication of such advertisement in the locality wherein the advertisement
is published.” “The clear import of the definition is that a retailer, in
selecting the medium for the advertised item, determines the particular market
in which the prevailing market prices are to be identified. The relevant market
is the one that exists in the locality of consumers likely to see the
advertisement at the time it is published, and consists of the vendors then
competing to sell the advertised item to them.”
For exclusive in-house goods, the “advertised actual price
for an in-house item necessarily constitutes the item’s prevailing market price
at the time the actual price is advertised.” The statute identifies the
relevant market price as that for the “advertised thing,” so if it specifies a
precise item “by reference to name, brand, or other distinctive features, … the
market and therefore the market price is properly determined on the basis of
sales of that item only.” [Mark Lemley & Mark McKenna may be interested to
see that the court cites an antitrust case noting that when a seller’s product
is differentiated, seller has “a little pocket of monopoly power.”]
The retailers and amici argued that “locality” is
necessarily vague, and that the advent of the Internet has made its application
“even more question-begging.” Nope. The reference is to “consumers targeted by
the advertisement and the sellers competing to sell the item to them. So
understood, the Internet raises no special difficulty regarding the term, as it
is merely a medium that reaches a very large group of consumers.” And for
exclusive in-house goods, it doesn’t matter. 
The reference price would have to be calculated on a rolling basis, and
though it might be difficult to calculate, there wasn’t anything fatally vague
about it.
The retailers argued that the statute was void for vagueness
as applied to them because it didn’t resolve whether the actual prices charged
for in-house items in their brick-and-mortar stores could serve as the basis
for their online former price claims. But the factual allegations of the
complaints contradicted the retailers’ assertions about in-house pricces.
As to nonexclusive goods, the retailers’ own actual former
prices weren’t enough to establish the prevailing market price.  Even so, the complaint plausibly pled a claim
because it was reasonable to infer that, in competitive markets, the actual
prices offered by vendors selling the same item tend to converge on the market
price. Thus, the factual allegation that the retailers’ advertised former
prices were consistently higher than their actual prices “supports the inference
that those advertised prices were not the prevailing market prices during the
requisite three-month period.”

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class action settlement can’t surrender state agency/CFPB’s rights to recover

Posted on April 29, 2019 by rtushnet

Consumer Protection Division v. Linton, 2019 WL 1770524, No.
2609 (Md. Ct. Spec. App. Apr. 22, 2019)
The court explains:
The class action settlement at issue
here involves vulnerable people who were poisoned by lead in their homes.
Before they ever saw television ads for Access Funding, LLC (“Access”), they
had the right to receive hundreds of thousands or millions of dollars over time
as damages for their injuries. When they responded to Access’s ad, they
received fraudulent and conflicted financial “advice,” and Access induced them
into agreeing to assign their revenue streams to Access for pennies on the
dollar in cash. Now, as a condition of a settlement meant to redress the fraud,
class members must agree to assign to Access their full rights to restitution,
all in exchange for a four percent lump-sum payment. This includes their rights
to restitution the Consumer Protection Division of the Office of the Maryland
Attorney General (the “Division”) and the United States Consumer Financial
Protection Bureau (the “Bureau”) might recover. The settlement also would
release Access and its affiliates and principals from liability for public
restitution claims.
Even if the court’s role wasn’t to see whether the
settlement was “a good deal,” this didn’t work. 
Although the settlement process was mostly fair, it interfered with the Division’s
and Bureau’s enforcement authority, and thus the approval was reversed.
Between 2013 and 2015, Access obtained judicial approval to
acquire 163 structured settlements from 100 victims, and obtained $33.8 million
in future payment rights (with a present value of approximately $25.5 million)
in exchange for $7.7 million in cash. Judicial approval for transfer of
structured settlement payments is required, and the court has to find that the
transferor “received independent professional advice concerning the proposed
transfer[.]”But an adviser is not “independent” if they are, among other
things, “affiliated with or compensated by the transferee[.]” Access referred its
potential clients to Charles Smith, a lawyer; in petitioning for approval of
the transfers, Access represented that Mr. Smith had provided the transferors
with independent professional advice. “In fact, Access had paid Mr. Smith for
each victim he ‘advised,’ more than $50,000 overall … and practiced law with
Access’s former attorney.”
The Division ultimately sued Access and its related
entities, Access’s executives, and Mr. Smith, alleging violations of the
Maryland Consumer Protection Act (MCPA) by failing to inform the victims that
it was affiliated with Mr. Smith and that Mr. Smith was not an independent
adviser, by converting future rights to payment into cash on grossly unfair
terms, and by misleading victims about their rights under Maryland law. Linton also
sued on behalf of 100 victims who sold their structured settlements, alleging negligence,
misrepresentation, fraud, constructive fraud, and civil conspiracy. The
settling parties proposed a settlement fund of $1.1 million, from which the class’s
attorneys would receive $330,000 in fees. The proposed settlement barred the class
from “receiving any benefits from any lawsuit or arbitration proceeding arising
out of or related to any of the Released Claims,” and compels the Class to
“irrevocably assign and transfer … any recovery based on the equitable
remedies of restitution, disgorgement of profits or damages obtained by [the
CFPB or the Division] for the benefit of each Settlement Class Member.”
Moreover, the settlement releases all of the Class’s claims against the Class
Action Defendants, as well as any claims against certain people involved in Access
(even though none of them was named in the suit).
The parties indicated that there was nothing much other than
a $1 million insurance policy for the class; counsel for Access stated that
Access and its related entities had “no assets” and were “basically insolvent.”
Counsel for Mr. Smith represented that he had only a “few thousand dollars”
other than the assets he held with his wife as tenants by the entireties.  Although one defendant might have had $5
million in assets, class counsel indicated that he had a strong defense to the
conspiracy asserted against him because he had provided legal advice in the
scope of his employment. The court declined to consider the financial resources
of three three executives who were not defendants in the class action, but the
court declined to do so.
In addition, class counsel argued that arbitration
requirements in the structured settlement transfer agreements would require class
members to arbitrate their claims individually and that litigating serial
claims would deplete Access’s declining limits insurance policy, making settlement
in the class’s best interest.  The trial court
ultimately agreed.
Nonetheless, the settlement interfered too much with the
Division and Bureau’s enforcement authority.  It “effectively preempted a major portion of
the pending claims.” Restitution and damages aren’t the same thing, “even if
the process of calculating them might (and often does) lead to the same result.
Damages are, well, damages, and compensate a party for their losses.
Restitution also, but primarily, seeks to prevent bad actors from being
enriched unjustly—an enforcement purpose properly commended to public
authorities, not private plaintiffs.” Requiring the plaintiffs to assign any
recovery from the Division/Bureau right back to the defendants “directly thwarts
the Division’s ability to combat unjust enrichment.”
This isn’t a great result, because Access’s declining-limits
insurance policy (which decreases as litigation costs mount) might be the only
concrete set of assets realistically available to fund a recovery. But the Division
and Bureau have to deal with this sort of question all the time, and the
settlement shouldn’t have included terms that “resolved or interfered with”
their enforcement authority.
A few minor points: the Division asked the court to require
the notice to inform prospective members that the settlement amount was
equivalent to only 4% of each prospective member’s loss. If the purpose of the
notice was objectivity, “language describing the extent of the Class’s
financial compromise would serve that purpose, even if it might dissuade
recipients from agreeing to the settlement.”  However, the majority didn’t resolve whether
the settlement was substantively fair; given what it did hold, the best
approach was to send it back for the parties to negotiate anew.  Still, a 96% discount on the value of claims
was “concern[ing],” as was the depth of the record on the financial fairness of
the settlement and the court’s decision not to consider whether any assets of
the non-defendant executives, who were getting releases from the settlement,
were available to fund the settlement. “The way Access treated its customers,
for its own benefit, provides ample reason to be skeptical of unsupported
representations it might make to the court about its finances. And yet despite
a months-long investigation and subpoena power, the Division could only express
skepticism, and couldn’t yet back it up.”
The dissent would have allowed the settlement and would have
held that releasing/assigning personal rights from public enforcement didn’t
sufficiently interfere with public enforcement authority to be barred. The
Division could still levy civil or criminal penalties.
Notably, a key reason the dissent would have held that the
settlement was substantively fair was the unfairness to which the victims had
already been subjected: they might well have been compelled to go to individual
arbitration rather than to litigate class claims because of the arbitration
provisions in the structured settlement transfer agreements. It’s a powerful
example of the knock-on effects of arbitration provisions in consumer fraud
cases.
The dissent also noted that Access apparently sold the
structured settlement rights, and if the transferees were bona fide purchasers,
the Division might well not be able to reclaim the rights as restitution.

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