Reed invalidates highway sign distance and permit regulations

Thomas v. Schroer, 2017 WL 1208672, No. 13-cv-02987 (W.D.
Tenn. Mar. 31, 2017)
Reed may or may
not work a sea change in First Amendment law generally, but it has definitely
worked a sign change.
The Tennessee Department of Transportation (TDOT)
promulgates and enforces regulation of billboards and outdoor advertising signs
under Tennessee’s Billboard Regulation and Control Act of 1972 and under the
Federal Highway Beautification Act of 1965. 
Regulated billboards and signs under the Billboard Act are subject to
location and/or permit and tag restrictions, e.g., they may not be “within six
hundred sixty feet (660′) of the nearest edge of the right-of-way and visible
from the main traveled way of the interstate or primary highway systems …
without first obtaining from the commissioner a permit and tag.” Some signs,
however, are exempted if they relate to the sale/lease of property on which
they’re located or if they advertise activities conducted on the property on
which they are located—these are known as on-premise signs.  Because, to qualify as an on-premise sign,
one must compare the content of the sign to the activities on the premises, the
court found the restriction content-based, and because it regulated all signs
rather than just commercial signs, it had to survive strict scrutiny, which it
did not.
The court commented that commercial sign regulations are
subject to intermediate scrutiny, not to Reed’s
strict scrutiny, but here the regulation affected both kinds of speech. 
Justice Alito described an off-premises/on-premises
distinction as content neutral in his concurrence in Reed, but the court here found that would only be true if a
regulation defined an on-premises sign “as any sign within [x] feet of a
building,” rather than also considering the relationship between the content
and the building’s use.  [The Reed dissents, too, pointed out that a
number of the examples were content-based if you define content-based without
any reference at all to the reasons we might want to protect speech against
government regulation. Even if you do that, it seems plausible that no lawful
content is barred by this regulation, depending on the use of the building.] 
First, the state’s interests were not compelling. The state
identified interests in preventing the proliferation of billboards, improving (1)
aesthetics and (2) traffic safety. These are substantial or significant
interests, but not compelling interests. 
Nor were they properly related to the speech-based distinctions made by
the regulation—the distinction between on-premises-related content and other
messages.  One of the defendant’s
witnesses testified that signs with more content and signs outside the driver’s
field of vision may create greater distractions, i.e. “I would know the golden
arches for McDonald’s or BP for gasoline, I know that that facility sits at the
bottom of that sign; and it’s a very quick glance and back to the road.”  So that’s an interesting claim about the
shorthand function of trademarks, but the court found it unrelated to
off-premises/on-premises distinctions.
In fact, the court reasoned, the on-premises/off-premises
distinction could interfere with the state’s interests, because “a small sign
with muted colors that says “Knowledge is Power” off of 1-40 would require a
permit and tag, and compliance with the six-hundred-sixty (660)- foot
restriction. Conversely, a large sign with loud colors that states ‘This
property is for sale. Right here. This one. The one this sign is on. Look at
this sign. Look at this property,’ would require no permit or tag, and could be
placed closer to another sign and the roadway.”
Even assuming the state’s interests were compelling, the law
wasn’t narrowly tailored. The state argued that “[o]n- premise signs enhance
safety by helping drivers locate relevant businesses and activities”; “[t]he
impact on aesthetics [by on-premises signs] is minimal because the signs are
already integrated with the current land use”; “[o]n-premise signs are
inherently self-regulating … [because] [o]wners of businesses do not want to
spend valuable real estate putting up a number of signs—that space is better utilized
for the business itself;” and off-premises signs are distracting.  But the state didn’t show that on-premises
signs were less distracting than off-premises signs, or that they had less
impact on aesthetics. “[T]he State’s conclusory assertion that business owners
do not want to put up numerous signs is speculative and lacks evidentiary
support. The assertion would certainly not be true for many firework vendors.”   
The law was also overinclusive because it regulated
off-premises signs that were not highly distracting, and underinclusive because
it didn’t regulate distracting on-premises signs.  The law was also not the least restrictive
means to further the state’s interests.
First, the state could limit its regulation to only
commercial speech; similar regulations have been upheld after Reed. 
While a non-commercial/commercial distinction might be less effective
than the current regulation, it wouldn’t be ineffective.  Second, size restrictions might be a
content-neutral alternative furthering the traffic safety interest.  [Really? 
What is a “sign”?  How do you make
that determination content-neutral?] 
Spacing requirements could also work, if they also allowed business
owners to erect additional signs within a certain distance of a building.  An ordinance that exempted only signs that
complied with the Manual on Uniform Traffic Control Devices might also be
constitutional.
An alternative regulation might also “require all signs,
regardless of content, to be a particular size, use a particular font (or a set
of fonts), be limited to a particular colors, face a particular direction, or
stand at a particular height, etc.” [Note that this might face federal
preemption issues given federal protections for the display of registered
trademarks.]
Anyway, bye-bye sign regulation.

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Court finds materiality of color questionable

Spruce Environmental Technologies, Inc. v. Festa Radon
Technologies, Co., No. 15-11521, — F. Supp. 3d —-, 2017 WL 1246327 (D.
Mass. Apr. 3, 2017)
The parties compete in the radon extraction business. Spruce
claimed that Festa falsely advertised its radon extraction fans in violation of
the Lanham Act; the Massachusetts Consumer Protection Act, M.G.L. ch. 93A; M.G.L.
c. 266, § 91 prohibiting false/unfair ads; and the common law of commercial disparagement.
Festa counterclaimed similarly. Spruce filed a motion for partial summary judgment,
which was denied.
Previously, the court enjoined Festa from using inaccurate
photos of Spruce’s fans and representing that Festa fans have Energy Star and
Home Ventilating Institute (HVI) certifications, and enjoined Spruce from
claiming that its fans were Energy Star certified. 
Spruce argued that it was entitled to summary judgment on
its claim that Festa’s promotions violated the Lanham Act and Chapter 93A
because they include a photo of a bright yellow Spruce fan when the fans are
actually a different shade of yellow or greyish-brown, which is material
because color is an inherent quality and because one of its potential customers
suggested in an email that color would affect his purchase decision.  But there were genuine issues of material
fact about whether the photo properly represented the fans; there was evidence
that the photo wasn’t manipulated and thus might not be literally false, and
the fans did become more yellow over time. 
Also, the email was hearsay and there was no other evidence of
materiality.  “[I]t is unclear whether
consumers would find that the difference between the bright yellow in the
advertisement and the yellow tint that admittedly develops is an inherent
quality.” Also, since the fan was supposed to remove radon, not to be
decorative, color might never be an inherent quality.  Injury was also a matter for factfinding.
Likewise for Festa’s Energy Star rating, which Festa
conceded was expired at the time of the ads. Spruce didn’t show that it was
injured, and there was an unclean hands problem as well; Spruce also made
literally false statements that two models were Energy Star rated.  Similarly, Festa allegedly falsely advertised
using photos that included HVI certification labels even though that
certification had expired. Festa responded that the small labels in the stock
photos were indecipherable and there was no evidence that consumers were
materially misled; the court agreed that there were genuine factual issues.

Similar factual issues precluded summary judgment on Festa’s
counterclaim.

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Causation failure dooms Lanham Act claim in bioengineered corn case

In re: Syngenta AG MIR 162 Corn Litig., MDL No. 2591, 2017
WL 1250791 (D. Kan. Apr. 5, 2017)
Plaintiffs asserted various claims against Syngenta relating
to Syngenta’s commercialization of the corn seed products Viptera and Duracade,
containing a genetic trait known as MIR 162, when China, a key export market,
didn’t approve that corn. Plaintiffs alleged that Syngenta’s acts caused corn
containing MIR 162 to be commingled throughout the corn supply in the United
States; that China therefore rejected imports of all corn from the US, causing
corn prices to drop; and that plaintiffs (who didn’t use Syngenta corn) were
harmed by that market effect. The court previously certified a nationwide
Lanham Act class and state-wide classes for claims under the law of Arkansas,
Illinois, Iowa, Kansas, Missouri, Nebraska, Ohio, and South Dakota. Here,
Syngenta got rid of all Lanham Act claims, as well as any claim of negligence
in which liability was based on any alleged misrepresentation, a voluntary
undertaking, a failure to warn, or a duty to recall.  The negligence analysis contains a lot that
seems quite interesting, but I’ll focus on the Lanham Act claims.
An August 17, 2011, letter to all Syngenta purchasers stated
that Syngenta expected import approval from China for Viptera in late March
2012.  The court found that plaintiffs
couldn’t prove injury causation. To show causation, they’d have to show both
that farmers read and were influenced by the letter and that the impact of the
letter was great enough to cause the embargo that allegedly caused the price
drop in this country. Of the more than 100 farmers deposed in this MDL and the
related Minnesota litigation, only one testified that he had seen the letter,
and none testified that he purchased Viptera or Duracade because of that
letter. There was no other survey or expert evidence.  By the time of the letter, Syngenta had been
selling Viptera for many months and planting for the 2011 season had been
completed. “[T]here was already more than enough corn containing MIR 162 in the
system to cause the alleged trade disruption.” 
This justified summary judgment for Syngenta on the Lanham Act claims.
Syngenta also won summary judgment on the negligence claims
to the extent they were based on alleged misrepresentations made in Syngenta’s
deregulation petition or in the course of a lawsuit suit against another market
participant.  Plaintiffs argued that they
weren’t asserting any negligent misrepresentation claims, but that the alleged
misrepresentations were part of the totality of Syngenta’s conduct regarding
the commercialization of Viptera that was allegedly unreasonable; the
applicable standard of care allegedly included transparency in communications.  The court disagreed.  “The law sets forth certain requirements for
liability based on negligence with respect to representations, and plaintiffs
may not circumvent those requirements by basing an ordinary negligence claim on
alleged misrepresentations,” even when additional negligent conduct was also
alleged.  However, failure to warn might
be part of the negligence claim.

Among the other rulings on negligence, the court rejected
Syngenta’s attempt to compare the fault of the Chinese government in causing
plaintiffs’ harm, which creates interesting questions about judging foreign
governments’ conduct in domestic disputes.

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LiveJournal’s missteps threaten its DMCA protection

Mavrix Photographs, LLC v. LiveJournal Inc., No. 14-56596
(9th Cir. April 7, 2017)
Initial note: What the court here describes as LJ’s business
model is in reality limited to its treatment of ONTD, the most popular
community on LJ.  Most other LJ
communities, not to mention its individual journals, operate very
differently.  Query whether subsequent
treatment will understand this important fact when dealing with the reversal of
summary judgment in LJ’s favor on its 512 defense.
Mavrix sued LJ for infringement of twenty photos.  Users submitted the photos, but “a team of
volunteer moderators led by a LiveJournal employee reviewed and approved them.”  Whether the acts of the moderators could be
attributed to LJ was a disputed question of material fact under the common law
of agency, which applies to DMCA analysis of whether material was “posted at
the direction of the user.” [At the outset, I don’t get this—the analysis on
knowledge etc. makes somewhat more sense, but they’re still user-submitted
photos whether or not the moderators screen them.] The court of appeals also
vacated the district court’s order denying discovery of the moderators’
identities.
LJ “allows users to create and run thematic ‘communities’ in
which they post and comment on content related to the theme.”  There are three unpaid administrator roles:
“moderators” review posts submitted by users to ensure compliance with the
rules; “maintainers” review and delete posts and have the authority to remove
moderators and users from the community; one “owner” per community can also
remove maintainers.  Oh No They Didn’t!
(ONTD) is a popular LJ community focused on celebrity news.
ONTD’s rules instructed users to “[i]nclude the article and
picture(s) in your post, do not simply refer us off to another site for the
goods.” Another rule: “Keep it recent. We don’t need a post in 2010 about Britney
Spears shaving her head.” ONTD’s rules included a list of sources from which
users should not copy, which were sources that informally requested that ONTD
stop posting allegedly infringing material. ONTD also automatically blocked all
material from one source that sent ONTD a C&D. Moderators reviewed proposed
submissions and publicly posted about one-third of them. The substantive
requirement for approval was new and exciting celebrity news, though they were
also supposed to screen out copyright infringement, pornography, and
harassment.
Like other LJ communities, ONTD used to be exclusively
volunteer, without LJ involvement in day-to-day operation of the site. But it
hit 52 million page views per month in 2010 and attracted LiveJournal’s
attention. “By a significant margin, ONTD is LiveJournal’s most popular
community and is the only community with a ‘household name.’” Thus, LJ
determined to exercise more control over ONTD so that it could generate ad
revenue from it. LJ hired a then active moderator, Brendan Delzer, to serve as
the community’s full time “primary leader” with the intent to “take over” ONTD,
grow the site, and run ads on it. Delzer instructed ONTD moderators on the
content they should approve and selects and removes moderators on the basis of
their performance, as well as performing moderator work of his own. Delzer was
paid and expected to work full time, while the other moderators are “free to
leave and go and volunteer their time in any way they see fit.”
ONTD posted the allegedly infringing photographs in seven
separate posts between 2010 and 2014. Some of the photos contained either a
generic watermark or a specific watermark featuring Mavrix’s website
“Mavrixonline.com.” Delzer did not recall personally approving the seven posts,
and LJ has no technological means to determine which moderator approved any
given post. Mavrix didn’t send DMCA notices, but when it sued, LJ removed the
posts.

The district court held that users’ submission of the posts was key to make
them “at the direction of the user.”  The
court of appeals disagreed, holding that §512(a) dealt with submission, while §
512(c) “focuses on the service provider’s role in publicly posting infringing
material on its site.  Contrary to the
district court’s view, posting rather than submission is the critical inquiry.”  This is … an interesting reading of the
DMCA.  §512(a) is about
transmission.  If §512(c)’s “hosting”
means “publicly posting,” then what happens if an ISP enables private storage? 
Anyhow, the common law of agency could make LJ responsible
for the moderators’ acts; the DMCA incorporates the common law of agency. To
the extent that BWP Media USA, Inc. v. Clarity Dig. Grp., LLC, 820 F.3d 1175
(10th Cir. 2016), contradicted this holding by suggesting that ISP employees
could be “users” under the DMCA, the court of appeals disagreed.
So, were the moderators LJ’s agents?  Agency requires actual or apparent authority
to act on behalf of the principal as well as the principal’s right to control
the actions of the agent.  There was
evidence that LJ gave its ONTD moderators explicit and varying levels of
authority to screen posts. [Note again that the court is writing as if
moderators were this deeply embedded in LJ’s business model throughout LJ’s
operations; in fact, I can make myself a moderator of a LJ community I create
with no scrutiny/direction at all other than LJ’s general TOS.  This discussion is about ONTD, not LJ as a
whole.]  Though they were “volunteers,” “the
moderators performed a vital function in LiveJournal’s business model. There is
evidence in the record that LiveJournal gave moderators express directions
about their screening functions, including criteria for accepting or rejecting
posts.”  There were genuine issues on
actual authority. So too with apparent authority. LJ users “may have reasonably
believed that the moderators had authority to act for LiveJournal”; for
example, one user whose post was removed pursuant to a DMCA notice complained
to LiveJournal “I’m sure my entry does not violate any sort of copyright law. .
. . I followed [ONTD’s] formatting standards and the moderators checked and
approved my post.”
Agency also depends on the level of control a principal has
over the agent, and there was evidence that LJ “maintains significant control
over ONTD and its moderators.”  Delzer supervised
moderators and selected and removed moderators on the basis of their
performance.  He also exercised control
over the moderators’ work schedule. “For example, he added a moderator from
Europe so that there would be a moderator who could work while other moderators
slept.” Moderators’ screening criteria derived from rules ratified by LJ—LJ
ratified them when one LJ employee discussed changing the rules with Delzer and
declined to do so.
However, ONTD moderators “are free to leave and go and
volunteer their time in any way they see fit.” The moderators can alos reject
submissions for reasons other than those provided by the rules, which called
into question LJ’s level of control. 
Thus, reasonable jurors could find agency, but might not be compelled to
do so.
If the moderators were LJ’s agents, the factfinder would
still have to assess whether Mavrix’s photos were posted at the direction of
the users in light of the moderators’ role in screening and posting. Activities
“narrowly directed” towards enhancing the accessibility of the posts wouldn’t
change the user-provided nature of the posts. Accessibility-enhancing
activities “include automatic processes, for example, to reformat posts or
perform some technological change” as well as “[s]ome manual service provider activities
that screen for infringement or other harmful material like pornography.”  This follows from § 512(m) of the DMCA, which
provides that no liability will arise from “a service provider monitoring its
service or affirmatively seeking facts indicating infringing activity.”  What are the edges of accessibility-enhancing
intervention?  When YouTube manually
selected videos for front page syndication on the basis of substance, the
district court on remand held that only those processes “without manual
intervention” satisfied § 512(c).  The
Fourth Circuit has approved a real estate website’s “cursory” manual screening
to determine whether photographs indeed depicted real estate.  This would be an issue for the fact-finder.
The ONTD moderators posted only about one-third of
submissions: only those posts relevant to new and exciting celebrity gossip. Betraying
a bit of a prejudgment, the court of appeals said that the question was whether
“their extensive, manual, and substantive activities went beyond the automatic
and limited manual activities we have approved as accessibility-enhancing.”
The court also addressed LJ’s actual and red flag knowledge of
the specific infringements alleged. 
Failure to use a DMCA notice “is powerful, but not conclusive, towards
showing that a service provider lacked actual knowledge.” Delzer didn’t
remember approving the posts, but Mavrix didn’t have the opportunity to depose
the moderators to determine their subjective knowledge [assuming they were
agents, which I guess we are now]. “On remand, the fact finder should determine
whether LiveJournal, through its agents, had actual knowledge of the infringing
nature of the posts.”  Even without
actual knowledge, red flag knowledge arises when a service provider is “aware
of facts that would have made the specific infringement ‘objectively’ obvious
to a reasonable person.” Watermarks were relevant even if Delzer didn’t know
that Mavrix had a website: “The existence of a watermark, and particularly this
watermark with a company name, is relevant to the knowledge inquiry…. [T]he
fact finder should assess if it would be objectively obvious to a reasonable
person that material bearing a generic watermark or a watermark referring to a
service provider’s website was infringing.”
In addition, LJ would have to show that it did not
financially benefit from infringements that it had the right and ability to
control. LJ’s general practices would be relevant, not its conduct with respect
to the specific infringements, since “right and ability to control” involves
“something more than the ability to remove or block access to materials posted
on a service provider’s website.” Something more can be present when the ISP
exercises “high levels of control over activities of users,” such as when it
“prescreens sites, gives them extensive advice, prohibits the proliferation of
identical sites,” provides “detailed instructions regard[ing] issues of layout,
appearance, and content,” and ensures “that celebrity images do not
oversaturate the content.”
The court of appeals rejected the district court’s
conclusion that LJ lacked “something more,” and sent it to the factfinder,
because:
LiveJournal’s rules instruct users
on the substance and infringement of their posts. The moderators screen for
content and other guidelines such as infringement. Nearly two-thirds of
submitted posts are rejected, including on substantive grounds. ONTD maintains
a list of sources that have complained about infringement from which users
should not submit posts. LiveJournal went so far as to use a tool to automatically
block any posts from one source.
LJ also needed to show that it did not derive a financial
benefit from infringement that it had the right and ability to control. “The
financial benefit need not be substantial or a large proportion of the service
provider’s revenue.”  The presence of a
vast amount of infringing material supported an inference of such a financial
benefit, where the service provider “promoted advertising by pointing to
infringing activity” and “attracted primarily visitors who were seeking to
engage in infringing activity, as that is mostly what occurred on [the service
provider’s] sites.” Here, LJ derived ad revenue based on the number of views
ONTD receives. Mavrix presented evidence showing that approximately 84% of
posts on ONTD contain infringing material, although LJ disagreed; again, this
was for the factfinder.

Also, on remand, whether the moderators were agents should
inform the district court’s analysis of whether Mavrix’s need for discovery
outweighed the moderators’ interest in anonymous internet speech. “Given the importance
of the agency analysis to the ultimate outcome of the case, and the importance
of discovering the moderators’ roles to that agency analysis, the district
court should also consider alternative means by which Mavrix could formally
notify or serve the moderators with process requesting that they appear for
their deposition at a date and time certain.”

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California Supreme Court finds waiver of statutory remedies unenforceable even as part of arbitration

McGill v. Citibank, N.A., No. S224086, 2017 WL 1279700 (Cal.
Apr. 6, 2017)
Statutory remedies available for a violation of the CLRA, UCL,
and FAL include public injunctive relief: injunctive relief that has “the
primary purpose and effect of prohibiting unlawful acts that threaten future
injury to the general public.” Here, the California Supreme Court holds that a
purported waiver in a predispute arbitration agreement that waives the right to
seek this statutory remedy in any forum was contrary to California public
policy, which was not preempted by the FAA. 
McGill sued Citibank based on its credit protector plan and its handling
of a claim under that plan when she lost her job. The trial court ordered her
to arbitrate everything but her claims for public injunctive relief, and the
court of appeals reversed on the injunctive relief based on Concepcion.  The agreement stated that any claims must be
made on an “individual (non-class, non-representative) basis,” and the parties
agreed that the agreement prevented her from seeking any public injunctive
relief in any forum.
The CLRA expressly declares that “[a]ny waiver by a
consumer” of the CLRA’s provisions “is contrary to public policy and shall be
unenforceable and void.” Under the UCL, the primary form of relief is an
injunction, whether prohibitory or restitutionary.  The FAL also allows injunctive relief.  Previously, the California Supreme Court distinguished
between private injunctive relief — i.e., relief that primarily “resolve[s] a
private dispute” between the parties and “rectif[ies] individual wrongs” and
that benefits the public, if at all, only incidentally — and public injunctive
relief — i.e., relief that “by and large” benefits the general public and that
benefits the plaintiff, “if at all,” only “incidental[ly]” and/or as “a member
of the general public.” An injunction under the CLRA against a defendant’s
deceptive methods, acts, and practices “generally benefit[s]” the public
“directly by the elimination of deceptive practices” and “will … not benefit”
the plaintiff “directly,” because the plaintiff has “already been injured,
allegedly, by such practices and [is] aware of them.” A CLRA plaintiff’s
private benefit, if any, is “incidental to the general public benefit of
enjoining such a practice.” So too with the UCL and the FAL.
Because of the parties’ agreement that the arbitration
provision “elected … to exclude public injunctive relief from arbitration,” as
well as barring non-arbitration relief, the question was whether the waiver of
McGill’s right to seek public injunctive relief in any forum was valid.  It was not.
The court also held that Proposition 64 didn’t eliminate the
ability of private plaintiffs to seek public injunctive relief.  Once a plaintiff has standing under Proposition
64, which McGill did because she lost money or property as a result of the
alleged violations, she could continue to seek all authorized forms of relief,
including the standard UCL remedy of an injunction.
Civil Code section 3513 provides: “Any one may waive the
advantage of a law intended solely for his benefit. But a law established for a
public reason cannot be contravened by a private agreement.” By definition, the
public injunctive relief available under the UCL, the CLRA, and the false
advertising law is primarily “for the benefit of the general public.” Waiver in
a predispute arbitration agreement “would seriously compromise the public
purposes the statutes were intended to serve.”  
Nor is this rule preempted by the FAA.  Citibank argued that the FAA required
enforcement of the arbitration provision “as written, regardless of what it
says or implies about claims seeking public injunctive relief.” But the FAA
only requires courts to “place arbitration agreements on an equal footing with
other contracts [citation] and [to] enforce them according to their terms.” The
FAA’s “saving clause” “permits arbitration agreements to be declared
unenforceable ‘upon such grounds as exist at law or in equity for the revocation
of any contract.’ ” Concepcion explained
that Congress’s “purpose” in enacting the FAA “was to make arbitration
agreements as enforceable as other contracts, but not more so.”  Thus, arbitration agreements may not be
invalidated “by defenses that apply only to arbitration or that derive their
meaning from the fact that an agreement to arbitrate is at issue.”
The defense at issue here — “a law established for a public
reason cannot be contravened by a private agreement”— was a generally
applicable contract defense, not a defense that applies only to arbitration or
that derived its meaning from the fact that an agreement to arbitrate was at
issue.  The Supreme Court previously said
that, “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the
substantive rights afforded by the statute; it only submits to their resolution
in an arbitral, rather than a judicial, forum.” The FAA thus does not require
enforcement of a provision in an arbitration agreement that “forbid[s] the
assertion of certain statutory rights” or that “eliminates … [the] right to
pursue [a] statutory remedy.”  Citibank
argued that those statements only applied to forfeiture of federal statutory
rights; the California Supreme Court disagreed. Under the FAA’s savings clause,
“ ‘[s]tate law’ … is applicable to determine which contracts are binding …
and enforceable under” the FAA, “ ‘if that law arose to govern issues
concerning the validity, revocability, and enforceability of contracts
generally.’ ”
Concepcion found the
FAA preempts even a “generally applicable” state law contract defense if that
defense (1) is “applied in a fashion that disfavors arbitration”, or (2)
“interferes with fundamental attributes of arbitration”, such as “ ‘lower
costs, greater efficiency and speed, and the ability to choose expert
adjudicators to resolve specialized disputes.’ ” Concepcion found that requiring a class arbitration procedure, the
rule (1) “sacrifices” arbitration’s “informality”, (2) “makes the process
slower, more costly, and more likely to generate procedural morass than final
judgment”, (3) “requires procedural formality”, and (4) “greatly increases
risks to defendants.”  Citibank argued
that there was little practical difference between “broad-based public
injunctions and … class-wide relief” since neither were necessary to protect
individual rights but just to help nonparties.
To the contrary, public injunctions were substantive
statutory remedies made available to individuals, not procedural devices like
the class action.  The Supreme Court has distinguished
between the “ ‘waiver of a party’s right to pursue statutory remedies’ ” — such
as “a provision in an arbitration agreement forbidding the assertion of certain
statutory rights” — and the waiver of a “procedural path to the vindication of
every claim” — such as a provision forbidding class action arbitration.  Nor would invalidation of the waiver interfere
with any of arbitration’s attributes.  The
FAA “does not … prevent parties who … agree to arbitrate from excluding
certain claims from the scope of their arbitration agreement.” The parties
elected to exclude public injunctive relief from arbitration, and requests for
such relief need not be arbitrated contrary to the parties’ agreement.  A stay of proceedings as to any inarbitrable
claims was also appropriate until arbitration of any arbitrable claims was
concluded. The Supreme Court has accepted “ ‘piecemeal’ litigation” of claims
the parties have agreed to arbitrate and claims they have not agreed to
arbitrate.”

So, was the rest of the provision enforceable?  The different versions of the agreement
Citibank provided contradicted each other—the 2001 version preserved the rest
of the agreement if portions were invalidated, but the 2005 Notice and the 2007
account agreement explicitly stated that the rest of the agreement wouldn’t
survive if any portion were deemed invalid or unenforceable.  This was an issue for remand.

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Lexmark injury requirement no bar to competitor’s standing at pleading stage

Crocs, Inc. v. Effervescent, Inc., 2017 WL 1229707,  No. 06–cv–00605 (D. Colo. Mar. 31, 2017)
Crocs sued Effervescent for patent infringement; in 2006,
defendants moved to stay the case pending ITC proceedings.  In 2015, defendant Dawgs moved to reopen the
case and lift the stay, and filed counterclaims.
The parties compete in the market for molded clogs. Dawgs
alleged that “[e]ach and every functional feature disclosed” in Crocs’ utility patent  application already existed in the market,
and that its design patent was also substantially similar to existing designs. Crocs
has allegedly been unable to secure patents similar to these patents outside
the United States because of the “well-known existence of prior sales, the
widely-recognized existence of invalidating prior art, and the established
identity of the true and proper inventorship and origin of the shoe.”
Just after the utility patent issued, Crocs filed a
complaint with the ITC a number of respondents, alleging infringement and
seeking a General Exclusion Order to ban the importation of molded clogs that
infringed on Crocs’ patents. The ITC initially found that the utility patent was
invalid as obvious in view of prior art, but the Federal Circuit (of course)
reversed and remanded, and the ITC then found that the respondents didn’t show
unenforceability. Defendant Dawgs filed an application for inter partes reexamination
of the design patent in 2012; the PTO found that it was unpatentable.

The court rejected most of Dawgs’ counterclaims (inequitable
conduct in patenting, monopolization, attempted monopolization, conspiracy to
restrain trade/exclusionary conduct, intentional interference with business
advantage), but allowed a false advertising claim to proceed.  Crocs allegedly misled consumers by claiming
that its footwear was “made of an exclusive and proprietary closed-cell resin
that they call ‘Croslite.’ ” However, “Croslite” was in fact ethyl vinyl
acetate, which is used by footwear companies around the world, including Dawgs.
Crocs’ promotional materials refer to “our patented CrosliteTM material” and “our
proprietary CrosliteTM material,” and claim that Croslite is a “revolutionary
technology,” though “Crocs does not own any exclusive proprietary or patent
rights to the material from which its footwear is made.” Thus, consumers were
allegedly deceived into concluding that the products sold by Dawgs are “made of
inferior material compared to Crocs’ molded footwear.” Crocs argued that Dawgs failed
to allege standing under the Lanham Act or a cognizable injury that was
proximately caused by the alleged Lanham Act violation, but Lexmark didn’t foreclose Dawgs’ claim at
the pleading stage. Dawgs fit within the zone of interests of the Lanham Act
because it was a direct competitor with Crocs who alleged an injury to
reputation or sales, and alleged that Crocs’ purportedly false descriptions of
Croslite had caused or would cause “a loss of consumer confidence, sales,
profits, and goodwill.” These injuries “flow[ ] directly from the deception.” Though
it would ultimately need to provide evidence of injury proximately caused by
the alleged misrepresentations, Dawgs was “entitled to a chance to prove its
case” under Lexmark.

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Copyright preemption and the right of publicity in the 9th Circuit

Maloney v. T3Media, Inc., No.15-55630 (9th Cir. Apr. 5, 2017)
Welp, the Ninth Circuit manages to gum things up again in
the right of publicity/copyright intersection. 
To the extent that, post-Reed,
the right of publicity has to survive strict scrutiny as applied to
nonadvertising uses, this incoherence may not be as important as it once
was.  But we might all have fewer
headaches if we read this decision as saying “conflict preemption” every time
it says something about §301 preemption. 
I have another suggestion below, as well.
Former student-athletes Patrick Maloney and Tim Judge alleged
that T3Media exploited their likenesses commercially by selling non-exclusive
licenses permitting consumers to download photographs from the National
Collegiate Athletic Association’s (NCAA) Photo Library for non-commercial art
use. The district court found copyright preemption and the court of appeals
affirmed.
Plaintiffs contested only part one of the two-part §301
test, whether the subject matter of the state law claim fell within the subject
matter of copyright.  Plaintiffs argued
that the right of publicity was outside the subject matter of copyright because
persona can’t be fixed in a tangible medium of expression.  The court of appeals disagreed for this type
of use: “[A] publicity-right claim is not preempted when it targets
non-consensual use of one’s name or likeness on merchandise or in advertising.
But when a likeness has been captured in a copyrighted artistic visual work and
the work itself is being distributed for personal use, a publicity-right claim
interferes with the exclusive rights of the copyright holder, and is preempted
by section 301 of the Copyright Act.”  
Allowing the right of publicity to interfere with licensing
a photo for non-commercial art use challenged the copyright owner’s “control of
the artistic work itself.”

The court distinguished other cases in part by misrepresenting them.  E.g., “[i]n Brown v. Ames, 201 F.3d 654 (5th
Cir. 2000), a record company misappropriated ‘the names and likenesses’ of ‘individual
blues musicians, songwriters, [and] music producers’ on the company’s CD’s,
tapes, catalogs, and posters. … [That case is distinguishable because it
involved] the use of an individual’s likeness on unrelated merchandise or in
advertising.”  Everything in that last
phrase is true except for “unrelated”—the tapes, catalogs, and posters featured
the artists at issue (and the advertising was for the goods embodying copies of
their works).  The rule, the court here
said, is that “when the ‘use’ of a likeness forms the ‘basis’ of a
publicity-right claim, the claim is not preempted.… The crux of the issue is
thus deciding when a publicity-right claim seeks to vindicate misuse of an
individual’s likeness, as opposed to merely interfering with the distribution,
display, or performance of a copyrighted work.” 
“Use” here is standing in for advertising/merchandising use, which seems
more like it would go to extra element than to subject matter of copyright.
Plaintiffs correctly pointed out that the case law sure
seems to treat photos differently than other works protected by the Copyright
Act.  The court responded that this
distinction had no theoretical or statutory basis, which is also true.
Along with other precedents, the court relied on Nimmer on
Copyright, which suggests that the right of publicity should be construed in
accordance with the Restatement of Unfair Competition, “which limits liability
to misappropriation for the purposes of trade.” [Which would be awesome if
California hadn’t already made clear that its law was so much broader than
that, unconstitutionally so.]  “The ‘use
for trade’ considerations can almost perfectly distinguish between the cases
finding preemption and those permitting publicity-right claims to proceed.”  And here we go again: the first footnote in
this sentence says, “[t]he cases finding preemption concern the display or
reproduction of copyrighted expressive works,” which is true.  The second footnote starts with Midler (ads), Waits (ads), White (ads),
Wendt (at least arguably advertising
use of robots “to draw customers to a bar,” as the court says), Toney (ads), Downing (ads), and Facenda
(found to be an ad by the court).  But
then it cites Comedy III—“images of
The Three Stooges used to sell t-shirts”—which is a misrepresentation of the
items at issue, because there were also prints in that case were declared to
violate the right of publicity, even if we decide that cotton has less
preemptive force than paper; separately, the Stooges were “used” to sell
t-shirts in exactly the same way the
images of the athletes here were “used to sell” the pictures of the athletes,
but T-shirts are just different because publicity rights.  And finally the footnote cites Keller—“use of student-athlete
likenesses to sell a video game”—which is even
more
ridiculous, since the only
thing the defendants here were selling was pictures of the athletes, not extra
creative content as in Keller. [Forget it, Jake. It’s the
Ninth Circuit.
]
Takeaway: “the crucial distinction is not between categories
of copyrightable works, but how those copyrighted works are used.”  McCarthy agrees: “[A] photo archive that
merely sells reproductions of photos of athletes is not infringing the right of
publicity of the pictured athletes. Since the vast majority of athletes (both
professional and amateur) do not own copyright in such photos, they have no
right to control the mere reproduction and sale of their photos per se.”).
[Right, and that’s perfectly consistent with Keller. If you belive that, I have a bridge in the shape of an
incredibly famous person that I’d like to sell you.]  “We believe that our holding strikes the
right balance by permitting athletes to control the use of their names or likenesses
on merchandise or in advertising, while permitting photographers, the visual content
licensing industry, art print services, the media, and the public, to use these
culturally important images for expressive purposes.” [But not videogame
makers, because that would be wrong.] Subjects of photos shouldn’t get “a de
facto veto over the artist’s rights under the Copyright Act, and destroy the
exclusivity of rights that Congress sought to protect by enacting the Copyright
Act.”
That was all supposedly step one analysis—are the rights
asserted within the subject matter of copyright?  Step two (which I would argue was mostly what they were doing above) was then easy because the rights plaintiffs asserted were “equivalent to rights within the general scope of copyright
as specified by section 106.”   Plaintiffs didn’t identify “any use of their
likenesses independent of the display, reproduction, and distribution of the
copyrighted material in which they are depicted.” That’s not qualitatively
different from a copyright claim.
Here’s a thought that might allow us to make sense of
calling this §301 preemption: I’ve always been uncomfortable with the
metaphysics of claiming that the right of publicity isn’t within the scope of a
copyright claim. The mere fact that a persona, or a voice, or a face, is
uncopyrightable does not mean that it’s outside the scope of copyright.  Coverage and protection are different.  Facts and ideas are uncopyrightable, but that
doesn’t mean §301 allows states to grant anticopying protection to them. To the
contrary, preempting such claims is a core job of §301, where uncopyrightable
elements are embedded in a copyrighted work and where the right claimed is
violated merely by copying.

That leaves us with the “extra element” issue.  We know that, in general, limiting the set of
claims to a subset of copying does not provide the necessary extra element,
e.g., “commercial use,” or “intentionally.” Try this: the right of publicity
has an extra element if and only if the person’s identity is used to sell
something other than a work including a representation of that person’s
identity—that is, a classic advertising use where the advertised product is not
itself an expressive work representing the person.  I think that could work.  It would require the application of
preemption in Comedy III (what the
court here calls “merchandising”) and Keller
type cases.  But I consider that a
feature rather than a bug.

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interpreting state law narrowly, court denies bad faith patent assertion claim

Digital Ally, Inc. v. Utility Associates, Inc., 2017 WL
1197561, No. 14-2262-CM (D. Kan. Mar. 30, 2017)
The parties compete in the market for in-car video and
surveillance systems (which makes the court’s conclusion below that they’re not
competitors a bit odd—the court really seemed annoyed with the plaintiff’s
arguments, which may have led it to stampede its conclusions).  Digital Ally sued Utility for antitrust
violations, bad faith assertion of patent infringement, false advertising, tortious
interference, defamation, and trade secret misappropriation; the court granted
summary judgment in Utility’s favor.
Utility owns a patent “directed to a system for capturing,
transmitting, and storing potential evidentiary video and related information
in mobile environments which is transferred to a home base data repository for
archival, retrieval, and evidentiary use.” In 2013, Utility mailed letters to
potential customers who were at that time customers of competing suppliers
stating that it owned the patent, and that:
As your office considers the
purchase of mobile video surveillance systems for its public safety operations,
you should consider the consequences of purchasing such mobile video
surveillance systems from third parties that are not licensed under the Boykin
patent. If your office purchases mobile video systems that are covered by the
claims of the Boykin patent and that are not licensed under the Boykin patent,
[you are] liable for patent infringement as a result of [your] use of such
infringing mobile video surveillance systems. Infringement may subject [you] to
an injunction against further use of the infringing mobile video surveillance
systems and may result in an award of damages not less than a reasonable
royalty, treble damages, attorney fees, and prejudgment interest. Moreover,
Utility is entitled to collect damages directly from the user of the infringing
mobile video surveillance systems leaving [you] left with whatever value any
indemnity from the seller of the infringing mobile video surveillance systems
might be worth if the seller does not have substantial financial resources.
Therefore, in order to avoid the
adverse consequences that may result from the purchase of infringing and
unlicensed mobile surveillance systems, your office should consider purchasing
its mobile video surveillance system needs from Utility.
In June 2014, Utility issued a press release stating that it
was suing Digital for patent infringement, though it didn’t file the lawsuit
until 8 days later.  Utility’s CEO also
sent a message to Digital’s lender, Hudson Bay, stating that Utility had filed
a patent infringement suit against Digital and that he’d like to “walk over and
have a chat about what you plan to do with the Digital Ally assets if they
default on your loan. … Reasonable chance your workout team will contact me
sooner or later, so might as well start a dialogue now.” [Wow.] Hudson Bay didn’t
respond.  Digital filed a petition for
inter partes review of all claims of the patent, and the PTAB found claims 1–7,
9–10, 12–25 to be unpatentable, declining to review claim 8 and finding claim
11 not unpatentable.
The antitrust claims failed because they’re antitrust
claims.
Digital alleged that Utility sent “demand letters to Digital
customers threatening them with suit for patent infringement in bad faith and
in violation of [GA. CODE ANN. § 10-1-27A (2014) ] despite knowing that the
patent was potentially invalid and not knowing whether Digital’s products
violated the patent.” That statute prohibits any person from making a bad faith
assertion of patent infringement. It defines “demand letter” as “a letter,
e-mail, or other written communication asserting or claiming that the target
has engaged in patent infringement.” It defines “target” as any person “[w]ho
has received a demand letter or against whom an assertion or allegation of
patent infringement has been made…has been threatened with litigation or
against whom a lawsuit has been filed alleging patent infringement” or “whose
customers have received a demand letter asserting that use of such person’s
product, service, or technology infringes a patent.” If the letter does not
contain the patent number, contact information for the patent holder, and
factual allegations describing how the target is infringing the patent, the
court may consider those facts as evidence that bad faith assertion occurred. Courts
can also consider other factors, such as whether the assertion of patent infringement
is meritless, and whether the patent holder knew or should have known it was
meritless.
The court found that the Georgia law wasn’t retroactive, and
Utility’s letters were sent before it became effective.  Also, the court found that the letters weren’t
“demand letters,” because they didn’t assert current liability for patent
infringement.  [That … seems like not the
reading of the letters that Utility intended when it sent them.]  “They do not claim that any entity is
currently liable for patent infringement. They merely suggest that recipients
consider investigating whether products they are purchasing fall under the
claims of the patent, and that if so, recipients investigate whether their
supplier is licensed or needs to be.” Digital didn’t provide testimony from any
recipients explaining their interpretation of the letters.
The court also found that subjective and objective bad faith
was required to avoid a conflict with federal patent law. Under federal law, “a
competitive commercial purpose is not of itself improper, and bad faith is not
supported when the information [in the notice] is objectively accurate.” “Sending
notices can prevent an entity from later asserting a defense of lack of
knowledge in a patent infringement case based, for example, on induced patent
infringement.”  Under the Georgia
statute, if the letters were demand letters, some factors would support a
finding of bad faith, including an absence of “factual allegations concerning
the specific areas in which the target’s products, services, and technology
infringe the patent or are covered by the claims in the patent.” However, “there
was no reason for defendant to do research about whether individual letter
recipients were purchasing products covered by the patent, because the purpose
of the letter was to inform recipients of defendant’s rights under the patent
and to try to win their business.”  Lack
of pre-mailing analysis of each recipient’s products to determine whether they
were covered by the patent could also indicate bad faith, but “this factor
would more appropriately fit with the scenario where a patent holder sent
demand letters to a competitor, not a potential customer,” or if the defendant
had suggested that recipients should take a license.
False advertising: Digital argued that Utility’s letters and
press releases falsely claimed that plaintiff’s products infringed on the patent,
falsely portrayed its financial position, and falsely stated that Utility had
sued Digital for patent infringement. 
Because of the intersection with patent law, the court applied bad faith
despite the lack of a general requirement for Lanham Act false
advertising.  Again, the court found no
bad faith. “Plaintiff cites no authority suggesting that patent holders are
required to investigate whether all prospective infringers of their patent in
fact infringe, before sending out notices that they own the applicable patent
and intend to enforce their rights under it.”
Also, Digital didn’t show that Utility’s claims were false.
The letters informed recipients of Utility’s patent ownership, “include[ed]
some puffery regarding the commercial success of the patent, and warn[ed] the
recipient that they should ‘consider the consequences of purchasing [products]
from third parties that are not licensed under the Boykin patent.’” Nothing
there was false.  Nor was the press
release.  Among Digital’s objections were
the statement that Utility was “concerned that collecting a judgment resulting
from a potential successful counter-suit might be in question.”   Digital didn’t show that this expression of
concern was a false statement about Digital’s financial position.  And stating that Utility had sued, even when
that wasn’t yet true, wasn’t shown to be harmful, especially since Utility sued
shortly thereafter. 
Tortious interference claims also failed for want of malice.  And defamation claims failed because of lack
of falsity.  Trade secret claims failed
because of failure to show damages.

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Incontestability challenge raised too late, court rules

Paleteria La Michoacana, Inc. v. Productos Lacteos Tocumbo
S.A., No. 11-1623 (D.D.C. Mar. 30, 2017)
Some mention of my previous blogging on the issue, but that
doesn’t matter to the ultimate result (though the court at least notices the
incontestability problem). PLM and Prolacto sell “paletas” and other frozen
treats under similar marks. “Paletas are a style of ice cream bars and popsicles originating in
Mexico that are traditionally made from fruit, spices, and nuts.” The parties
sharply disputed first use and good/bad faith. 
The Court found that PROLACTO had the better side of that argument,
finding that “PROLACTO has demonstrated that it used its Indian Girl mark
before PLM used its LA INDITA MICHOACANA mark.” PLM argued that, through
tacking, the priority date of PLM’s LA INDITA MICHOACANA mark should be
advanced to the date that PLM first used any Indian Girl mark. PROLACTO
prevailed after the Court found that, “particularly without any evidence of
consumers’ perceptions, the Court cannot find that PLM’s LA INDITA MICHOACANA
mark meets the ‘exceedingly strict’ standard for tacking.” PROLACTO’s
unregistered Indian Girl design was confusingly similar to, and thus infringed,
PLM’s earlier, registered Indian Girl marks, but PROLACTO’s mark had priority
over LA INDITA MICHOACANA and the registration of LA INDITA MICHOACANA had to
be cancelled.
In the motion to reconsider, PLM tried to provide a legal basis
to deny PROLACTO’s cancellation petition: an equitable defense known as the “Morehouse defense” or the “prior
registration” defense.” Under this defense, the party seeking cancellation of a
mark cannot be damaged if the registrant already “owns an existing registration
for the same or substantially identically mark for the same or substantially
identical goods.”  PLM argued that this
was a standing issue, and that because PROLACTO couldn’t be damaged by the
registration of the LA INDITA MICHOACANA mark, PROLACTO lacked standing, which
was an issue not subject to waiver. “The problem with PLM’s clever argument is
that it incorrectly conflates the constitutional ‘case or controversy’
requirement with the standing requirement found in the Lanham Act.” PROLACTO
had standing under the “generous standard” of the Lanham Act, anyway—a “real
interest” in the proceedings and a “reasonable basis” for a belief of damage
(ignoring Lexmark).  PLM hadn’t preserved an argument based on the Morehouse defense.
PROLACTO also moved to amend the Court’s findings and to amend
the judgment, specifically its finding that two of PLM’s Indian Girl marks were
incontestable.  The court again found
waiver of this argument; it’s been a while since I’ve had any occasion to
consider the waiver standard, but I do think what happened reflects (1)
unfamiliarity with incontestability by courts and defendants alike and (2) the
really unfortunate consequences of failure to have better procedures on
incontestability.  I can’t know the souls
of the PLM filers, but it’s possible that really clear requirements to attest
that they were unaware of any pending cases challenging the validity of the
mark might have prevented this plainly wrong Section 15 filing.  Query: should the PTO act on its own accord
to withdraw the Section 15 acknowledgements, if it now knows the truth?
Previously, the court found that the relevant PLM Indian
Girl registrations “became ‘incontestable’ pursuant to 15 U.S.C. § 1065 on
December 12, 2014 upon PLM’s filing of Section 15 affidavits with the USPTO.”
PROLACTO didn’t assert any of the enumerated defenses to incontestability [I
think that the court means that there was nothing incontestability-specific,
because PROLACTO did seek cancellation on grounds of fraud and
abandonment].  But, the very day that PLM
filed the affidavits (which state, among other things, that there is “no
proceeding involving said rights pending and not disposed of either in the
United States Patent and Trademark Office or in a court”), there was a status
conference on this case, in which there was a challenge to the registrability
of the marks.  PLM unpersuasively argued
that “at the time PLM filed the affidavits of incontestability, there was no
pending counterclaim challenging PLM’s Indian Girl With Paleta and Indian Girl
With Cone registrations because this Court had entered summary judgment on
those claims in PLM’s favor,” even though nothing about the “proceeding” was
final, but luckily for PLM the court didn’t reach the merits because of its
waiver finding.
The court acknowledged that there is no substantive
examination of Section 15 filings, and that the TMEP states that “[t]he
question of whether the registration is incontestable arises and is determined
by a court if there is a proceeding involving the mark.”  Still, PLM repeatedly raised the incontestability
of the marks, and nowhere in this “drawn-out litigation” did it challenge the
incontestability.  A Rule 52(b) motion is
not a second bite at the apple.
PROLACTO also moved for a new trial based on newly
discovered evidence of PLM’s registration and use of the domain name
“laflordemichoacan.com.”  But its core
argument was that this registration was evidence of bad faith, given that PLM
was well aware of PROLACTO’s two marks that included the words “La Flor De
Michoacan” because of the then-pending TTAB proceeding.  However, a court should not grant a new trial
because of new evidence that is “merely cumulative or impeaching,” and PROLACTO
was arguing that the domain name made PLM’s witnesses less credible in their
testimony of good faith.  Also, this
evidence wouldn’t change the outcome.  As
the court previously ruled, if it was “to hold that PLM was not entitled to any
rights in its marks on the basis of bad faith, despite the fact that it was
first to use its marks in the United States, it would appear that the Court
would be the first to do so in the history of American trademark law.”  [Query what result should occur under Belmora.]  Even assuming that this bad faith theory was
legally valid, it concluded that PROLACTO failed to show its application to the
present facts.
Here’s the court’s explanation of the theory, which sounds a
lot like the theory blessed by Belmora:
[I]f a party adopts a mark in the
United States that has been previously used in a foreign country and engages in
various forms of advertising with the intention of benefitting from the foreign
user’s goodwill and reputation by deceiving consumers as to the true origin of
its products—even if the foreign user has never used the mark in commerce in
the United States and even if the foreign mark does not meet the requisite
level of “fame” under the famous mark doctrine—then the party cannot obtain
rights to the mark.
However, the court found that here, PLM adopted the name “La
Michoacana” because they had seen the name in Mexico, but they did not believe
that the term denoted a single source of product in Mexico. PROLACTO’s legal
theory would still be inapplicable even with the newly discovered domain name
evidence.  “Crucially, PLM did not
register the domain name ‘laflordemichoacan.com’ until after the TTAB
proceeding that preceded this action.” The registration of the domain name
occurred long after PLM’s initial decisions.

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NY class certified in “flushable” wipes case with statutory damages available

Kurtz v. Kimberly-Clark Corp., No. 14-CV-1142 et al., 2017
WL 1155398, — F.Supp.3d —- (E.D.N.Y. Mar. 27, 2017) (not effective until
April 10, 2017) (I suspect this is another way for the judge to say “get this
out of my courtroom already,” but I’ll take suggestions on what this means)
Judge Weinstein is a class action legend, and here he
expresses many of his current thoughts about the class action mechanism in the
course of certifying a New York class in this action against vendors and makers
of “flushable toilet wipes.”  Plaintiffs
alleged that, in fact, the products aren’t flushable because they clog
household plumbing.  The ideal was “to achieve a
single decision by a single court or administrative agency—preferably through a
global settlement—that fairly decides all pending disputes, forestalls future
similar disputes, and protects both consumers and suppliers.”  But the parties didn’t take that route, even
though the court indicated that this dispute “could have been readily settled
to the benefit of all parties and the public by relatively minor changes in
labeling.”
The central injury alleged here was payment of an unjustified
premium for a product misrepresented as “flushable.” Damages to plumbing
wouldn’t be covered by the class certification. 
Likewise, consumers didn’t argue that they could also bring
municipalities’ claims “as taxpayers because clogging at sewage plants
ultimately puts in danger the system to which their household disposal systems
are connected.”
The district court stayed the litigation to see if the FTC
could resolve the issue.  The FTC entered
into a final consent order with Nice-Pak, which also covered its retailers, including Costco and CVS.  The consent order had a “flexible and somewhat
amorphous definition of ‘flushability,’” to wit, “disperses in a sufficiently
short amount of time after flushing to avoid clogging, or other operational
problems in, household and municipal sewage lines, septic systems, and other
standard wastewater equipment.”  Still,
it was “a reasonable attempt to devise a national standard protective of
consumers, manufacturers and retailers.” Nonetheless, the FTC responded to the
court’s referral by stating that it would address flushability only on a case
by case basis; the FTC can’t engage in “aggregate adjudication” of claims and
didn’t intend to engage in rulemaking on this issue, though the parties could
look to the Nice-Pak consent order for the FTC’s views.  Judge Weinstein griped that consolidated
agency action with a uniform definition of flushability would have been
better.  A class-wide settlement could
also have done the job, or “industry-wide regulation through standards set by
the relevant industry association, through multidistrict litigation, or by
legislative action at the municipal, state, or federal level.”  But this has not happened, so state-by-state
litigation it is.
The court found all the requisites satisfied for injunctive
and damages classes.  Ascertainability
was satisfied even though many consumers might not have retained receipts; only
one product was at issue, and it was labeled uniformly as to the relevant
claim.  Costco had electronic records of
purchases, and anyway to require receipts would destroy most consumer
protection class actions.  Article III
standing for injunctive relief existed, despite the named plaintiff’s
unwillingness to buy again, because the product was still on sale and, “[i]f
defendant’s theory were to be accepted, it would effectively bar injunctive
classes in consumer deception cases …. That result is undesirable as a matter
of public and federal policy and practice.”
The court also approved hedonic regression as a measure of
classwide damages to show the premium for “flushable” wipes.  NY GBL §349 doesn’t require showing
individualized reliance.  Although
previously the court indicated that FTC proceedings would be “superior” to a
class action, that’s not going to happen. 
The court also previously indicated that “an award of statutory damages
could be excessive and in violation of New York State policy.”  The reason is that §349 allows statutory
damages of fifty dollars per event, but NY civil procedure bars statutory
damages in class actions unless that’s specifically authorized by the
underlying statute, which it is not for §349. 
The Supreme Court has explicitly held that Rule 23 conflicts with this
rule and prevails, making statutory damages available in federal class
actions.  On further reflection, the
court concluded that to weigh the policy conflict against certification would
“flout” the Supreme Court’s decision.  “While
disagreeing with the Supreme Court majority opinion, the district court is
bound by it.”  And the court’s initial
stay of the cases under the primary jurisdiction doctrine was no longer
supportable, given the FTC’s subsequent actions.  The Nice-Pak consent order provided “a solid
basis for settlement of all cases with but minor tweaking,” but the parties
resisted settlement.
[Scroll past the images of wipes]
Charmin label

More Charmin

Cottonelle label

Cottonelle sewer and septic safe

Cottonnelle SafeFlush technology

More Cottonelle claims

Kirkland flushable

Kirkland flushable-only one at a time claim
Kirkland “safe for well-maintained sewer and septics”

Kirkland “not recommended for motor homes/basement pumps”

A few specifics about particular brands: P&G offers full
reimbursements to consumers who claim that Freshmates caused a clog, including
a full refund of the purchase price and a “goodwill” reimbursement of up to
$250 if the consumer complains that Freshmates caused plumbing damage. Freshmates
packaging provides a toll-free customer service telephone number, but no
information about P&G’s refund policies. Costco also offers its customers a
full refund—no questions asked—if they are not 100% satisfied, but the phone
number provided on the packaging is the phone number for the manufacturer,
Nice-Pak. Nice-Pak sometimes reimburses a complainant for reasonable plumbing
costs upon receipt of documentation from the customer, but the packaging
doesn’t disclose this refund policy.  Kirkland’s
wipes are probably better labeled than the others in that, while other brands
suggest using up to two wipes before flushing, Kirkland states “NEVER FLUSH MORE
THAN 1 WIPE AT A TIME” and also claims “Safe for Well-Maintained Sewer &
Septics*” with a warning “*NOT RECOMMENDED FOR USE IN MOTOR HOMES OR WITH
BASEMENT PUMP SYSTEMS.”
Defendants argued that what “flushable” meant to consumers
couldn’t be decided on a classwide ebasis because of variability in the
definitions.  One of their experts deemed
a golf ball “flushable”; P&G committed to “it will not cause problems in
their home system.”  Kimberly-Clark and
Costco argued that “flushability” had to be determined individually. All
defendants followed the guidelines of the Association of the Nonwoven Fabrics
Industry in their labeling.
The court found that the meaning of flushability was subject
to classwide proof, but strongly suggested that a study of New York consumers
was warranted. Regardless, “[t]ypically … where the consumer protection
statute at issue supplies an objective test, such claims are considered ‘ideal
for class certification’ because they allow the court to adopt classwide
presumptions of reliance and do not require an investigation into ‘class
members’ individual interaction with the product.’ ”  Unlike a case in which the impact of the
phrase “The Better Vitamin C”—akin to puffery—couldn’t be disentangled from
other non-misleading representations on the label, flushability was
sufficiently distinctive that it could be isolated from other label claims.
The common questions:
(1) What do defendants’ “flushable”
representations mean to a reasonable consumer?
(2) Do defendants’ products currently
satisfy that meaning?
(3) Did previous iterations of
defendants’ products satisfy that meaning?
(4) Are defendants’ “flushable”
representations materially misleading?
(5) Did class members pay an
unsupported premium as a result of the “flushable” representation?
(6) Was that premium—to the extent
that it can be reasonably ascertained—relatively uniform?
Defendants argued that payment of a price premium “depends
on the purchaser’s individual experience with the product after purchase.”  But that’s not the right injury in a false
advertising case, which doesn’t depend on individual reliance or whether the
product met consumers’ personal, subjective expectations. The fact that some
“consumers were satisfied with the product is irrelevant” if the advertising
was likely to mislead a reasonable consumer.
The court also found typicality satisfied. Defendants argued
that Kurtz continued buying the wipes—and refrained from flushing them—after he
no longer believed the wipes were “flushable,” making him subject to a unique “voluntary
payment” defense. It was unclear whether his subjective belief that the wipes
should not be flushed constituted “full knowledge of the facts” so that this
defense applies. There was also no evidence that Kurtz’s purchases were ever
made with “full knowledge” that he was paying a premium price for the
“flushable” representation.  Even if the voluntary
payment defense applied to any person who purchased wipes and did not flush
them, typicality would still not be defeated, because, according to defendants,
many consumers who purchased wipes did not flush them. The individual
circumstances related to his plumbing also didn’t matter since his claims were
based on the price of the wipes.
As for Rule 23(b)(2) injunctive class status, plaintiffs wanted
the products to “either be relabeled or taken off the market.”  Some courts (including the Second Circuit)
require plaintiffs to demonstrate that a (b)(2) class is “cohesive” and
“necessary.” Cohesiveness is similar to commonality, and necessity reflects
that certification is not always required to get relief that runs to the
benefit of others similarly situated to the named plaintiff.  Judge Weinstein commented that “[t]hese
additional case law interpretive requirements to Rule 23 are unjustified in
light of the detailed legislative attention to Rule 23, which does not contain
them,” but regardless, cohesiveness and necessity were present. 
Defendants argued that injunctive relief would be “prudentially
moot” because the FTC has already provided the plaintiffs with all the relief
they could be accorded through an injunction, given the FTC’s decisions to
enter into a consent order with Nice-Pak and to close its investigation of
Kimberly-Clark. The FTC’s actions allegedly established that the products now
on the market as packaged definitely do not contravene law, and Costco’s
agreement with the FTC meant that it “voluntarily ceased” any past illicit
conduct. “Prudential mootness doctrine often makes its appearance in cases
where a plaintiff starts off with a vital complaint but then a coordinate
branch of government steps in to promise the relief she seeks.” However, the
mere promulgation of an informal definition of “flushable” wasn’t adequate
relief. The FTC’s investigation of P&G was ongoing, so it was too soon to
say whether Freshmates even met that vague definition. The FTC’s letter on the
closed investigation on Kimberly-Clark no expressly stated that the closure “is
not to be construed as a determination that no violation has occurred.” Costco,
whose wipes were subject to the Nice-Pak Final Consent Order, had the strongest
mootness argument, but a promise made to an administrative agency to do
something—or to refrain from doing something—didn’t assure that no violation
occurred or will occur or that the effects of any past violation had been
completely and irrevocably eradicated. “There is too much money at stake for
plaintiffs to assume defendants will do ‘the right thing’ in a relabeling that
might reduce sales and profits.” Moreover, the consent order didn’t provide the
relief Kurtz was actually seeking: a change in the label or removal of the
product from the market.
Turning to Rule 23(b)(3), this too was satisfied.  On predominance, defendents argued that some
consumers “consistently flushed without problem” and therefore could not “have
been deceived” by the “flushable” label. But there’s the price premium issue
again. The question of whether the products didn’t disintegrate “for some
individuals goes solely to the merits; it has no relevance to the class
certification issue.” Nor did materiality require individual proof, because “individualized
proof of reliance is not necessary” for § 349 claims. Materiality to a
reasonable consumer’s decision to purchase “is an objective inquiry that
focuses on that packaging.”
It was also common sense that “flushability” was “a valuable
characteristic that producers include on their labels with the expectation that
it will allow them to extract a higher price for the product. Internal company
documents make it clear that flushability is the raison d’être for this market
niche.” Testimony from company executives confirmed this importance.  All three companies expended significant
resources to improve “dispersibility” of the wipes once flushed.  “It is impossible to accept the argument that
these companies would make this investment to gain or improve flushability
without expecting a reasonable financial return.”
The single question of whether plaintiffs paid more than
they would have for the good because of the deceptive flushability label
predominated over any individualized damages inquiries. This was especially
true because the battle of experts on the magnitude of any price differential
was “largely beside the point,” because once the fact of injury was
established, statutory damages could be calculated classwide: $50 to each class
member for each time defendant violated the statute by a sale.  Individualized issues of physical plumbing
damages would be tried on an individual basis, not as part of the class action,
and any such potential recoveries were likely to be de minimis as compared to
the class recovery.
Superiority: defendants argued that their refund programs
were superior, providing faster compensation with lower transaction costs than
a class action. But statutory damages were a more effective remedy for most
class members than a simple refund. “[T]he uncertain prospect of some class
members recovering money for plumbing damages—which is likely to be a de
minimis sum—does not make the refund program superior to a class action.” Also,
given the failure to advertise that the companies were willing to reimburse
consumers for plumbing expenses incurred allegedly due to use of their
products, any potential recovery of plumbing damages that could inure to class
members through a refund program was “somewhat illusory,” as compared to a
class action remedy. A remedy that consumers don’t know about can’t be
superior.  Nor was FTC action superior,
given the limited possibility of further action.

As for Kurtz’s common law claims of negligent
misrepresentation, breach of warranty, and unjust enrichment, though, common
questions of law or fact didn’t predominate because individualized proof would
be necessary to demonstrate each purchaser’s reliance on defendants’ alleged
misrepresentations.

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