Insert scatological pun here: cities’ lawsuit over flushable wipes mostly continues

Posted on October 4, 2016 by rtushnet
City of Wyoming v. Procter & Gamble Co., 2016 WL
5496321, No. 15-2101 (D. Minn. Sept. 28, 2016)
“Hygienic wipes labeled and sold as ‘flushable’ have caused
and are continuing to cause increased costs and property damage to the
governmental entities that operate sewer systems and water treatment
facilities.” Municipalities in Minnesota and Wisconsin sued over the costs and
property damage they say they have suffered due to false advertising of “flushable”
wipes. The court allowed some of their claims to proceed.
Plaintiffs alleged that each defendant represents that its
respective wipes are “flushable.” Some, like Cottonelle, made additional claims
such as “Sewer and Septic Safe” and “break up like toilet paper after flushing.”
Defendant Tufco allegedly made “flushable” wipes for private label
customers.  Plaintiffs alleged that
approximately 25% of their sewer clogs could be attributed to flushable wipes
clogging pipes.  Further, they alleged
that defendants were members of the Association of Nonwoven Fabrics Industry (INDA),
a trade association that created “Guidelines for Assessing the Flushability of
Disposable Nonwoven Products.” Defendants, through their membership in INDA,
allegedly “manipulated [INDA’s] test standards and guidelines making them
weaker to guarantee [Defendants’] products could be marketed as ‘flushable’
under the INDA guidelines.”

Standing: defendants argued that plaintiffs didn’t detail
exactly how defendants caused their injuries.  
It was enough for the municipalities to explicitly make allegations that
they are injured by wipes marketed as flushable, that defendants each produce
and sell these “flushable” wipes, and that it is “Defendants’ continued sale
and promotion of wipes as ‘flushable’ and ‘sewer and septic safe’ ” that has
caused and is causing Plaintiffs’ injury.” The court here distinguished Wallace
v. ConAgra Foods, Inc., 747 F.3d 1025 (8th Cir. 2014), in which plaintiffs
alleged that not all Hebrew National hot dogs were 100% kosher, as ConAgra had
advertised. The Eighth Circuit found that because plaintiffs had not alleged
that they themselves had actually purchased or consumed any defective
non-kosher hot dogs, plaintiffs had not pleaded an injury for standing
purposes.  But, unlike Wallace, this wasn’t a manufacturing
defect case.  The municipalities weren’t
arguing that some poorly-made subset of flushable wipes was responsible for
their injuries, but that falsely advertising an entire class of wipes as
flushable harmed them.  The Wallace plaintiffs “never claimed to
have actually come into contact with the offending non-kosher hot dogs, while
Plaintiffs here have repeatedly alleged that not-actually-flushable ‘flushable’
wipes are clogging their water treatment facilities.”  Defendants’ manipulation of INDA also
plausibly caused the municipalities an injury.
Nor was it fatal that clogs can be traced to numerous
different causes.  “A plaintiff is not
deprived of standing merely because he or she alleges a defendant’s actions
were a contributing cause instead of the lone cause of the plaintiff’s injury.”
Article III standing is not proximate causation.  Flushable wipes allegedly caused one in four
clogs, which was enough for standing. 
Plus, the municipalities plausibly alleged a risk of future harm, which
couldn’t be accompanied with a perfectly detailed causal chain. The court did
find that plaintiffs couldn’t proceed with a Declaratory Judgment Act claim
because it wasn’t a real claim.
But more importantly, breach of warranty and consumer
protection claims survived. Breach of warranty: In Minnesota, “where a
third-party suffers property damage from a product, that person may constitute
a third-party beneficiary even if the party never used, purchased, or otherwise
acquired the product,” and that was properly alleged here.  Defendants argued that plaintiffs’ claims
were time-barred by the four-year statute of limitations, since the wipes have
been on the market since at least 2008. 
But the warranty at issue here, that the wipes are actually flushable,
“extends to future performance of the goods” – the flushing of the wipe. The cause
of action does not accrue until the date “the breach is or should have been
discovered,” which is no earlier than the date the consumer flushes the wipe
down the toilet. Thus there was no time bar “for at least a great portion of
the wipes that are allegedly clogging and will clog Plaintiffs’ sewer
systems.”  Nor was there a failure to
provide pre-suit notice, as required by Minnesota law.
Express warranty: Minnesota, adopting the UCC, takes the
position that: “In actual practice, affirmations of fact made by the seller
about the goods during a bargain are regarded as part of the description of
those goods; hence no particular reliance on such statements need be shown in
order to weave them into the fabric of the agreement.” The wipes say
“flushable”; this affirmation of fact was woven into the fabric of the
agreement.
Implied warranty of merchantability: Defendants argued that
a reasonable person might think a wipe was “flushable” as long as it passed
through their toilet’s piping.  But the municipalities properly alleged that
the defendants described their wipes as safe not just for toilets, but also for
wastewater treatment facilities. “A reasonable person would undoubtedly expect
that a product represented to be safe for sewer systems actually be safe for
sewer systems – not just for the consumer’s own piping.”  However, the court dismissed claims based on
the implied warranty of fitness for a particular purpose.
Minnesota consumer protection statutes: the municipalities
weren’t purchasers, but the state law doesn’t require them to be.  Grp. Health Plan, Inc. v. Phillip Morris Inc.,
621 N.W.2d 2 (Minn. 2001) (“[T]o state a claim that any of the substantive
[consumer protection] statutes has been violated, the plaintiff need only plead
that the defendant engaged in conduct prohibited by the statutes and that the
plaintiff was damaged thereby.”)  Nor did
Minnesota’s deceptive trade practices statute require competition between the
parties.  Lexmark was persuasive, but not state law, “and cannot overcome the
text of Minnesota’s statute: Plaintiffs ‘need not prove competition’ in Minnesota.
Minn. Stat. § 325D.44, subd. 2.”
The Wisconsin Tort Reform Act didn’t defeat these claims
either.  The legislature was trying to
bar plaintiffs from recovering “even when a plaintiff could identify only a
class of products, made and sold by a class of companies, as the source of the
plaintiff’s injury.” The plaintiff in a product liability case must therefore “prove
that the defendant is associated with ‘the specific product alleged to have
caused the claimant’s injury or harm.’”  There were no cases interpreting the statute.
Nonetheless, the court declined to dismiss most of the
claims. First, the Tort Reform Act was a burden of proof rule, not a pleading
rule.  Under Twiqbal, plaintiffs’ complaint satisfied the Act’s requirements;
they alleged injury by the specific wipes produced by these defendants. The
municipalities also alleged that they could determine which wipes were in which
particular plaintiff’s wastewater treatment facilities. “[I]t is a close
question whether it is plausible that each and every specific product is
causing each and every plaintiff harm – but when examined on a product by
product basis, it is plausible that each product has been sold to customers in
the vicinity of Plaintiffs’ sewer systems and has entered their piping and caused
them the harm that they allege to have taken place.”
Plaintiffs also pled a public nuisance claim.  In Wisconsin, a public nuisance is “a
condition or activity which substantially or unduly interferes with the use of
a public place or with the activities of an entire community.” The allegations
that defendants’ products were drastically increasing the cost of water
treatment facilities, and that these facilities were used to clean the water
for the public health, were sufficient. Defendants’ main argument was that they
weren’t responsible for the literal clogs, but rather the allegedly inadequate
or false warnings that indirectly led to the clogs.  But Wisconsin didn’t require direct
causation, only that the defendant (1) had “either actual or constructive”
notice of the alleged public nuisance, and (2) failed to “abate” the public
nuisance causing the plaintiff’s injury.  Representing that wipes were flushable could
be a covered nuisance “activity.”

Tufco brought a separate motion to dismiss. Because it makes
wipes for private label customers and is “apparently not a consumer-facing
company,” tracking Tufco’s responsibility was more difficult. Still, plaintiffs
did allege that Tufco “clearly advertises ‘flushable’ wipes for its consumers”
on its website, and it was more than plausible to suggest that this claim
mattered to private label customers. 
However, for Wisconsin claims, the Tort Reform Act required more.  Plaintiffs needed to allege that Tufco made
wipes for a specific company, and that those wipes caused them harm.

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Lumps in materiality survey fail to justify its exclusion

Posted on October 3, 2016 by rtushnet
Select Comfort Corp. v. Tempur Sealy Int’l, Inc., No.
13-2451, 2016 WL 5496340 (D. Minn. Sept. 28, 2016)
The court resolves various motions surrounding expert
testimony in this false advertising case about the effects of certain
comparative claims on Select Comfort Sleep Number mattress sales.  The claims were made mostly through the flyer
below, though also allegedly through statements from salespeople, the latter including
that Sleep Number beds develop mold and that defendant Mattress Firm chose to
stop selling Sleep Number due to quality issues.
flyer

In 2013, the Court granted a TRO enjoining Mattress Firm
from making various representations to consumers regarding Select Comfort and
its products, but lots of issues remain.
For one thing, the court allowed testimony about calculation
of profits to stay in, because disgorgement may be an available remedy even
though the court previously granted summary judgment against Select Comfort on
the issue of willfulness.  Whether
disgorgement is available without willfulness is an issue of law reserved for
later.  However, the court excluded
testimony about Tempur-Pedic’s total profits from sales of products other than
Tempur-Choice, the subject of the comparative ads at issue:
Tempur-Choice is the only
Tempur-Pedic product with the same feature as the Sleep Number bed—the ability
to separately adjust mattress firmness on either side of the bed.
Tempur-Pedic’s other mattress lines (not air-adjustable) vary greatly to the
extent that they offer different features and sell at different prices. An
accounting of profits under the Lanham Act is intended to award profits on
sales that are attributable to infringing conduct. While under a disgorgement
model Plaintiff must only prove Tempur-Pedic’s sales, those sales must be of the
allegedly falsely advertised products.
The court also excluded a lost profits calculation based on
comparing Select Comfort’s sales at stores near defendant Mattress Firm stores
versus sales at stores not near Mattress Firm stores.  Because the expert didn’t distinguish between
Mattress Firm stores where the salespeople made the statements at issue as part
of an organized campaign of disparagement from Mattress Firm stores where there
was no evidence of such statements, the damages model was inappropriate
bootstrapping: it assumed liability to prove liability.  Nor did the model appropriately account for
other differences between stores, such as the amount of local advertising
Select Comfort invested in.
Hal Poret conducted a survey for Select Comfort.  One group was used to test the materiality of
three statements Mattress Firm sales representatives made with regard to Sleep
Number beds; another group was questioned about the flyer or a control version
of the flyer that didn’t use “hammocking” imagery or claim that Select Comfort
used “commodity foam.”  The flyer groups
were asked what they understood the flyer to communicate, such as a comparison
between Tempur-Choice and Sleep Number beds. The survey used open-ended
questions about what the flyer communicated, then questions about specific
sections of the flyers such as as “commodity memory foam” and the “hammocking”
imagery. Respondents were then shown the flyer and asked about specific parts,
with the specific parts marked with a red box, e.g., “What, if anything, does
this phrase (with a red box around it) communicate to you about SLEEP NUMBER
beds?” and followups about why the statement was negative or positive
(depending on the respondent’s answer) and whether it would affect their
purchase intentions.
 

survey flyer with check marks
Poret concluded, based on the closed-ended question, 44% of
the test group respondents understood the phrase “commodity foam” to
communicate something negative, and 31% of the test group respondents answered
that the phrase “commodity” memory foam would make them less likely to purchase
a Sleep Number bed. In the closed-ended question, 27.5% of the Test Group
respondents answered that that Sleep Number beds allow hammocking, and 55%
answered that this section of the ad would negatively impact their likelihood
of purchasing a Sleep Number bed.  

Poret also tested statements allegedly made by Mattress Firm sales associates
that: (1) the store stopped selling Sleep Number beds because too many
customers returned them; (2) the store stopped selling Sleep Number beds
because too many customers had problems with them; and (3) Sleep Number beds
develop mold.  Poret also asked about
additional statements aimed at being “control statements.”  Poret concluded that the test statements were
“highly material” because high percentages said that the test statements would
influence their decisions.  Respondents
also said that the control statements would influence their decisions to
various degrees, averaging 14%, which he counted as the relevant noise.  Even after subtracting 14% from the test
question results, he concluded that the results still “strongly indicate[d]”
that the statements or substantially similar statements were material.
Defendants challenged the survey for having an overinclusive
sample population: any individual who purchased any memory foam or adjustable
air/memory foam mattress in the past two years, or who planned to purchase any
memory foam or adjustable air/memory foam mattress in the next two years. Poret
did not limit his sample population to those who purchased or planned to
purchase mattresses within the relevant price range, and didn’t control for
current owners of the parties’ products.  Further, defendants argued the survey didn’t
approximate actual market conditions because of the other information consumers
would have encountered in the marketplace and because it forced them to pay
attention to and understand the challenged claims, which might not have
otherwise happened, especially since Poret circled the challenged claims with
red boxes (which has a negative connotation). 
The court found that none of these criticisms merited excluding the
survey, especially given the presence of a control group.
Mattress Firm also challenged Poret’s use of specific
statements to test materiality, arguing that its salespeople didn’t say those
exact things.  “Mattress Firm can
question Poret about his choice of test statements and a jury can decide how
much, if any, weight to afford the survey based on that, and other factors.”  Defendants’ own experts could also criticize
Poret for not including other factors that might influence mattress purchases.
A defendant expert witness on polyurethanes, however, didn’t
have relevant expertise to testify on the meaning of “commodity foam” to
consumers:

Here, there is no evidence that
Defendants consulted any expert to determine the meaning of “commodity” before
creating their advertisement, and it appears that Fogg’s testimony on this
point is being offered as an after-the-fact explanation for a marketing
decision. Fogg is a polyurethane expert, not a marketing expert, and he has no
particular qualification that would allow him to opine on how a consumer would
perceive the meaning of the advertisement. 

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Migration of false/misleading divide into consumer protection claims continues in infant formula class action

Posted on October 3, 2016 by rtushnet
Hasemann v. Gerber Prods. Co., 2016 WL 5477595, No. 15-CV-2995
(E.D.N.Y. Sept. 28, 2016)
In this putative class action, the plaintiffs alleged that Gerber’s
advertising and marketing misrepresented that its Good Start infant formula
reduces the risk that infants will develop allergies, and also misrepresented
that the Infant Formula was the first and only infant formula that the FDA
endorsed to reduce the risk of infants developing allergies.
In 2009, Gerber asked the FDA to approve a qualified health
claim that “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 1st year of life and up to 3 years of age.”  The FDA found that this claim was misleading,
but proposed four alternative qualified health claims, including a qualifying
statement: “Partially hydrolyzed formulas should not be fed to infants who are
allergic to milk or to infants with existing milk allergy symptoms. If you
suspect your baby is already allergic to milk, or if your baby is on a special
formula for the treatment of allergy, your baby’s care and feeding choices
should be under a doctor’s supervision.”
The statements plaintiffs challenged were: “1st & only
routine formula to reduce the risk of developing allergies,” “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,” and similar
claims.  Plaintiffs alleged two
misrepresentations: (1) that the formula reduced allergy risk, and (2) that the
formula met the criteria for an FDA qualified health claim for atopic
dermatitis. Plaintiffs alleged that several scientific studies have concluded
that partially hydrolyzed whey protein does not lower the risk that infants
will develop allergies.  Further, they
alleged that Gerber’s actual statements weren’t one of the four qualified
health claims that the FDA approved and, in addition, didn’t include the
required qualifying statement.
The FDA sent a warning letter to Gerber about the formula’s
advertising, noting that it found the labeling misleading and that it had
“previously considered and denied” the statement on the label that it was the
“1st & only routine formula to reduce risk of developing allergies.” Consistent
with the FDA’s four proposed qualified health claims, Defendant’s labeling and
website both stated that there was “limited evidence” that partially hydrolyzed
whey protein can reduce the risk of infants developing atopic dermatitis, but the
warning letter concluded that by failing to include the qualifying statement
required by the FDA, Gerber failed to provide “essential information necessary
to ensure the safety of consumers,” and so the labeling was misleading.  The FTC sued Gerber, alleging that the two
claims at issue here were false, misleading, and, for (1), unsubstantiated.
The court first declined to wait for the FTC under the
primary jurisdiction doctrine.  Plaintiffs’
false advertising claims didn’t involve technical considerations within the
particular expertise of either the FDA or the FTC.   There was no need to wait for an
investigation to conclude, because the FTC had already sued.
However, plaintiffs lacked Article III standing to seek
injunctive relief because they didn’t allege any intent to buy the formula in
the future.  (Hey, with respect to
formula in particular, why isn’t this “capable of repetition, yet evading
review,” given its close connection to infant development and the fact that all
consumers will age out of the product fairly quickly?  If there was standing in Roe v. Wade, it would
seem also justified here.)
The court then ruled that, given state precedent, Wisconsin
Deceptive Trade Practices Act § 100.18, which “generally prohibits false,
deceptive, or misleading representations or statements of fact in public
advertisements or sales announcements,” didn’t cover food, but only “real
estate, merchandise, securities, service or employment”; an intermediate state
court previously held that “merchandise” doesn’t mean “food” here because a
different section of the law specifically mentions food and doesn’t provide for
a private right of action.
However, § 100.20(2)(a) authorizes the Wisconsin Department
of Agriculture, Trade and Consumer Protection “to ‘issue general orders
forbidding methods of competition in business or trade practices in business
which are determined by the department to be unfair.’ ” “Section 100.20 also
authorizes a private right of action,” permitting “[a]ny person suffering
pecuniary loss because of a violation by any other person of any order issued
under this section [to] sue for damages ….” And, pursuant to this authority,
the department has issued a general order requiring food sold in Wisconsin to
be labeled in compliance with FDA rules. 
Here, the FDA has found that the labeling at issue was misleading.
Gerber argued that the FDA had closed its investigation,
making the warning letter irrelevant. 
Gerber relied on a 2015 letter stating that the FDA has completed “an
evaluation” of Defendant’s “corrective actions in response to [the FDA Warning
Letter]” and that it “appears that [Defendant] addressed the violations
contained in [the FDA Warning Letter].”  The court wouldn’t consider this letter on a
motion to dismiss.
Gerber also argued that plaintiffs were bringing a mere lack
of substantiation claim, not a misleadingness/falsity claim, which they
couldn’t do as private plaintiffs. Gerber contended that its qualified health
claim wasn’t literally false because the FDA determined that its
representations regarding atopic dermatitis were “generally consistent” with
the qualified health claims proposed by the FDA, and that the FDA found that
there was some scientific support for its qualified health claim.  But plaintiffs were claiming misleadingness,
not literal falsity, because of the absence of the qualifying statement
required by the FDA.
Plaintiffs also alleged that the allergy risk reduction
claim was false because the FDA determined in 2006 that there was no scientific
evidence to support the claim and because a 2011 scientific study contradicted
Gerber’s claim. That was sufficient to allege falsity.
Likewise, the misleadingness of the FDA endorsement claim
was sufficiently alleged, which was enough under Florida law—but it wasn’t
enough for Wisconsin law, which the court found to require literal falsity.
(This seems like an extreme overreading of Wisconsin law’s reference to
“falsity” to me—a falsehood can be express or implied, and Wisconsin doesn’t
explicitly limit its coverage to “explicitly false” claims, nor is there a good
policy reason for it to have chosen to do so.) 
Gerber also invoked the awful In re GNC Corp. case, where the Fourth Circuit held that “in order to
state a false advertising claim on a theory that representations have been
proven to be false, plaintiffs must allege that all reasonable experts in the
field agree that the representations are false.” The court here distinguished GNC because, in GNC, “there was some credible scientific evidence supporting the
allegedly deceptive representations,” but plaintiffs alleged that there was no
credible scientific evidence supporting Gerber’s allergy risk reduction claim.
“[F]actual disputes about whether the scientific evidence actually disproves
the qualifying health claim, or whether there is mere scientific debate
regarding the qualifying health claim, cannot be resolved by the Court on a
motion to dismiss.” Anyway, whether there was some scientific support was
relevant to explicit falsity, but not to misleadingness.
Finally, this was not a lack of substantiation claim.  “Under Florida law, a claim that a
representation is false or misleading because it has been disproven or
contradicted by scientific evidence is not a lack-of-substantiation claim.”  Plaintiffs alleged that Gerber’s qualified
health claim was misleading without the qualifying statement, and that the
allergy risk reduction claim was literally false because it was contradicted by
all of the credible scientific evidence: that was more than lack of
substantiation.
Plaintiffs also properly alleged causation under Florida’s
Deceptive & Unfair Trade Practices Act, which didn’t require actual reliance
but only that an objective reasonable person would have been deceived.  For other Florida and Wisconsin claims,
plaintiffs needed to allege justifiable reliance, which they did—reliance is
unreasonable if they had notice of facts which would have told them the truth,
but that didn’t appear from the pleadings.

Plaintiffs’ price premium theory also sufficiently alleged
damages.  Plaintiffs don’t have to plead
the price of comparable products to allege that they paid more than the product
was worth. 

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Failure to disclose expiration date when existence of expiration is disclosed isn’t misleading

Posted on October 3, 2016 by rtushnet
Cline v. TouchTunes Music Corp., 2016 WL 5478432, No. 14
Civ. 4744 (S.D.N.Y. Sept. 29, 2016)
A couple of general points from this state law class action
over a music service: GBL Section 349 makes unlawful “[d]eceptive acts or
practices in the conduct of any business, trade or commerce or in the
furnishing of any service in this state,”
and GBL Section 350 has similar wording for false advertising.  Neither named plaintiff resided in New York
or alleged that she accessed TouchTunes’ services or used a TouchTunes jukebox
in New York. 
The New York Court of Appeals has held that the transaction
in which consumer is deceived must occur in New York for these provisions to
apply. But the court’s analysis didn’t turn on residency “because the statute
neither was intended to police out-of-state transactions by New York companies
nor to bar out-of-state plaintiffs with claims based on New York transactions.”  The Second Circuit has subsequently focused
on where the relevant transaction took place, since there’s no per se bar on
out-of-state plaintiffs.
For app and credit card users, TouchTunes processes customer
payments in New York, where it’s based. Plaintiffs also alleged that TouchTunes’
music servers were in New York. The TouchTunes Terms of Use Agreement provides
that “any dispute between [the user] and TouchTunes will be governed by the law
of the State of New York” and that those disputes must be brought in New York
state or federal courts.  It was a fair
inference that the users’ music selections were transmitted electronically to
TouchTunes’ New York servers. Thus, the court would consider New York claims
based on use of the TouchTunes App and the purchase of credits at jukeboxes by
use of credit cards, but not to cash users of TouchTunes jukeboxes.  For cash users, “the ultimate recipient of
their out-of-state payments, a governing law-choice of forum provision in a
“click-wrap” agreement on out-of-state electronic jukeboxes, and the location
of TouchTunes’ servers” weren’t enough to justify the application of New York
law.
Under §349, plaintiffs brought claims of three separate
misleading acts: that (1) App users were not refunded for unplayed songs even
though TouchTunes has the technical capability to do so, (2) TouchTunes failed
to disclose that venue owners were able to skip paid-for songs and that the
Terms of Use were misleading as to this fact, and (3) TouchTunes misled App
users by failing to disclose the expiration dates of credits purchased through
the App.
(1) failed because a refusal to refund credits wasn’t in and
of itself misleading; plaintiffs didn’t allege facts to suggest that they
reasonably expected such a refund, and TouchTunes Terms of Use stated that
refunds wouldn’t be issued for unplayed songs “under any circumstances.” That
might be distasteful, but it wasn’t deceptive or misleading.
(2), however, was a legitimate claim.  Although the complaint alleged that
plaintiffs witnessed bartenders or managers at TouchTunes-equipped venues skip
songs in the TouchTunes queue, that fact doesn’t mean that a reasonable consumer
would be well aware that their songs might be skipped. The Terms of Use
disclosed generally that songs may not play and that consumers will not receive
a refund “under any circumstances.”  But
that disclosure didn’t indicate that venue owners could deliberately skip songs,
instead stating that songs might not play due to “factors, including the
inherent unreliability of the Internet” or the “inaccessibility or technical
failure of my TouchTunes.” This language could plausibly have led reasonable
consumers to believe that the only reason songs wouldn’t play was because of
technical failures beyond any party’s volitional control.

(3) also failed because the Terms of Use didn’t say or
suggest anything about the expiration time period was, just that expired
credits wouldn’t be usable.  “Where
customers were made aware of the fact that credits will expire but were given
no indication of the length of the expiration period, they cannot claim to have
been misled.”

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Failure to reevaluate at summary judgment leads to fee award in false advertising case

Posted on October 3, 2016 by rtushnet
Design Resources, Inc. v. Leather Indus., 2016 WL 5477611,
No. 10CV157 (M.D.N.C. Sept. 29, 2016)
After defendants Leather Industries (LIA) and Ashley
Furniture prevailed
in this false advertising case, they sought a fee award.  The Fourth Circuit applies the Octane Fitness standard in Lanham Act
cases: exceptional cases deserving fee awards are those “ ‘that stand[ ] out
from others with respect to the substantive strength of a party’s litigating
position (considering both the governing law and the facts of the case) or the
unreasonable manner in which the case was litigated.’ ” More specifically,
courts consider whether
(1) there is an unusual discrepancy
in the merits of the positions taken by the parties, based on the
non-prevailing party’s position as either frivolous or objectively
unreasonable, (2) the non-prevailing party has litigated the case in an
unreasonable manner; or (3) there is otherwise the need in particular
circumstances to advance considerations of compensation and deterrence.
Something less than bad faith is required; “[r]elevant
considerations include[ing] economic coercion, groundless arguments, and
failure to cite controlling law.”
Here, DRI argued that its claims survived early motions and
were only dismissed at summary judgment, and thus weren’t frivolous or
objectively unreasonable.  LIA argued
that DRI should have known that it couldn’t prevail with the evidence gathered
during discovery.  Ashley pointed out
that, on appeal, the Fourth Circuit described DRI’s literal falsity by
necessary implication claim as “confounding,” requiring the court to accept
that the ad meant the opposite of what it said. 
DRI responded that it failed to prevail because it didn’t show
misleadingness, but that didn’t make its claim groundless.  However, “the Lanham Act provides for an
award of attorneys’ fees when the conduct of the litigation becomes
unreasonable over time.” A plaintiff is thus “obligated to continually assess
the strength of its claim throughout the litigation.”
The court found that the case began as an objectively
reasonsble claim; DRI could have thought it was a target of Ashley’s ad against
suppliers “using leather scraps that are misrepresented as leather.”  However, discovery failed to show literal
falsity or misleadingness.  DRI’s own
evidence didn’t show any consumer confusion, and that changed the context of
the case.  Thus, fees should be awarded “as
a result of Plaintiff’s failure to continually assess the substantive strength
of its litigation position, particularly by the conclusion of discovery.”
Defendants also argued that DRI litigated the case in a
needlessly aggressive way.  However, “conduct
triggering relief must go beyond an aggressive litigation strategy.”  But deterrence goals supported a fee award:
litigants should know not to pursue their claims “when the claim has fallen
apart following discovery due to a lack of supporting evidence.”

Thus, the court awarded fees of $274,036 to Ashley and
$250,676 to LIA on the Lanham Act claims, and commented that it would have
reached the same result under North Carolina law (for the coordinate state law
claims).

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Right of publicity/passing off blast from the past

Posted on September 29, 2016 by rtushnet

From The Spirit of the Times, May 21, 1845

“Gen. Tom Thumb’s father brought suit in Paris, against the manager of a theatre, who announced a play called Tom Pouce, (Thumb,) while the General was exhibiting himself at another place. The tribunal decided in favor of the General, the name of Tom Pouce had to be removed from the bills, and the manager paid the costs of suit. The piece was produced as ‘Tom Pouff’ afterwards.”

H/T Zach Schrag

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when are state law unfair competition claims preempted?

Posted on September 29, 2016 by rtushnet
Duer v. Bensussen Deutsch & Associates, Inc., 2015 WL
11256568, No. 14-CV-01589 (N.D. Ga. Jul. 8, 2015)
Very broad preemption finding makes me blog this older case
that popped out of Westlaw.  Duer makes
medicine dosage adherence tools suitable for affixing to pill bottles. The
product has seven slides, each representing a day of the week, and a user moves
a slide each day she takes a pill.  Duer claimed
rights in the trademark “Take-n-Slide”; a utility patent; and copyright in the
insert sheet packaged with her product.  Defendants allegedly copied Duer’s product and
package insert sheet, which she discovered when one of their customers
contacted her, believing that they’d received her product.
Duer properly alleged non-functionality by identifying  several non-functional elements, including
the particular shape of the product, the vertical arrangement of the days of
the week, and the chosen color scheme. “The existence of a utility patent which
contains claims that may include the above elements does not change the
analysis.” The utility patent was strong but not conclusive evidence of
functionality; she was entitled to try to meet her “heavy” burden of showing
nonfunctionality. Duer also properly pled secondary meaning, with details about
her ad expenditures, how long she’d advertised, and at least one instance of
actual confusion as well as intentional copying.
However, the court dismissed Duer’s claims for false
advertising and unfair competition. 
False advertising: the product insert allegedly actually displayed Duer’s
product.  However, this wasn’t “commercial
advertising or promotion,” because it wasn’t disseminated to influence
consumers to buy defendants’ goods.  “A
product insert cannot influence a consumer’s purchasing decision because the
public would only see a product insert after purchasing the product.”
Duer’s unfair competition/passing off claim failed because
she failed to allege that defendants weren’t the actual, physical origin of the
products it sold.  This seems quite
wrong: her argument was that defendants sold products that were falsely
attributed to her; the fact that they
are the origin is kind of the point.
More plausibly, but still interestingly, the court held that
Duer’s Georgia Uniform Deceptive Trade Practice Act and her tortious
interference with contract claim were preempted by the patent/copyright laws
because they relied on the same conduct alleged in her patent, copyright, and
trade dress infringement claims.  [Sloppiness
here: there’s no preemption based on the trade dress-related claims, on these
facts.]  Duer was essentially arguing
reverse passing off—that defendants were claiming her design as their own—which
courts routinely find to be preempted.

Duer argued that her GUDTPA claim had an “extra element” of
a deceptive act, but reverse passing off implicitly contains a deceitful act or
misrepresentation.  “The fact that the
defendants were selling the allegedly infringing works under their own
names—and, hence, implicitly misrepresenting the origin of the works or causing
confusion in the consuming public cannot alter the finding of preemption.” 

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Parody product fails to squeak through the cracks in dilution/infringement claim

Posted on September 29, 2016 by rtushnet
VIP Products, LLC v. Jack Daniel’s Properties, Inc., No.
14-cv-02057 (D. Az. Sept. 27, 2016)
The court denied VIP’s motion for summary judgment on its
declaratory judgment action against JDPI, and also kicked out a number of VIP’s
defenses, leaving confusion and dilution claims for trial based on VIP’s “Bad
Spaniels” durable rubber squeaky novelty dog toy, which is in the shape of a
liquor bottle and features a wide-eyed spaniel over the words “Bad Spaniels,
the Old No. 2, on your Tennessee Carpet.” On the back of the Silly Squeakers
packaging for the Bad Spaniels toy, it states: “This product is not affiliated
with Jack Daniel’s.”

 VIP’s product, on left

VIP’s label

The court found that VIP couldn’t be engaged in nominative
fair use because this defense only applies where a defendant uses the plaintiff’s
identical mark or trade dress, which VIP didn’t.  “[I]t is the defendant’s very use of the
plaintiff’s identical trademark that makes the nominative fair use analysis
necessary rather than application of AMF Inc. v. Sleekcraft Boats, 599 F.2d 341
(9th Cir. 1979) which utilizes eight factors to focus on the similarity of the
trademarks used by the plaintiff and the defendant in order to determine
liability for likelihood of confusion in the marketplace.”  This is an extremely tone-deaf reading of New Kids, because it’s the reference to
the plaintiff, not the identicality of the marks, that drives the First
Amendment interests justifying a different liability test.  The fact that a trademark owner can claim
confusion based on a parodic reference to it makes the need for New Kids at least as great when the
reference also involves distortion.
Then, and arguably worse, the court found that VIP couldn’t
raise a First Amendment defense because its dog toy wasn’t an artistic or expressive
work.  Aaaaaaaaaaargh.  OK: (1) Both parties claim that the markings,
shape and coloration of the dog toy communicate a message, though they disagree
about what that message is.  That means
that the dog toy is expressive, even if it’s not a painting.  (2)  Expressive
is not the opposite of commercial speech, nor is it the opposite of “has
trademark significance”; the dog toy is not, in any event, commercial speech. (3)
The trademark owner’s claim seeks to suppress an allegedly infringing message,
not any nonexpressive characteristics of the dog toy: trademark regulates
communication, which doesn’t make it unconstitutional but does mean that
extending it beyond commercial speech is dicey business indeed. 
Nonetheless, the court found that regular Sleekcraft applied. “[T]he First Amendment
affords no protection to VIP because it is trademark law that regulates misleading
commercial speech where another’s trademark is used for source identification in
a way likely to cause consumer confusion.” 
Why is the design of the product commercial speech?  Because “VIP makes trademark use of its
adaptations of JDPI’s trademarks and the Jack Daniel’s trade dress to sell a
commercial product, its novelty dog toy,” and thus it has “the dual purpose of
making an alleged expressive comment as well as the commercial selling of a
non-competing product.”
A reasonable trier of fact could find likely confusion and
dilution of a famous mark. VIP also failed to exclude the report and the
testimony of JDPI’s dilution expert, Dr. Itamar Simonson, who opined on “the
implication(s) of the association between the Bad Spaniels toy and Jack
Daniel’s whiskey on JDPI’s trade dress and trademarks and the meaning of the
mark/brand to consumers.”

JDPI proposed that Simonson would discuss: 1) The basics of
consumer behavior and “how marks such as famous trade dress are represented in
memory”; 2) the basics of the “associative network memory model” which are
accepted by experts in the consumer behavior field; 3) the application of the
“associative network memory model” to the instant case; and 4) the conclusion
that VIP’s Bad Spaniels toy causes negative implication for JDPI’s trade dress
and marks and thus is likely to tarnish them. 
The court allowed his testimony as admissible based his knowledge,
training and experience rather than on his use of scientific evidence with a
testable, proven methodology.  Surveys,
focus groups, studies, or other real world tests weren’t required for him to
apply his expertise to the facts of the case.

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Texas and 3 other states sue to block ICANN transition

Posted on September 29, 2016 by rtushnet

Read the complaint.  Let me know if you can make sense of the theory.

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Ad featuring old, mild citations against health facility was false by necessary implication

Posted on September 29, 2016 by rtushnet
Heartland of Urbana OH, L.L.C. v. McHugh Fuller Law Group,
P.L.L.C., 2016 WL 5375676, 2016 -Ohio- 6959, No. 2016–CA–3 (Ct. App. Sept. 23,
2016)
Heartland appealed from summary judgment granted to McHugh
in Heartland’s deceptive trade practices case against McHugh, and the court of
appeals reversed, finding that the relevant ad was false by necessary
implication and that injury was presumed because the ad targeted Heartland.
In 2014, McHugh published a full-page ad and online ad in
the Urbana Daily Citizen newspaper that discussed Heartland, a skilled nursing
care facility located in Urbana, Ohio. The ad contained a picture of
Heartland’s facility in Urbana, and stated:
ATTENTION!
The government has cited HEARTLAND OF URBANA NURSING AND
REHABILITATION CENTER for failing to provide necessary care and services to
maintain the highest well-being of each resident. If you suspect that a loved
one was NEGLECTED or ABUSED at Heartland of Urbana, call McHugh Fuller today! Has
your loved one suffered?
Bedsores
Broken Bones
Unexplained Injuries
Death
“Attention,” “Neglected or Abused,” and “Death,” were in
red, bold type. “Cited” was also underlined in red.
In fact, Heartland had not had a citation of any kind for
over two years, and had not had a citation remotely similar to the one alleged
in the advertisement since June 24, 2010, more than four years previously. Even
the June 2010 citation did not cause harm to any nursing home patient, and the
deficiencies had been corrected in June 2010.  Under Federal standards, violations are assessed
by letters ranging from “A” to “L,” with “L” being the most severe. “J,” “K,”
or “L” violations mean that a nursing facility is in immediate jeopardy, and is
in risk of being cut-off from Medicare reimbursement. The particular violations
on June 24, 2010 were only “E” and Level 2 violations, “which, at worst,
contemplate only minimal physical discomfort and the potential to undermine a
given resident’s ability to maintain or reach his or her highest practicable
well-being, in light of definitions of that resident’s plan of care.”
According to Heartland, “negligence, abuse, bedsores, broken
bones, unexplained injuries, and death” would have Level 4 severity. By
contrast, three matters that were involved in the June 24, 2010 citation, were:
a failure to document and administer laxatives prescribed for constipation; a
failure to timely reassess abdominal pain for 18 hours; and a failure to apply
prescribed antibiotic for two weeks after a physician had ordered a culture.
Subsequently, the legislature amended state law to prohibit
the use of the results of an inspection or investigation of a home in an ad unless
the ad included:
(i) The date the inspection or
investigation was conducted;
(ii) A statement that the director
of health inspects all homes at least once every fifteen months;
(iii) If a finding or deficiency
cited in the statement of deficiencies has been substantially corrected, a
statement that the finding or deficiency has been substantially corrected and
the date that the finding or deficiency was substantially corrected;
(iv) The number of findings and
deficiencies cited in the statement of deficiencies on the basis of the
inspection or investigation;
(v) The average number of findings
and deficiencies cited in a statement of deficiencies on the basis of an
inspection or investigation conducted under this section during the same
calendar year as the inspection or investigation used in the advertisement;
(vi) A statement that the
advertisement is neither authorized nor endorsed by the department of health or
any other government agency.
Query: what are the First Amendment implications of this
rule?
The trial court found that this legal change had mooted
Heartland’s claim.  The court of appeals
reversed, because if McHugh willfully violated the state Deceptive Trade
Practices Act, Heartland would be entitled to attorneys’ fees.
Ohio courts follow the Lanham Act in interpreting the DTPA.  The court of appeals found the ad false by
necessary implication.  “When the
advertisement was published, McHugh, a law firm, would have known that any
claims based on the June 24, 2010 citations were barred due to the statute of
limitations.”  McHugh also had access to
information that Heartland wasn’t cited in 2012 or 2014, and that none of the
2010 citations related to harm to residents. “[T]he only reasonable conclusion
is that the advertisement falsely implied Heartland was a facility where
patients were being exposed to very dangerous conditions, including death,”
which justified a finding of intent to deceive consumers.

In noncomparative advertising, plaintiffs must show
causation and harm, but a material, misleading comparison to a specific product
necessarily causes harm to the target, relieving the target of its burden of
separately showing causation and harm. 
The court of appeals applied this rule here, to the broader category of “misleading
advertisements identifying a specific party,” although the ad wasn’t
comparative. The court of appeals did say that the presumption of causation and
injury was rebuttable.

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