Gerber Good Start off to a bad start in false advertising/allergy case

Posted on April 4, 2019 by rtushnet

Hasemann v. Gerber Products Co., 2019 WL 1434263, Nos. 15-CV-2995
(MKB) (RER), 16-CV-1153 (MKB) (RER), 17-CV-93 (MKB) (RER) (E.D.N.Y. Mar. 31,
2019)
Hasemenn  alleged that
Gerber misrepresented that its “Good Start Gentle” infant formula was the first
and only formula that reduces the risk that infants will develop allergies, and
that GSG was the first and only infant formula that the FDA endorsed to reduce
the risk of infants developing allergies.  Here, the court certified Florida and New York
subclasses and denied certification of the North Carolina and multistate subclasses.
Brief background: in 2005, Gerber petitioned the FDA for
approval of a qualified health claim for GSG. The FDA rejected this in 2006
concluding that there was “no credible evidence to support the qualified health
claim relating consumption of 100 percent partially hydrolyzed whey protein in
infant formula to a reduced risk of food allergy.” Gerber tried again in 2009
with “emerging clinical research shows that, in healthy infants with family
history of allergy, feeding a 100% Whey-Protein Partially Hydrolyzed infant formula
instead of a formula containing intact cow’s milk proteins may reduce the risk
of developing the most common allergic disease of infancy — atopic dermatitis —
throughout the [first] year of life and up to [three] years of age.”  The FDA “determined that this claim
mischaracterized the scientific evidence and was therefore misleading.” It proposed
four alternative qualified health claims (of varying wishy-washiness and
dubious intelligibility to consumers), over which it would consider exercising
its enforcement discretion not to challenge the qualified health claim as long
as Gerber also included a statement about the risks of partially hydrolyzed
formulas to infants who are allergic to milk who have milk allergy symptoms.
Regardless, GSG went ahead with claims that, e.g., GSG is
the “1st & Only Routine Formula to REDUCE THE RISK OF DEVELOPING
ALLERGIES.” (Used on larger containers 2013-2016.)
 

1st and Only Routine Formula to Reduce Risk of Developing Allergies sticker

A manufacturer’s coupon bore a gold badge that reads: “MEETS
FDA QUALIFIED HEALTH CLAIM” around the outer perimeter of the badge and read in
large font “1st AND ONLY” in the center of the gold badge. A statement on the coupon
attachment stated that Good Start “is the first and only formula brand made
from 100% whey protein hydrolyzed, and that meets the criteria for a FDA
Qualified Health Claim for atopic dermatitis.” [I don’t admire the chutzpah here, but it does remind me of xkcd’s “contains a clinically studied ingredient.”] Gerber used the label “on
exterior product packaging” for some larger containers and the gold badge “on
supermarket displays advertising [GSG].” (Hasemann Compl. ¶ 47.) Specifically,
the coupon was attached to certain “containers of Good Start that contained 22
ounces or more of powder formula.”
 

GSG coupon

Gerber ran a 2012/2013 TV ad stating, “You want
your Gerber baby to have your imagination … your smile … your eyes … not
your allergies …. [I]f you introduce formula, choose the Gerber Good Start
Comfort Proteins Advantage.” A magazine ad likewise claimed, “If you have
allergies in your family, … research shows the formula you first provide your
baby may make a difference. In the case of Gerber® Good Start® Gentle Formula,
it’s the Comfort Proteins® Advantage that is easy to digest and may also
deliver protective benefits.” An ad that ran in People and Parents magazines in
2013 used a badge on the advertisement, “1st FORMULA WITH FDA QUALIFIED HEALTH
CLAIM,” and listed its website as gerber.com/allergy.
 

magazine ad

An ad in Drugstore News, a trade journal, also claimed that
GSG “is the first and only infant formula that meets the criteria for a FDA
Qualified Health Claim,” and in smaller font: “Breastfeeding helps reduce the
risk of developing atopic dermatitis – the most common allergy of infancy. Now
there is a formula that can help too, especially for those babies with a family
history of allergy. The 100% whey protein partially hydrolyzed used in our
Gerber Good Start formulas is easy to digest and may provide protective
benefits. This is out Comfort Proteins® Advantage and only Good Start has it.”
Another exhibit showed an in-store display sign from 2011
that contains a picture of a GSG container and the image of the gold badge
described above.
Plaintiffs argued that the ads made two deceptive claims:
(1) that GSG reduces the risk that infants will develop allergies (a claim
rejected by the FDA and also allegedly shown to be false by several studies),
and (2) that GSG meets the criteria for an FDA qualified health claim for
atopic dermatitis (not approved by the FDA, and Gerber didn’t use the FDA-required
qualifying statement).  In 2014, the FDA
sent a warning letter to Gerber over this conduct, stating that the health
claims were unauthorized and that the labeling was misleading.  The FTC also filed a still-pending lawsuit
over the labeling, and other consumer claims were filed/are pending.  Hobbs v. Gerber Prod. Co., No. 17-CV-3534,
2018 WL 3861571 (N.D. Ill. Aug. 14, 2018) (denying Defendant’s motion to
dismiss); Zakaria v. Gerber Prod. Co., No. 15-CV-00200, 2017 WL 9512587 (C.D.
Cal. Aug. 9, 2017) (decertifying after having initially certified a class),
aff’d, No. 17-CV-56509, 2018 WL 5977897 (9th Cir. Nov. 14, 2018); Slocum v.
Gerber Prod. Co., No. 16-CV-04120, 2016 WL 3983873 (W.D. Mo. July 25, 2016)
(remanding to state court); Nat’l Consumers League v. Gerber Prods. Co., No.
14-CA-8202 (D.C. Super. Ct. Aug. 8, 2015) (denying Defendant’s motion to
dismiss).
Gerber’s basic argument against the consumer protection
claims here was that “that the challenged claims did not consistently appear on
GSG’s labels and the advertising was extremely limited,” and that
“advertisements are often disseminated for short periods of time, and their
substance changes frequently.” Its marketing materials, it argued, emphasized
multiple benefits of GSG, and the majority had “nothing to do” with allergies
or the qualifying statement.  With
respect to each contested element of the certification standard, Gerber argued
that the variation in what consumers probably saw precluded a finding that
plaintiffs satisfied that element (e.g., typicality, predominance).
Although the case citations differ a bit (there are a lot of
them; future cases could easily look to this comprehensive opinion for a
review), the court’s ultimate conclusion for the Florida and NY subclasses was
the same for each element: Where, as with those states, the consumer protection
statute uses an objective standard for likely deception and doesn’t require
reliance, and where the plaintiff offers a price premium theory of damages, the
fact of some potential variation in exposure doesn’t preclude certification.
The challenged claims here (1) were widely advertised, including in store
displays even when they weren’t on the product packages and (2) had the same
core falsity problem even if they varied in terminology.  That was enough to go forward.  This result is consistent with the liberal
aims of the FDUTPA and NY GBL.  (Even in
California, which requires a more rigorous exposure/reliance showing, courts
should find exposure “[w]here the alleged misrepresentation appears on the
label or packaging of each item being sold,” but “[e]ven where each product is
not sold in a container on which the alleged misrepresentation appears,
class-wide exposure may be inferred where there is a sufficiently extensive
advertising campaign that includes the alleged misrepresentation.”) 
Causation and reliance, though related, should not be
conflated—a deceptive practice can cause actionable harm even without reliance,
for example through a price premium. Ultimately,
[t]he fact that the same label did
not appear on every single product of GSG that a consumer may have purchased,
does not mean that the deceptive act would not still have likely deceived a
consumer, given that the labels were both abundant, accompanied by advertising
campaigns, and appeared prominently on shelves where consumers shopped. To find
otherwise could encourage a defendant to avoid liability under the FDUTPA, a
broad statute, by for example, creating multiple labels for a product line.
At a mimimum, the court agreed with the magistrate judge
that, because “diminished risk of allergy was a consistent and prominent theme
among Gerber’s various marketing campaigns for GSG,” it was therefore a “ ‘near
certainty’ that every consumer was exposed to the alleged misrepresentations.”
Thus, plaintiffs could prove typicality despite the
variations in labels on the market. Without a reliance requirement, the court
declined to read any subjective inquiry into a plaintiff’s response into the
standard. “Plaintiffs are arguing that the same course of events — the unlawful
conduct of false labeling and marketing — resulted in price premiums for an
entire product line. … Plaintiffs will have the incentive to prove the elements
of the claims under the FDUTPA and GBL to the same degree that any individual
class member would.”
Ascertainability: Although some courts in the Second Circuit
have declined to permit the use of self-identifying affidavits as a way to
satisfy the issue of ascertainability, many recent false advertising cases have
allowed such affidavits, in part to protect the class action device as a key
mechanism for consumer protection law. The Second Circuit has specifically declined
to read an administrative feasibility requirement into the factor of
ascertainability, rejecting “heightened ascertainability test” found in other
circuits and confirming that ascertainability presents only a “modest
threshold” that “does not concern itself with the plaintiffs’ ability to offer
proof of membership under a given class definition.”
Further, consumers are more likely to remember their
purchases of baby formula—“a primary source of nutrition” and an “important”
purchase—and the time period during which they purchased than they are to
remember a random consumer product.  The
age/developmental stage of purchasers’ children will provide them with clear
referents.
Predominance:  “While
predominance may be difficult to demonstrate in mass tort cases, such as
Amchem, in which the ‘individual stakes are high and disparities among class
members great,’ it is a ‘test readily met in certain cases alleging consumer or
securities fraud or violations of the antitrust laws.’ ” “The objective
standards — including whether the representations would likely have misled a
reasonable customer — underlying the elements of the statutes render them
particularly well-suited to generating common questions.”
Finally, damages were subject to classwide proof under
damages models that could satisfy Comcast.  The plaintiffs’ burden at this stage isn’t to
prove injury but to show that it’s “capable of proof at trial through evidence
that is common to the class rather than individual to its members.” Plaintiffs
offered a number of class-wide methods to quantify the alleged price premium:
(1) using a generic as a benchmark and subtracting the price of the generic
from the price charged by Gerber; (2) calculating the value that Gerber
ascribed to its allergy claims; (3) looking at price increases and hikes made
during the class period; (4) running a “hedonic regression” analysis, which
“statistically analyze(s) fluctuations in price within a given group of products,
over a given time”; and (5) running “conjoint analyses,” which utilize surveys
in determining “the individual value consumers place on various product
attributes,” in order to “determine the hypothetical fair value of a product
absent any misrepresentations.” It offered two expert declarations saying this
could be done.  Gerber’s expert said it
couldn’t.
Comcast held that
a damages model must establish “that damages are capable of measurement on a
classwide basis,” and that “any model supporting a ‘plaintiff’s damages case
must be consistent with its liability case.’ ”  But in that case, the damages model assumed
the validity of four different theories of antitrust liability, only one of
which was legally valid by the time certification came around, so the model
wasn’t tied to the legal violation alleged.
Gerber argued that it was impossible to isolate the effect
of the challenged allergy claims because they were always promoted along with
multiple other product attributes and “there is no pricing variation between
those containers of GSG that displayed the challenged representation on the
label and those containers that do not.”
The court disagreed: several of the proffered damages models
were consistent with the theory of liability and injury in this case, and many
of Gerber’s specific arguments were premature.  The legal theory is that the
misrepresentations misled consumers into paying a price premium and all of that
theory is still in the case, unlike in Comcast.
And while conjoint analysis or other mechanisms for assessing the price premium
might ultimately fail, a conjoint analysis can lead to a proper damages
calculation if it takes relevant factors into account, such as the price of other
comparable products.

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Call for Authors – Feminist Judgments: Rewritten Property Opinions

Posted on April 4, 2019 by rtushnet

Deadline for Applying: Friday, April 26, 2019
The U.S. Feminist Judgments Project seeks contributors of
rewritten judicial opinions and commentary on the rewritten opinions for an
edited collection tentatively titled Feminist Judgments: Rewritten Property
Opinions. This edited volume is part of a collaborative project among law
professors and others to rewrite, from a feminist perspective, key judicial
decisions in the United States. The initial volume, Feminist Judgments:
Rewritten Opinions of the United States Supreme Court, edited by Kathryn M.
Stanchi, Linda L. Berger, and Bridget J. Crawford, was published by Cambridge
University Press in 2016. Cambridge University Press has approved a series of
Feminist Judgments books. In 2017, Cambridge University Press published the tax
volume titled Feminist Judgments: Rewritten Tax Opinions. Other volumes in the
pipeline include rewritten trusts and estates opinions and rewritten family law
opinions.
Property law volume editors Eloisa C. Rodriguez-Dod and
Elena Maria Marty-Nelson seek prospective authors and commentators for fifteen
rewritten property opinions covering a range of topics. With the help of an
advisory board of distinguished property law scholars, the editors have
selected a list of cases that have not appeared in other Feminist Judgment
volumes; potential authors are welcome to suggest opinions which do not appear
on the list.
Proposals must be either to (1) rewrite a case opinion (subject
to a 10,000-word limit) or (2) comment on a rewritten opinion (subject to a
4,000-word limit). Rewritten opinions may be re-imagined majority opinions,
concurrences, or dissents. Authors of rewritten opinions will be bound by the
law and precedent in effect at the time of the original decision. Commentators
should explain the original court decision, how the rewritten feminist opinion
differs from the original decision, and the impact the rewritten feminist
opinion might have made. The volume editors conceive of feminism as a broad
movement and welcome proposals that bring into focus intersectional concerns
beyond gender, such as race, class, disability, gender identity, age, sexual
orientation, national origin, and immigration status.
To apply, please email (1) a paragraph or two describing
your area of expertise and your interest in this project; (2) your top two or
three preferences from the list of cases below; and (3) whether you prefer to
serve as an author of a rewritten opinion or an author of a commentary to a
rewritten opinion. Please submit this information via email to the editors,
Eloisa C. Rodriguez-Dod and Elena Maria Marty-Nelson, at elrodrig@fiu.edu and
nelsone@nova.edu by Friday, April 26, 2019. The Feminist Judgments Project and
the Property book editors are committed to including authors from diverse
backgrounds. If you feel an aspect of your personal identity is important to
your participation, please feel free to include that in your expression of
interest. The editors will notify accepted authors and commentators by Monday,
May 13, 2019. First drafts of rewritten opinions will be due on Monday,
September 16, 2019. First drafts of commentaries will be due on Monday, October
28, 2019.
Tentative List of Cases:
1.         Moore v. City
of E. Cleveland, 431 U.S. 494 (1977) (exclusionary zoning)
2.         Ass’n for
Molecular Pathology v. Myriad Genetics, Inc., 569 U.S. 576 (2013) (patents)
3.         Sawada v.
Endo, 561 P.2d 1291 (Haw. 1977) (tenancy by the entireties)
4.         Gruen v.
Gruen, 496 N.E.2d 869 (N.Y. 1986) (inter vivos gifts)
5.         Coggan v.
Coggan, 239 So. 2d 17 (Fla. 1970) (ouster of co-tenant)
6.         Phillips
Neighborhood Hous. Tr. v. Brown, 564 N.W.2d 573 (Minn. Ct. App. 1997) (lease
termination for illegal activity)
7.         Taylor v.
Canterbury, 92 P.3d 961 (Colo. 2004) (secret severance of joint tenancy)
8.         White v.
Samsung Elecs. Am., Inc., 971 F.2d 1395 (9th Cir. 1992) (publicity rights)
9.         Johnson v.
M’Intosh, 21 U.S. 543 (1823) (Native American property rights)
10.       Dolan v.
City of Tigard, 512 U.S. 374 (1994) (exactions/eminent domain)
11.       Bartley v.
Sweetser, 890 S.W.2d 250 (Ark. 1994) (premises liability)
12.       Tate v.
Water Works & Sewer Bd. of City of Oxford, 217 So. 3d 906 (Ala. Civ. App.
2016) (adverse possession and condemnation)
13.       Blake v.
Stradford, 725 N.Y.S.2d 189 (Dist. Ct. 2001) (ejectment of domestic partner)
14.       Moore v.
Regents of Univ. of California, 793 P.2d 479 (Cal. 1990) (property interest in
one’s genetic material)
15.       Pocono
Springs Civic Ass’n, Inc. v. MacKenzie, 667 A.2d 233 (Pa. Super. Ct.1995)
(abandonment of real property)

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misrepresentation of FDA clearance as FDA approval needs non-anecdotal evidence of consumer deception to be actionable

Posted on April 2, 2019 by rtushnet

Repro-Med Sys., Inc. v. EMED Technol. Corp., 2019 WL 1427978,
No. 13-cv-01957-TLN-CKD (E.D. Cal. Mar. 29, 2019)
The parties have been fighting over their competing medical
devices for a while. Here, RMS alleged among other things that EMED was
intentionally misrepresenting FDA “clearance” as “approval.” There are other
cases indicating that this difference can be literal falsity, since clearance and approval
are two separate things, but the court here, relying on California law, required
evidence that the statements were “misleading to a reasonable consumer,” and
further stated that “[a]necdotal evidence alone is insufficient to prove that the
public is likely to be misled.”  Seamlessly transitioning to the Lanham Act
standard, the court required “extrinsic evidence, such as consumer survey
evidence, that the challenged statements tend to mislead consumers.”  By not analyzing the literal/implicit divide and whether “approval” has a literal meaning,
the court definitely raised the burden for RMS.
RMS provided the declaration of an FDA expert, who argued
that “to the consumer and public at large, an assertion of FDA approval carries
with it the implied statement that the product has been subjected to intense review
and scrutiny, and the costs of time and resources associated therewith.” But
this declaration was no substitute for extrinsic evidence of consumer
deception.
Similarly, RMS alleged that EMED’s promotional materials
present flow rate data inconsistent with the its 510(k), so that the data
provided to the FDA for clearance purposes differs from the data provided to
customers for marketing purposes.  Flow
rate is the amount of fluid which passes per unit of time, and too-fast or
too-slow delivery of infused medications can make a big difference to patient
health. As I understand it, RMS argued that EMED used a flow rate in its 510(k)
that allowed it to say it was the same as the RMS product, entitling it to
clearance; if the truth is otherwise (as indicated by the advertising
materials), then it should’ve sought separate approval.  But as EMED pointed out, the connection
between this discrepancy and false advertising as a cause of action is
unclear.  “RMS failed to provide concrete
evidence of how the alleged mischaracterization misled or confused the public.
While an average person may understand the flow rates are different, RMS has
provided no information as to how this understanding confuses, misleads or
deceives customers.”
Further, RMS attacked EMED’s CEO’s online statement that
RMS has been cited by the FDA for
numerous regulatory infractions, some of which have potential impact on patient
health and safety…. While RMS may snub its nose at the FDA, the deficiencies
uncovered by the FDA are serious business. To complete the record, RMS is also
a defendant in lawsuits being brought by EMED Technologies alleging that RMS
has been consistently infringing patents created and controlled by EMED, to the
detriment of the healthcare consumer.
RMS alleged that the CEO “was clearly aware that not only
has there been no finding of infringement, but that both of the patents at
issue stand at present as invalid.” Some of this was opinion, which couldn’t be
a material misrepresentation.  The
factual statements were verifiable; in early 2016, the FDA sent a warning
letter to RMS raising several adulteration and misbranding violations, that
“could significantly affect safety and effectiveness” of RMS products. Thus,
the “numerous regulatory infractions, some of which have potential impact on
patient health and safety” statement wasn’t objectively false. RMS argued that
a warning letter isn’t an enforcement action, as falsely implied by the EMED
statement, but again there was no evidence of consumer reception/deception.
Unsurprisingly, the court also found that RMS failed to show
irreparable harm or in any way quantify or concretize its losses; it declined
to adopt a presumption of harm from false comparative advertising (though that’s
likely at least in part driven by its refusal to find false advertising in the
first place).

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Variation in supplement bottle contents defeats consumer protection claim

Posted on April 2, 2019 by rtushnet

Gaminde v. Lang Pharma Nutrition, Inc., 2019 WL 1338724, No.
18-cv-300 (GLS/DEP) (N.D.N.Y. Mar. 25, 2019)
Gaminde alleged that CVS Krill Oil contains only approximately
sixty percent of the 300mg of Omega-3 Krill Oil represented by the label, citing
“independent research funded by the United States Department of Agriculture[ ]
[ (USDA) ] and published in the Journal of the Science of Food and Agriculture.”  The court dismissed the claim because Gaminde
failed to allege that the bottle he
bought was similarly deficient based on testing.  “[N]umerous factors … affect the nutrient
content amount from sample to sample, lot to lot, and bottle to bottle,” and
this created an issue of subject matter jurisdiction, requiring Gaminde to
prove his entitlement to proceed by a preponderance of the evidence.
The allegation that his bottle didn’t contain the labeled
amount of oil was conclusory and unsubstantiated. Although “[t]he court must
take all facts alleged in the complaint as true and draw all reasonable inferences
in favor of plaintiff, … jurisdiction must be shown affirmatively, and that
showing is not made by drawing from the pleadings inferences favorable to the
party asserting it.”
The journal study wasn’t enough to cross the line from
speculation to a preponderance of the evidence. “Gaminde’s failure to allege
that he tested his bottle of CVS Krill Oil—indeed, his failure to make any
allegation regarding how he knows that it was mislabeled—is fatal.”  [The court noted that the journal study seemed
to test two lots, not two bottles, but that didn’t matter.]  The USDA study itself “concede[d]” that
“[t]here are many possible reasons for the supplements containing less than the
stated label amount of [Omega-3 Krill Oil],” including “fluctuations in the fatty
acid concentrations of fish during different times of the year.”  The sample size was small, and the study was
published before Gaminde made his purchase, creating a temporal issue. The USDA
study tested CVS Krill Oil purchased in the areas around Lafayette, Indiana and
Chesterfield, Missouri, whereas Gaminde made his purchase in or around
Schenectady, New York.  All this made the
study unhelpful to Gaminde.
Query: if bottle contents vary so much, isn’t the consistent
labeling false or misleading?  Since
consumers apparently can’t bring claims, it’s up to regulators to do it if it is
to be done at all.

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NY false food labeling law still exists despite being old

Posted on April 2, 2019 by rtushnet

Warner v. StarKist Co., 2019 WL 1332573, No. 18-cv-406
(GLS/ATB) (N.D.N.Y. Mar. 25, 2019)
Warner survived a motion to dismiss his claims for deceptive
practices, false advertising, dealing in misbranded food, and unjust
enrichment, under New York law, based on StarKist’s use of a “Heart-Check Mark”
on certain seafood products. The failure to disclose that the check mark, accompanied
by “American Heart Association – CERTIFIED – Meets Criteria For Heart-Healthy
Food,” was a paid-for endorsement was plausibly misleading, though the court
thought it was “a close call, which could be revisited at the summary judgment
stage.”
Also, Warner’s mislabeling claim under the Agriculture and
Markets Law survived.  StarKist argued
that there was no private remedy, but Abounader v. Strohmeyer & Arpe Co.,
243 N.Y. 458 (1926), held that “the statute confers a right of action upon an
ultimate purchaser against the person who originally prepared for market and
sold the containers with false labels or statements of their contents” and “no
one doubts that the statute by express provision might give to an ultimate
purchaser of falsely labeled containers however remote a right of action
against the person who violated the statute by marketing them with false labels.”
StarKist argued that this case was old but “case law does not expire solely
with the passage of time.”
However, injunctive relief claims were dismissed because
Warner, who now knows the truth, lacks standing to maintain a request for
injunctive relief on behalf of the class.

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Fifth Circuit upholds denial of disgorgement despite willfulness & some sales diversion

Posted on April 2, 2019 by rtushnet

Retractable Technologies, Incorporated v. Becton Dickinson
& Co., — F.3d —-, 2019 WL 1346002, No. 17-40960 (5th Cir. Mar. 26,
2019)
“A jury found that Becton Dickinson & Co. falsely
advertised its products for years. The district court determined that neither
disgorgement of profits nor further injunctive relief would be equitable under
the circumstances. It did not abuse its discretion.”
Retractable syringes are designed to reduce risk of
accidental needlesticks; they compete with other varieties of safety syringes
and with “conventional” syringes. They provide significant protection against
accidents but their needles prevent use for some hospital and clinical
purposes.  RTI and BD compete in the safety
syringe market along with two other major safety syringe manufacturers. RTI dominates
the retractable syringe sub-market; BD produces retractable syringes, but
conventional and non-retractable safety products that account for the bulk of
its revenue.
BD falsely advertised the “world’s sharpest needle,” which
is important because consumers see needle sharpness as a proxy for patient
comfort, and persisted in doing so after its internal tests indicated
otherwise. It also falsely promoted its retractable syringes as having seven
times less “waste space” than RTI’s product, meaning that the syringes would
waste less medicine.  BD’s testing initially
supported this claim, but not after 2003.
RTI sued BD for antitrust violations and false advertising
under the Lanham Act and won a jury verdict on one of its antitrust claims and
all of its Lanham Act false advertising claims. The jury found that RTI was due
more than $113.5 million in antitrust damages ($352 million with trebling +
attorneys’ fees), but the court of appeals kicked that out because it’s an antitrust
case and sent the case back to see if there were Lanham Act damages. RTI had
requested disgorgement of BD’s profits and injunctive relief; the district
court had concluded that equity favored disgorgement, but that any relevant
profits were subsumed by the trebled antitrust damages award. The district
court also enjoined BD to cease certain advertising claims for several years,
post a notice on its website, notify various entities of the false claims
(stayed as to end users pending appeal), and implement a training program for
employees and distributors.
The court of appeals specifically approved of some of the
district court’s findings on false advertising: “at least some portion of BD’s
profits were attributable to the false advertising,” BD intended to confuse or
deceive consumers, and RTI did not unreasonably delay in seeking relief. On
remand, the district court declined to disgorge profits or reinstate any
portion of the vacated injunction.
On injunctive relief, this result was foretold by the
remand, which emphasized that, though a further need for injunctive relief was
“theoretically possible,” “[a] plaintiff seeking injunctive relief must show a
real and immediate threat of future or continuing injury apart from any past
injury,” and that any injunction should be “no broader than reasonably
necessary to prevent the deception.”  BD
took multiple steps to comply with the non-stayed aspects of the injunction for
two years before the court of appeals reversed.  It notified “over 750 distributors, over
10,000 employees, and all the major Group Purchasing Organizations, stating
that its needle sharpness and waste space claims were inaccurate.” Further, “BD
removed the false advertising from its marketing materials … and posted a
notice on its website.” It also implemented a training program for employees
and distributors. This was enough, the district court reasonably deemed, to
remedy any injury or threat of injury RTI had suffered from the false
advertising.
RTI argued that all this still didn’t provide notification
to end users, who play a significant role in medical decisions to purchase
syringes. But the district court found no “real and immediate threat of future
or continuing injury.”
Disgorgement as a remedy requires weighing (1) whether the
defendant had the intent to confuse or deceive, (2) whether sales have been
diverted, (3) the adequacy of other remedies, (4) any unreasonable delay by the
plaintiff in asserting his rights, (5) the public interest in making the
misconduct unprofitable, and (6) whether it is a case of palming off.  A district court can consider other
factors.  It must also consider whether
the defendant’s profits are attributable to the Lanham Act violation. When the
plaintiff doesn’t show the defendant benefited from the false advertising,
disgorgement isn’t allowed even if the rest of the test favors disgorgement. However,
it was the law of the case that “at least some portion of BD’s profits were
attributable to the false advertising” and that the “intent to confuse or
deceive” and “unreasonable delay” factors favored disgorgement. The public
interest also favored disgorgement.
Still, the district court found that the equities weighed
against disgorgement because RTI had not shown diversion of sales or palming
off and injunctive relief was an adequate remedy.  [Why is palming off weighed separately from
intent to confuse or deceive?  They are
in essence the same thing, only trademark infringement gets double-counted,
even though one might think that materially false advertising was at least as
bad as infringement that need not be material to consumers. Along with
unjustified trademark exceptionalism, this formulation is a classic instance of
a series of considerations turning into a “balancing test,” without much thought about the
justifications.]
RTI argued (I think correctly) that palming off is irrelevant
in false advertising cases; if it should be included in the balancing test, it’s as a measure of the egregiousness of trademark infringement and not as a reason that false
advertising always has a thumb on the scale against disgorgement. The court of
appeals wasn’t fully convinced: “If a false advertising plaintiff has otherwise
shown concrete harm due to the false advertising, such as diverted sales, a
court should not heavily weigh the absence of palming off against disgorgement.”
But palming off retains its significance as a way in which RTI could have demonstrated
concrete harm, but did not.  [Hunh?  It’s
not a trademark case.  RTI also didn’t
demonstrate that BD broke in and stole its chattels.  So what?  If there had been palming off without sales diversion–if a trademark plaintiff couldn’t produce more or didn’t produce the palmed-off things at all–that just goes to the unjust enrichment of the defendant.] 
In the absence of sales diversion or palming off, disgorgement “would
grant RTI an unjustifiable windfall” and in such cases the plaintiff “faces an
uphill battle in obtaining disgorgement.”
RTI argued that the district court should have considered
loss of goodwill in lieu of palming off. In principle, that’s right, but RTI’s
evidence of lost goodwill and steps taken to combat that lost goodwill was merely
speculative, especially given that its market share in the retractable syringe
sub-market increased and its sales nearly doubled over the relevant period of
false advertising.  (The evidence was that
its employees who were worried about loss of goodwill “had to expend effort and
energy to go around and try to … tell people and convince them that it wasn’t
true” and “spent a lot of time going to customers and trying to correct the
misinformation, a lot of meetings, direct meetings, letter-writing, things like
that.”)        
Although sales diversion favored disgorgement, the district
court found that it did so only slightly because at least some of BD’s profit
from its false advertising may well have come not at RTI’s expense but at the
expense of others in the market.  [Note
that if you think of disgorgement as a deterrent, it’s not clear why that
should matter, at least as long if you think that some of BD’s profit did come
at RTI’s expense and as long as there’s no double recovery in another suit by a
different competitor.]  This finding was
not an abuse of discretion.
First, the jury’s finding of Lanham Act liability did not “conclusively”
establish sales diversion.  Injury and
actual damages are different.  So are having
profits attributable to the false advertising (law of the case) and showing
sales diversion (not law of the case). “[I]nternal BD documents suggested that
the false advertising allowed BD to command premium pricing and claim increased
market share,” but “it was not clear that every dollar BD earned came out of
RTI’s pocket,” only that some of the dollars did.
We want to avoid unjustified windfalls to plaintiffs.  The “profits attributable to the false
advertising” requirement is one protection against that, but “sales diversion”
is separate; these are related but distinct elements.  [I gotta say, it seems to me that the court is
requiring the plaintiff to quantify its damages to receive the defendant’s
profits, which is not the standard in other situations—one reason I thought we
had disgorgement was to deal with the inequitable situation in which we’re sure
the plaintiff was harmed, but not sure enough how much it was harmed to award a
dollar amount of its damages.  Disgorgement
(and injunctions) can make sure that the defendant doesn’t stay better off for
having falsely advertised, and the risk of error is appropriately on the false
advertiser especially if we’re requiring willfulness.  I can see the justification for the result
here as well—it’s largely a matter of preferences/beliefs about deterrence—but what
I really don’t like is the special treatment trademark gets.  The statutory language is the same; the
reasoning should be the same too.]
Nor did the district court clearly err in finding that RTI offered
insufficient proof of diversion. The best evidence of diversion was internal BD
correspondence boasting about the commercial impact of its “needle sharpness”
and “waste space” claims, and “the trial court was persuaded that this
correspondence did not actually prove that RTI’s customers or potential
customers chose to purchase from BD instead of RTI as a result of the false
advertising…. At least some customers expanded their purchases from RTI after
the dates they were allegedly presented with the deceptive waste space
comparisons. In contrast, BD had difficulty selling its retractable syringes
during the same period.”
These findings were consistent with the court of appeals’
reasons for holding that BD’s false advertising, standing alone, could not
ground antitrust liability. The parties’ customers were sophisticated; none
testified to being driven by BD’s false claims and several testified that they
weren’t. “RTI’s evidence consisted mostly of boastful e-mail exchanges between
BD sales representatives recounting what they believed were successful sales
pitches, but notably there was no testimony from the customers themselves.”  [Again, fair enough! But if you tried that argument
in a trademark case, there’s tons of cases about how courts should presume that
bad intent is successful, and that divergence doesn’t make a lot of sense.]
Fundamentally, RTI and BD weren’t the only players in the
safety syringe market, so no presumptions about false comparative advertising
were appropriate (if they’re even allowed).
The district court also relied on “the adequacy of other remedies”
in rejecting disgorgement even as it decided not to reimpose injunctive relief,
which RTI pointed out was weird. Still, it was ok to weigh the steps BD had
already taken to comply with the injunction as a factor counseling against the
need for disgorgement, given the absence of evidence of concrete harm. However,
the court cautioned that “[w]e do not necessarily approve of a general rule
that, ex ante, injunctive relief is preferable to disgorgement.”
RTI finally argued that the court should value deterrence and
avoidance of unjust enrichment more. But those values don’t require disgorgement
where it’s not equitable to disgorge profits to a particular plaintiff. There
was no abuse of discretion.  And we get
another TM comparison! The district court distinguished a previous case approving
of disgorgement on deterrence grounds because that case was a trademark case,
and trademarks and trade dress are unique “protected property right[s].” RTI
argued that the Lanham Act also protects trade reputation and goodwill as
property interests. [Note: as a matter of history, RTI is correct that the same
property language has been used for all these things; indeed, the classic
treatment of the “trademark is property” concept was really always “the
property is the underlying goodwill; the trademark is the symbol of the
property, which only exists appurtenant to the goodwill of a business.”  It’s only casual shorthand that confused some
later courts into thinking there was some sort of property right in the trademark
as such.] But the court of appeals doesn’t wade into that because RTI failed to
show that its goodwill was harmed in a way that affected potential customers’
decisions, and thus didn’t show harm that “parallels the harm caused a
markholder whose mark is used without consent.”
Anyway, BD was not “unscathed” by its violation of the
law.  It complied with (most of) the
original injunction for nearly two years. And for deterrence, “future would-be
false advertisers” should note that a plaintiff who shows harm may be able to
get disgorgement.
In closing, the court of appeals put the denial of
disgorgement in the larger context of a “meritless” antitrust claim [interesting
word—should BD get attorneys’ fees?] made during a time in which RTI nearly
doubled its own sales and increased its share of the retractable syringe
sub-market to two-thirds. “RTI elected not to test its proof of Lanham Act
damages before the jury,” and the court wouldn’t let it wave the flag of the
public interest to get BD’s profits now. The public interest would be best
vindicated in the marketplace.
Judge Graves dissented; he would have vacated and remanded
on the theory that the district court erred in reweighing the diversion factor
and in finding insufficient evidence to support disgorgement.  He thought that the prior court of appeals
opinion’s treatment of sales diversion related to the amount to disgorge, but fixed the law of the case as to whether
sales diversion had happened, merely remanding for assessment of other factors
in light of the disappearance of the antitrust award. The district court had
clearly already found that “RTI produced evidence that on occasion BD relied on
these false advertisements to divert sales from RTI directly” and “[t]his
evidence confirms the rational conclusion that some portion of BD’s ill-gotten
sales came at RTI’s expense.”
Of the three factors that weren’t law of the case, the
public interest factor favored disgorgement. On remand, the district court “improperly
weighted the absence of diversion and palming off to the exclusion of other
factors.” In light of this reweighing “and the fact that the adequate remedies
the district court had previously found no longer exist,” the dissent thought
that the district court likewise erred in its reconsideration of the adequacy
of other remedies.

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smells bad? 9th Circuit approves tuna voucher settlement as not a coupon settlement

Posted on April 1, 2019 by rtushnet

Hendricks v. Ference, 754 Fed.Appx. 510 (9th Cir.
2018)
Objectors appealed the approval of a class action settlement
over the alleged under-filling of Starkist tuna cans; over a partial dissent,
the court of appeals affirmed. In particular, the court affirmed the district
court’s determination that the award of tuna vouchers was not a form of coupon
relief under the Class Action Fairness Act (CAFA). “The vouchers did not
expire, they were freely transferrable, they could be used at a wide variety of
stores (any retailer selling Starkist products), and the vouchers had sufficient
value that class members could use them to purchase tuna without additional
out-of-pocket expense.”  The underlying claims
were about insufficient tuna, and the settlement supplied the missing tuna—using
a voucher instead of mailing cans to class members “does not transform the
settlement from a tuna settlement into a coupon settlement” (and is almost
certainly a better idea from an olfactory/health perspective).  CAFA’s restrictive coupon provisions don’t
apply to all non-cash settlements; this was an in-kind settlement and the in
kind redress could be provided with “a voucher that is sufficiently usable and
related to the harm suffered.”
A partial dissent would have found that this was a coupon
settlement. Judge Friedland doesn’t like the governing 9th Circuit
standard for determining what’s a coupon (and would find this to be a coupon even
under that standard).  These are coupons
within the common meaning of the term: they’re only good for buying canned
tuna. Lack of expiration and free transferability are important for things like
cash cards or even credit cards [debit cards? The case citation is to gift cards
redeemable at Walmart, a giant retailer] but not where the “vouchers” are “remarkably
inflexible.”  Canned tuna bought five
years from now is still canned tuna; you still have to buy the thing that was
the source of your problem to benefit. 
Transferability is also less relevant where the market for the vouchers
is dependent on the fact that they are vouchers for canned tuna. “After all,
Congress ‘targeted [coupon] settlements for heightened scrutiny out of a
concern that the full value of coupons was being used to support large awards
of attorney’s fees regardless of whether class members had any interest in
using the coupons.’”  The dissent also
pointed out that the vouchers were going to be in round dollar amounts; using
them might require the consumer to make an outlay or leave tuna money on the
table, which were coupon-like effects. “Even though many class members will
leave a portion unredeemed, and even though many class members will not redeem
the voucher at all—whether because they lose it, forget they have it, decide
they no longer like tuna, or for any other reason—the majority’s holding that
the vouchers are not coupons means all the distributed vouchers will be counted
at their full face value for purposes of calculating the settlement value and
the resulting attorney’s fees. This is exactly the sort of result Congress was
trying to prevent when it adopted the coupon provisions in CAFA.”
If writing on a blank slate, the dissent would treat “any
type of discount, credit, gift card, or voucher” as a coupon under CAFA, and
would also treat vouchers for replacements for the original product as coupons even
if the class member didn’t have to put in any more cash.  [The dissent doesn’t outright say that
mailing cans of tuna would be “coupons,” but why not under that logic? If you’re
concerned about overvaluation, Starkist would get to count the retail price of
the tuna as the value of the settlement even though the production cost is much
lower, so it’s possible to manipulate the final settlement value that way too.]  If the coupons were close-to-cash (e.g., Walmart
gift cards), redemption rates would be high and attorneys’ fees would be based
on those high rates. If not, then the fees wouldn’t be that high, which was
Congress’s goal.  A bright line rule
would also make things easier for district courts and for attorneys, who’d find
it easier to tell whether they’d crafted a coupon settlement.

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Oklahoma’s Indian arts & crafts consumer protection law preempted by federal law

Posted on April 1, 2019 by rtushnet

Fontenot v. Hunter, No. CIV-16-1339-G  (W.D. Okla. Mar. 28, 2019)
Oklahoma’s American Indian Arts and Crafts Sales Act of 1974
was amended in 2016 to exclude from its definition of “American Indian” all
persons but citizens or enrolled members of a federally recognized tribe.  Fontenot, a member of the Patawomeck Indian
Tribe of Virginia, a tribe recognized by the State of Virginia but not by the
United States, sued under a variety of theories including a general right to
engage in her trade; she lost on all of them except the Supremacy
Clause/federal preemption argument based on the Indian Arts & Crafts Act.
Oklahoma’s law is a specific false advertising statute whose
purpose “is to protect the public, under the police powers of the state, from
false representation in the sale of authentic and imitation American Indian
arts and crafts.”  The law makes it
“unlawful to distribute, trade, sell or offer for sale or trade within th[e]
[S]tate [of Oklahoma] any article represented as being made by American Indians
unless the article actually is made or assembled by American Indian labor or
workmanship.”
Fontenot is an artist who’s made her heritage part of her
art and her marketing for decades. Before 2000, Plaintiff marketed herself “as
a Cherokee artist” even though she is not a member of the Cherokee Nation and
the Cherokee Nation had not certified her as a tribal artisan. After 2000, Fontenot
changed statements on her event signs and business cards from “Cherokee artist”
to “Cherokee descent,” since she is “not certified by that tribe, and Cherokee
artist implied that [she] was.”  In 2006,
she became a tribal member of the Patawomeck Indian Tribe of Virginia, which
requires descent from a tribal member for membership.  Her current advertising describes her artwork
as “Native American” and she uses the designations “Patawomeck,” “Potawatomi,”
and “Cherokee Descent.”
Fontenot challenged the law as a violation of her Fourteenth
Amendment due process rights, “irrationally burden[ing] . . . [her] right to
earn a living,” and “protect[ing] artists who are members of federally
recognized tribes from economic competition,” without a legitimate government
interest. The state law was an economic regulation that didn’t affect
fundamental rights. It passed rational basis review: Consumer protection is a
traditional area of state concern and the law here was rationally related to a
legitimate government purpose. “[N]otwithstanding Plaintiff’s disagreement with
the definition of American Indian reflected in the State Act, there is no
reasonable dispute that the Oklahoma legislature could rationally have
concluded that, to meet the purpose of the State Act, some definition must be
drawn and the definition it adopted was a reasonable one.”
Equal protection: Fontenot argued that the law “creat[ed] an
irrational and arbitrary distinction among American Indian artists.”  Again, this passed rational-basis
review.  “As the State has argued, that
distinction ‘prevents consumers from being misled as to the status of the
artist as “American Indian,” given the rigorous process associated with federal
tribal recognition and membership.’” Rational basis review is especially forgiving
when linedrawing is necessary, and defining “American Indian” for the purpose
of a consumer-protection statute must “‘inevitably require[] that some persons
who have an almost equally strong claim to favored treatment be placed on
different sides of the line.’” That’s a matter for the legislature.
Dormant Commerce Clause: Fontenot argued that the law “discriminates
against and excessively burdens interstate commerce in American Indian art by
favoring in-state American Indian artists at the expense of out-of-state
artists.”  She failed to show
discrimination between in-state artists and out-of-state artists, either on the
law’s face or in its direct effects. Nor was there an undue burden. Undue
burden analysis requires balancing (1) the nature of the putative local
benefits advanced by the [statute]; (2) the burden the [statute] imposes on
interstate commerce; (3) whether the burden is “clearly excessive in relation
to” the local benefits; and (4) whether the local interests can be promoted as
well with a lesser impact on interstate commerce.  There was no genuine issue of material fact that
could avoid summary judgment here. “The State Act does not prohibit an artist
from offering his or her art and crafts for sale in Oklahoma; it restricts the
manner of how these goods are marketed,” and it did so equally for
in-state and out-of-state artists. There was no evidence
that the burden on out-of-state artists was clearly excessive in relation to
the local benefit of protecting the public from improperly identified goods.
First Amendment: Fontenot argued that this law constituted
impermissible content-based and identity-based discrimination.  Although Central
Hudson excludes false/misleading commercial speech from any First Amendment
protection, the court nonetheless ran through the remaining three part test for
nonmisleading commercial speech. First, there’s substantial interest in
“protect[ing] the public . . . from false representation in the sale of
authentic and imitation American Indian arts and crafts.” Second, there’s “a
reasonable fit” between the law and the state’s “consumer protection
interests,” meaning that the law “directly advances those interests and is narrowly
tailored.”  The fact that there were
other reasonable definitions of “American Indian” didn’t change that, as long
as this definition was reasonable,
which it was. Central Hudson requires
a reasonable fit between the legislature’s ends and its means, not a perfect
fit.
But all is not lost! 
Under the Supremacy Clause, IACA had to control. Congress passed IACA “to
protect Indian artists from unfair competition from counterfeits.” It provides
for liability for any “person who, directly or indirectly, offers or displays
for sale or sells a good . . . in a manner that falsely suggests it is Indian
produced, an Indian product, or the product of a particular Indian or Indian
tribe or Indian arts and crafts organization.” For purposes of this prohibition,
IACA expressly includes in its definition of “Indian tribe” any Indian group
that has been formally recognized as an Indian tribe by “a State legislature; a
State commission; or another similar organization vested with State legislative
tribal recognition authority.”
Although there was no express preemption provision, and no
field preemption (“Congress expressly contemplated continuing state regulation”),
the court found conflict preemption.
What constitutes a sufficient obstacle to the federal
objectives depends on Congress’s intent, which itself is primarily evidenced by
its statutory language.  The statutory
language and legislative history of IACA reflect a struggle with the definition
of “Indian.”  The initial draft was
narrow and included only federally recognized tribes and their members, but
even then the drafters noted their belief that these definitions would “have to
be broadened.”
By excluding from the state definition of “American Indian”
members (or certified artisans) of tribes that are recognized by a state but
not the federal government, the state law constituted “an obstacle to the
accomplishment and execution of the full purposes and objectives of” IACA,
whose express purpose was “to promote the economic welfare of the Indian tribes
and Indian individuals through the development of Indian arts and crafts and
the expansion of the market for the products of Indian art and craftsmanship.” The
state’s narrower definition prohibited the marketing and sale of works by some
artists that would otherwise be protected by IACA, harming the market IACA was
supposed to promote and develop. The state’s definitions weren’t unreasonable
or unconstitutional in the abstract; they just conflicted with the federal law.

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Bad argument of the day: potential registration should count as (R) because opposer is accused infringer

Posted on April 1, 2019 by rtushnet

Herman Miller, Inc. v. Blumenthal Distributing, Inc., 2019
WL 1416472, No. LA CV17-04279 JAK (SPx) (C.D. Cal. Mar. 3, 2019)
Lots of stuff going on here. 
Herman Miller sued Blumenthal for infringing on the trade dress of one
of its office chairs, the Caper, with a “distinctive bowler-hat-like backrest.”  The court found a factual issue on
nonfunctionality, relying in part on the existence of design patents as
evidence of nonfunctionality even though that’s not right given the mismatch
between “functionality” for design patent and “functionality” for trademark
purposes.  The court found the other
evidence also admitted of different interpretations—the advertising touted
functional benefits, but a jury could find that the particular configuration of
the whole chair, especially the specific perforations in the backrest, was
distinctive and nonfunctional.

Caper chair

accused designs
Herman Miller whinily argued that it had applied to register
the trade dress, had the application published for opposition, and then had been opposed
by defendant.  If not for defendant’s
opposition, then the registration would have issued and Herman Miller would
have a presumption of validity/nonfunctionality in this infringement litigation.  So, Herman Miller reasoned, it should have a presumption of validity
and nonfunctionality.  This argument has
chutzpah, but little else to recommend it. 
As the court noted, the law requires the registration to issue before it
can provide favorable presumptions, and it provides for the mechanism of
opposition to prevent a registration from issuing.
The court also deemed it too late for Herman Miller to add,
after the close of discovery, unfair competition claims based on a defendant’s
alleged use of its reputation as a seller of “knock-off goods” to “position the
accused chairs as substitutes for real Caper chairs,” and that it “target[ed]”
and “interfere[d] with” Herman Miller dealers who were “contractually obligated
to not sell Caper knock-offs.” This was not a trade dress infringement theory
and it came too late.

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making claims against counsel’s advice could be willful for disgorgement remedy

Posted on April 1, 2019 by rtushnet

Dependable Sales & Service, Inc. v. Truecar, Inc., No. 15-cv-1742
(PKC), 2019 WL 1407440 (S.D.N.Y. Mar. 27, 2019)
“Plaintiffs are 108 new-car dealerships located throughout
the United States.”  TrueCar is a lead
generator: online, it puts consumers in contact with a car dealership that
contracted with TrueCar. TrueCar allegedly falsely advertised by promising
consumers a negotiation-free, haggle-free buying experience through the TrueCar
website. Customers were allegedly channeled toward a TrueCar-affiliated
dealership with a pledge of “guaranteed savings” on vehicles that often were
not available on the dealership’s lot, then put into the negotiation process
typically associated with buying a new car. TrueCar’s website also generated a
graphic called the “TrueCar Curve,” which allegedly misled consumers about
vehicles’ pricing data, specifically as to the “factory invoice” price paid by
dealers to manufacturers.
TrueCar moved for summary judgment on the issue of harm. Plaintiffs’
consumer surveys went to falsity, not harm; their deposition testimony “describes
only vague, general perceptions of injury.” This was insufficient to avoid
summary judgment as to plaintiffs’ damages. However, there was evidence of
willfulness, which meant that equitable disgorgement might be an appropriate
remedy.
The evidence of falsity (and willfulness) included TrueCar’s
generation of a “Certificate” showing a “guaranteed savings” off the MSRP,
which the consumer could then take to a dealer and apply toward the purchase
price of a specific make, model and trim of car from a specific dealership. But
plaintiffs argued that “TrueCar-affiliated dealerships seldom honored the
Certificate’s terms, and the particular make and model of vehicles searched by
consumers were rarely available on the dealerships’ lots. In an internal
TrueCar presentation, one of the Company officer’s discussed findings that 80%
of consumers reported that TrueCar-affiliated dealers did not honor the
Certificate price.”  [That’s bad—that’s a
level that might attract state AGs/the FTC.] 
A TrueCar co-founder and former officer described the Certificate as
highly successful in attracting consumer business, and also as going toward
“bullshit virtual vehicle[s]” that were seldom available on dealer lots.
TrueCar’s ads also touted a negotiation-free, haggle-free
purchasing experience; TrueCar didn’t dispute literal falsity for the purposes
of this motion, which seems like a good idea insofar as “No negotiation” was a
big part of the ads, e.g. this
anti-traditional-dealers ad with the happy guy indicating: “Because I used
TrueCar, there was no haggling about the price.” “TrueCar’s market research
concluded that a promise of ‘no negotiation’ was a ‘magic bullet for people’ because
negotiations were generally challenging to consumers.”  TrueCar’s outside counsel advised the Company
against using the “No Negotiation” claim given the claim’s “lack of clarity,
concerns with regulators and the likelihood that dealers and consumers would
negotiate.” TrueCar chose not to follow this advice, though it stopped
advertising a haggle-free buying experience in 2016; some of the plaintiffs in
this case were affiliated with TrueCar for some of the false advertising
period.
Separately, TrueCar’s “Curve” was allegedly false to the
extent that it showed a “TrueCar Price” lower than a “factory invoice” price,
implying that the dealer paid a factory invoice price and misled consumers into
thinking that TrueCar allows them to pay “less than the dealer paid.” TrueCar
argued that “factory invoice” doesn’t mean the dealer’s cost to buy a car,
while plaintiffs argued that consumers understand the term to mean just that.
Although a disclaimer defined the term “factory invoice” as the price a
manufacturer initially charges a dealer, excluding discounts, dealer incentives
and money allocated to the dealer upon a sale, plaintiffs argued that this
definition was not conveniently displayed or easily accessible to consumers.

The court found that the parties weren’t direct competitors and TrueCar’s ads
weren’t specifically comparative to them, thus preventing any presumption of
injury and causation. Although “[t]he type and quantity of proof required to
show injury and causation has varied from one case to another depending on the
circumstances,” ads that “do not draw direct comparisons,” or products “that
are not obviously in competition,” will “require a more substantial showing” of
injury.  Here, the parties occupied
different positions in the marketplace, since TrueCar didn’t sell cars at all
(though there was evidence that TrueCar’s former CEO considered non-TrueCar dealerships
“competitors”).  The key was that “[a]
sale made through TrueCar is not necessarily a sale lost by a plaintiff
dealership, as opposed to some other competing dealership in the same market.” Where
a plaintiff “operates in a large market” that includes numerous types of
retailers, injury “may well be difficult to prove” where it “depends upon the
idea that [plaintiff’s] sales are specifically affected by [defendant’s]
behavior.” Famous Horse Inc. v. 5th Ave. Photo Inc., 624 F.3d 106 (2d Cir.
2010), abrogated on other grounds by Lexmark.
Plaintiffs’ proposed expert on damages was successfully
excluded, so that evidence couldn’t be used to show harm causation. The expert
didn’t weigh the “no-haggle” claim against other features on the TrueCar site, didn’t
account for other factors that influenced a consumer’s choice of dealerships,
and didn’t consider what portion of TrueCar-generated sales could have gone to
other competing dealerships in the same geographic markets.  Nor could evidence of falsity, including
consumer survey evidence showing that more than half of consumers received a
no-haggling/you’ll know the price when you show up message, substitute for evidence
of harm.  Individual witnesses “articulated
only a vague impression of lost sales and damage to reputation, and did not
identify a discernable harm that would permit a reasonable trier of fact to
find injury.”  None of the witnesses identified
a specific actual sale lost to a TrueCar-affiliated dealership, or evidence of
harm to the business reputation of their respective dealers.
TrueCar argued that it should win summary judgment on
materiality. The court understandably disagreed. TrueCar argued that consumers
who purchased through TrueCar after haggling were obviously not affected by the
no-haggle promise, and consumers who were turned off by the surprise haggling
wouldn’t buy from TrueCar.  “TrueCar does
not cite evidence to support of its description of consumer behavior, and for
that reason alone has not met its burden as summary judgment movant. Even if
the scenario TrueCar describes is assumed to be accurate and complete, it
describes a bait-and-switch transaction … which sometimes led to a sale by a
TrueCar-affiliated dealer.”
The Second Circuit has identified “three categorically
distinct rationales” for ordering disgorgement of a defendant’s profits: “The
rule in this circuit has been that an accounting for profits is normally
available ‘only if the defendant is unjustly enriched, if the plaintiff
sustained damages from the infringement, or if the accounting is necessary to
deter a willful infringer from doing so again.’ No matter what the theory,
willful deceptiveness is required. The first two rationales require some sort
of showing of injury, whereas disgorgement based on deterrence “is not
compensatory in nature, but rather seeks to protect the public at large.” Disgorgement
can be partial or full, depending on the need to satisfy a relevant rationale.
Willfulness is necessary, but not always sufficient. Along
with the egregiousness of the conduct, other relevant factors include “(1) the
degree of certainty that the defendant benefited from the unlawful conduct; (2)
availability and adequacy of other remedies; (3) the role of a particular
defendant in effectuating the infringement; (4) plaintiff’s laches; and (5)
plaintiff’s unclean hands.”
There was enough evidence of willfulness to proceed.  First, “failure to follow the advice of
counsel … must factor into an assessment of … bad faith.” TrueCar’s outside
counsel stated in email, “I strongly advise against using the phrase
‘negotiation-free’ in any form in our ads or other self-attributed public
communications …. In my view it is a much greater risk than we should bear at
this point.” The CEO, responded in part, “I am inclined to take some practical
risk here.” Counsel noted that use of the phrase “negotiation free” “was over
my objection, but that is an historical footnote that will hopefully be
irrelevant over time ….”  [Narrator: It
wasn’t.]  Another email: “I do not
believe we should talk about being ‘negotiation free’ in the present tense
because we are not (both for the reasons we have debated at length and
additionally because in nearly 20% of our jurisdictions we cannot even promise
a guaranteed savings, meaning in those states nothing about the experience is
‘negotiation-free’.)” Although counsel approved “no hassle,” he rejected “no haggle”
because TrueCar couldn’t assure users that they would not be expected to
bargain about price and because consumers would believe that TrueCar would take
an “active role” in arranging for sales terms.
Second, TrueCar was “separately aware that its ads left
consumers with a false impression about the process of purchasing a new vehicle
through TrueCar,” as shown by evidence from several years before it
discontinued the claim. Its Chief Product Officer told the CEO that customers
were using TrueCar to “configure a virtual vehicle that has less than a 2%
chance of existing on a dealer’s lot.” He continued: “when we send in our
prospects with a certificate of a bullshit virtual vehicle, we don’t arm them
with the proper tools to ensure they know we have their back at the most
critical moment.” In deposition, he walked back the 2% figure, but yikes.  Separately, a TrueCar executive noted a
consumer survey finding that 80% of respondents stated that TrueCar-affiliated
dealers did not honor the “Guaranteed Savings” certificate.
There was also evidence that TrueCar acted against the
advice of counsel in listing a factory invoice price on the TrueCar Curve. And
a dealer from TrueCar-affiliated dealership that was active in an advisory
committee called the “TrueCar dealer council” told TrueCar that certain
manufacturers “strictly prohibited” their dealerships “from advertising a price
below dealer invoice” as a way “to prevent ‘bait and switch’ advertisements.” He
stated, “Many car buyers believe that the dealer invoice is the true cost of
the car; it is not.”

There was evidence that weighed against a finding of willfulness. TrueCar
stopped running the disputed advertisements in 2016 (the evidence above was
mostly from 2013). The homepage included a disclaimer stating that “[e]ach
dealer sets its own pricing. Your actual purchase price is negotiated between
you and the dealer.” Disappointingly, although TrueCar’s chief marketing
officer described the text as “mouse print,” the court considered the
disclaimer to be “some evidence” that TrueCar qualified its “negotiation-free”
claim on its homepage, rather than simply contradicting the explicit, key claim
in ads. 
TrueCar argued that it didn’t profit from its
advertisements, meaning that “there are no profits to disgorge” after accounting
for its operating expenses. But a court of equity “has considerable discretion
in deciding whether operating expenses during a start-up period ought to be netted
against profits in a later period.”
A reasonable trier of fact could conclude that TrueCar
willfully violated the Lanham Act’s prohibition against false advertising and
profited therefrom.  Injunctive relief
and corrective advertising also remained remedies on the table.
State law claims were stayed pending resolution of the
Lanham Act claim—which sounds like it’s headed for a bench trial.

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