plaintiff must identify elements of trade dress, specific false claims

Homeland Housewares, LLC v. Euro-Pro Operating LLC, 2014 WL 6892141, No. CV 14–03954 (C.D. Cal. Nov. 5, 2014)
Previously, the court granted a preliminary injunction on certain false advertising claims and refused to stop the plaintiff from publicizing that.  Now it granted in part and denied in part a motion to dismiss.  The parties compete in the home blender market. Homeland sells the Nutribullet, Nutribullet Sport, and Nutribullet Pro, and allegedly spent several hundred million dollars in ads, including infomercials.  Euro-Pro’s Nutri Ninja allegedly copied “the color scheme, fonts, phraseology, and overall look and feel of Plaintiff’s NUTRIBULLET packaging trade dress.”  Also, the packaging compares the Nutri Ninja to the Nutribullet in a chart.  Homeland also alleged that Euro-Pro planted “false reviews on the Internet, making false claims of defects in NUTRIBULLET blenders and touting the NUTRI NINJA as a superior alternative.”
Euro-Pro didn’t move to dismiss false advertising claims based on the chart, but did as to the allegedly fake reviews.  Homeland didn’t sufficiently allege that part of the claim.  It didn’t specify what “false claims of defects” Euro-Pro allegedly made:

Without something more, the allegation is ambiguous. Do the reviews, for example, label Plaintiff’s products “poorly made” or “too small” or “ugly,” which would be statements of opinion? Or do they make falsifiable factual claims about Plaintiffs’ blenders? Secondarily, even if Defendant made statement of fact, were they material? These questions matter, because merely alleging that Defendant said negative things about one’s product is not stating a claim for false advertising. Plaintiffs must clarify its allegations to state a cognizable false advertising claim based on false reviews.

In addition, saying that false reviews were somewhere on the internet wasn’t enough, “as the internet is vast and contains multitudes.”  Without more, Homeland failed to allege likely deception or injury.  “Some indication of the nature and scope of the communication is required to successfully allege false advertising.”
The trade dress infringement claim was dismissed for failure to sufficiently specify the elements of the claimed trade dress.  A photo plus a written description wasn’t enough where the written description claimed “the color scheme, fonts, phraseology, and overall look and feel” of Homeland’s product packaging.
Trade libel: this requires pleading special damages, which Homeland didn’t do. Instead it just claimed “lost sales, disruption of business relationships, loss of market share and of customer goodwill” to the tune of $3 million.  Homeland needed to allege its established sales for a substantial period, sales after the allegedly libelous publication, and facts showing that loss was the natural and probable result of the publication.
California FAL and UCL claims: tracked the results above.

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It’s all about control: how to get a survey excluded

First Data Merchant Services Corp. v. SecurityMetrics, Inc., No. RDB–12–2568, 2014 WL 6871581 (D. Md. Dec. 3, 2014)
This is a motion to exclude in a false advertising/antitrust case. “This origins of this contentious case lie in a soured business relationship and the settlement of earlier litigation in the United States District Court for the District of Utah.”  Plaintiffs (First Data) sued SecurityMetrics over alleged post-settlement misconduct, and SecurityMetrics asserted 15 counterclaims.
PCI is an acronym for Payment Card Industry.  The PCI Security Standards Council (PCI Council) was formed in 2006 by the major credit card brands and developed the PCI Data Security Standard, which has been adopted by the major credit card brands as their data security compliance requirement for all merchants.  The PCI Standard’s requirements vary based on merchant size; at issue here are merchants with the lowest transaction volume (but because there are so many of them, they have the highest number of transactions collectively).  There are a number of different types of certified PCI standard compliance service vendors, with certifications recognized by the card brands; SecurityMetrics has a number of these PCI Council certifications while First Data allegedly does not.
First Data processes credit and debit card transactions for merchants and independent sales organizations. SecurityMetrics provided PCI compliance services to some merchants for whom First Data provides processing services.  The parties worked together until the relationship deteriorated, ending with SecurityMetrics’ allegation of a material breach of their contract by First Data.  SecurityMetrics also alleged that at that point First Data began offering a service called PCI Rapid Comply, which competes with the services offered by SecurityMetrics.  First Data allegedly allowed its fees for PCI Rapid Comply to count toward the required billing minimums for customers, but not fees paid to other PCI compliance services; and First Data allegedly told merchants they’d have to pay for PCI Rapid Comply even if they used a different security compliance vendor.  The parties settled their first suit, and then First Data sued.
I’m only going to discuss advertising-relevant issues.  One SecurityMetrics expert was a marketing professor at San Diego State, Michael Belch.  He surveyed consumer perceptions of the name PCI Rapid Comply, and opined that consumers would be deceived if the service wasn’t in fact approved or certified by the PCI Council. But his survey didn’t use a control to test for whether it was the name, PCI Rapid Comply, creating confusion.  SecurityMetrics didn’t adequately explain how Belch reached his conclusions linking confusion to the use of PCI in the name.  This was a “significant flaw,” and justified exclusion when combined with several other “troubling” aspects of the survey.  First, the survey tested the name alone, divorced from typical marketing materials.  Second, the original, online version of the survey was not preserved and was never turned over to First Data. Third, the survey questions repeatedly mentioned the name PCI Rapid Comply, creating a possible bias that wasn’t addressed because there was no control.  Thus, Belch’s testimony could confuse a jury.
SecurityMetrics’ proffered expert Clark Nelson was a CPA, CGMA, and CFF with an MBA from Wharton, who opined that First Data generated $190,951,243 in PCI-related revenues, which SecurityMetrics sought to disgorge under its two Lanham Act claims.  Challenges to Nelson’s calculations could be addressed on cross-examination.  Though First Data argued that he failed to consider alternative reasons for SecurityMetrics’ lost profits, his report “reflect[ed] a complex analysis that included calculation and consideration of SecurityMetrics’ natural attrition and penetration rates and a variety of other factors,” and wasn’t so methodologically flawed as to warrant exclusion.
SecurityMetrics, however, was bound by the fact that its Rule 30(b)(6) deponent was only able to identify a few specific instances of merchant customers lost due to First Data’s alleged conduct.  It later created a more detailed chart and argued that, since it had already disclosed the recordings on which the chart was based, the chart should come in.  Whether intentional or not, this reflected an end run around Rule 30(6)(b), so SecurityMetrics’ evidence of damages would have to be tied to specific testimony from the deposition or evidence in exhibits from that deposition.

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Public Knowledge on the monkey selfie threat letter

Sherwin Siy, bringing just enough snark in reply to the camera-owner’s demand letter. 

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Reading list: Putting Intellectual Property in Its Place

Laura J. Murray, S. Tina Piper, & Kirsty Robertson, Putting Intellectual Property in Its Place: Rights Discourses, Creative Labor, and the Everyday: Coming at roughly the same time as Jessica Silbey’s The Eureka Myth, this book, like Silbey’s, challenges IP lawyers’ reflexive assumption that intellectual property is central to the production of creative works, even for-profit creative works. They’re both important and intriguing works. Here, the basic argument is that IP laws have limited and attenuated effects in many different creative fields. Though rights talk and economics do matter, they’re at best loosely linked to formal law, which is “invoked or imagined occasionally, opportunistically, or instrumentally,” often to achieve objectives other than incentivizing creativity. IP is more rhetoric than rule; it can appear as fantasy (potential riches), rumor (fear of being sued), threat, whipping boy fueling resistance—“as a symbol of corporate power rather than as a specific set of rules,” and so on.

Much like Silbey, the authors conclude that IP appears as a strategy “adopted to cross or police boundaries long after a work has been created or an innovation has taken place.” Even when statutory and case law is readily available, “people actually choose to understand the law through information and opinion gathered from friends, strangers, coworkers, and the media.” They regularly choose their own grounds for negotiation and dispute, ignoring legal mechanisms. So, law on the books is far less important than how law is mis/understood on the ground.

The authors position themselves partly against studies of IP’s “negative space,” contending that such framing positions IP as primary and low-IP spaces as the ones in need of explanation, whereas creative practices generally are in fact low-IP. All groups have rules about attribution, ownership/custodianship, and fairness; sometimes those are formalized, but more often they are “indigenous”—“foundational and persistent, not ancestral or supplemental.”

Chapters examine specific communities of practice. One chapter (attributed to all authors) analyzes free culture rhetoric in Canada, which they argue has been raced, gendered, and US-oriented, with a presumed-male subject as the unexamined universal. Individualism is a politically limiting feature of this vision of “free culture,” they argue. (I’ve long thought that “free as in free speech, not free as in free beer” has a very interesting gender resonance on both sides—not only does some speech trade off with and suppress other speech in a way unrecognized by the first part of the slogan, but I always saw “free beer” as very far from free.) Creative Commons, then, tries to be liberatory, but accepts a US model that might not apply elsewhere, trying to fight supposedly restrictive norms that might not have been shared. Programs may be “ported,” but cultures are far trickier, and in choosing the language of “porting” CC licenses from the US to other countries, CC is making a significant move in presuming mechanical commonality between countries, legal systems, and creative cultures. Ultimately, what CC licenses legally would do in court isn’t as important as the symbolic relations they indicate. And the authors suggest that licenses aren’t appropriate to structure certain relations.

One example of different cultural meanings they explore is “appropriation.” In US legal discourse, “appropriation art” is edgy, challenging, and increasingly legally accepted as fair use, which most people treat as an advance compared to earlier infringement findings. But “appropriation” has a very different meaning when it comes to dominant groups exploiting artistic traditions and practices of oppressed groups.

Another chapter (Robertson) studies various crafters, using works like quilt patterns. Crafters use the rhetoric of IP if not the real law; their rules may even be more stringent than law when it comes to the acceptability of making money from an object created using a pattern. And, like many others, they often conflate copyright, trademark, and patent into a kind of agglomeration of “rights.” It’s easier to manage boundary issues when the rightsholders come from outside: while disputes persist about some norms within the community, other practices coalesce into best practices over time, particularly with respect to first sale/the acceptability of making things from purchased fabric featuring licensed characters. The discussion of knitters leads into a comparison with Canadian scientists, “who like the online knitters work and compromise with, cajole and bully their peers into common (and sometimes community-created) norms” as a way of managing community in new situations or spaces.

The scientists chapter (Piper) then examines a historical example of the use of patents relating to plant hormones as moves in a larger conversation with multiple goals: credit, sometimes commercialization, furthering the public interest. Uncertainty about the law allowed ideas about IP, rather than formal law, to shape behavior. In addition, the chapter emphasizes the importance of the material world: objects were often more important than abstract rights, as scientists shared their products with those they trusted.

Another historical chapter (Murray) looks at exchanges among 19th-century newspaper editors, who didn’t get copyright protection for their works but instead used cheap postage to get stories and to share stories in return so that everyone could fill their local papers with interesting coverage. To the publishers, this wasn’t permissionless copying—it was “the essence of an editor’s job” to select and collate the best. As one newspaper said, after condeming plagiarism, “This doctrine of never borrowing, of saying nothing but what you yourself originated, is cruel in the extreme. It would condemn most men to perpetual silence. In the halls of legislation, in the courts of law, in drawing rooms, and at dinner parties, what a long, sad, solemn stillness there would be!” Credit and reciprocity were important, but not law. “IP law can be a strategic crisis-management and boundary-policing tool without driving everyday knowledge management practices.” Borrowing was the beginning of the process, generating responses; newspapers developed brands based on the sources from which they copied and the editorial stance they took towards other sources.

The entry of new competitors and outsiders, however, drove a resort to law. In a familiar pattern, new entrants disrupted existing behaviors, and producers responded with any tools they could find—just as they did more recently with search engines. When producers began to use “hot news” misappropriation claims, however, they faced continuing challenges from non-IP methods of organization. The authors suggest that a high level of rights enforcement may indicate a sector’s sickness, not its health.

Another chapter (Piper) considers copying in the Canadian legal profession. Copying is a core feature of legal thought—making up new expression would often risk distortion of the meaning of a law or a legal test, so we often value fidelity. Lawyers, like other professionals, police the boundaries of their field; this self-regulation clashed with attempts by legal publishers to control copying legal materials from law libraries. And in Canada, the legal profession won: the Canadian Supreme Court ruled that such copying was fair dealing. Here, the authors argue, unlike knitters, “lawyers do not appeal to law to bolster their credibility or ability to make an income in their profession; such an appeal may even undermine their reputations.” But like knitters and scientists, they do appeal to IP law “when dealing with strangers or for market-based transactions.”

A chapter on cultural labor and institutions in a small Canadian city (Murray) looks at the art world outside prestige art and also outside “traditional knowledge,” the two more usual objects of study. IP is only a small part of the messy, in-between ways in which artists in this community make art and make a living.

A final chapter on production of paintings in Dafen, China (Robertson), looks at the ways in which the labor of individual copiers, who hand-paint the copies of classic and sometimes modern art, is understood or ignored. Copying “functions in many ways in the art world, most of them totally separate from both appropriation and also IP protection.” As in the other chapters, IP is invoked “where perceptions of how the art market should function collide with long-held, but often unmarked, norms among artists (for example in terms of what constitutes originality).” Thus, Robertson focuses on Western perceptions of Dafen, which tend to valorize Western art and denigrate Chinese artists. Westerners, she suggests, tend to position authenticity in the content, while Chinese commentators find authenticity in the act of painting.

When Western coverage didn’t find sufficiently sweatshop-like conditions of production, it shifted to Dafen’s challenge to the idea of “art” through its mass production techniques, though as the chapter points out, “arguably the presence of the hand in the Dafen paintings is precisely the opposite of industrialization.” The painters themselves say they’d run out of ideas if they had to paint their own works, and defend the idea of giving access to art to people who otherwise couldn’t afford it. They see their works as original because they aren’t mass replicated. And, the chapter notes, given that most art is accessed through copies—online, in books, etc.—these works may not be exceptional. Price depends on the quality of the copy, and customers can also request changes so that people in paintings look more like loved ones.

In another manifestation of the interaction between material objects and immaterial rights (or lack thereof), source images (including digital files or existing paintings) are important assets, returned to a boss after a commission is complete, and protected through agreements more like trade secrets or contracts than IP rights, since knowing what’s popular is key to profiting. Even copies of in-copyright works aren’t “fakes,” she argues, any more than the appropriated artworks of Sherrie Levine or Richard Prince are fakes—they’re copies, and they serve different functions. But the Western perception that Levine and Prince deliberately challenge concepts of originality and expression insulates them from the charge of fakery, as Dafen is not. Originality and authenticity may even give us alternatives to talking about the more politically challenging and controversial subject of labor; and at the same time, whether paradoxically or naturally, our discourse tends to focus on business rather than art. It’s a fascinating set of complications.

Overall, highly recommended.

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Reading list: facts versus opinions in mandatory disclosure

From the intro:
[This] essay reports the results of an original survey that presented respondents with the actual disclosures at issue in a number of recent compelled speech cases, and asked them to categorize these disclosures as factual or opinionated. Participants proved proficient at distinguishing fact from opinion, suggesting that consumer surveys could provide a valuable resource for courts. They also expressed dramatically different understandings of the controversial disclosures at issue in NAM and R.J. Reynolds than the D.C. Circuit did, offering a new and important perspective on how these, and similar, forms of mandated speech should be treated in future litigation.

Posted in commercial speech, disclosures, first amendment, reading list | Leave a comment

When is a 13-year discrepancy immaterial?

According to the UK ASA, when it’s the difference between 1860 and 1873 as the confirmed date of a bakery’s founding: “We understood that their competitors were much younger, with the oldest having been founded in 1949 and so Warrens Bakery was the oldest pasty provider still trading. In light of that, we considered that any consumers who had chosen to purchase a pasty from Warrens Bakery, as opposed to one of their competitors, because of their claimed heritage, would still have made the same decision to do so had they been aware that the earliest official record of the bakery’s existence that they were able to supply was 1873.”

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False advertising claims not arbitrable when ads predated agreement

Mohebbi v. Khazen, Case No. 13-cv-03044, 2014 WL 6845477 (N.D. Cal. Dec. 4, 2014)
Mohebbi sued Khazen over Mohebbi’s agreement to invest over $1 million in a partnership in exchange for defendants’ help in getting him qualified for the federal EB–5 immigrant visa program.  He sought recission and brought 22 claims against defendants.  The court found the arbitration agreement he signed enforceable and required him to arbitrate everything but his false advertising and recission claims, and stayed the false advertising claims pending the completion of arbitration.
Mohebbi’s false advertising claims concerned defendants’ alleged misrepresentations on their website, including an alleged misrepresentation of defendants’ business as a qualified Regional Center designated by the US Customs and Immigration Service for the purpose of assisting investors in applying for EB–5 visas.  False advertising claims are arbitrable, but the false advertising and reliance occurred before Mohebbi signed the agreement with the arbitration clause.  The agreement didn’t explicitly encompass claims predating its signing.  An agreement must be retroactive on its face to cover claims that predate its execution, and thus the false advertising claims were not arbitrable.
The arbitration clause was, however, enforceable and Mohebbi failed to meet his heavy burden to show that it was fraudulently induced, so he was not entitled to recission. 
The court then rejected defendants’ motion to dismiss the Lanham Act claim (California false advertising claims also survived but defendants apparently didn’t make separate arguments about them).  Along with the “Regional Center” claims, defendants allegedly promised to help “achiev[e] the fastest path to U.S. residency and citizenship.”  This adequately alleged falsity with respect to defendants’ services.  (The court didn’t address the obvious Lexmark problem of “standing,” that is, Mohebbi was a customer, not a competitor or other type of market participant.  But that wouldn’t get rid of the California claims anyway.)  The court then stayed the litigation pending the completion of arbitration, as required by the FAA.  Note that if arbitration is more trouble for Mohebbi than for defendants, then defendants gained an advantage in the non-arbitrable claims because Mohebbi brought arbitrable claims; there’d have been no stay without them.

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Garcia v. Google thoughts: input welcome!

Along with many others, Shyamkrishna Balganesh, Justin Hughes, Peter Menell, and David Nimmer submitted an amicus in Garcia v. Google making a number of interesting arguments; I’m generally sympathetic to the idea that we should be more flexible about joint authorship.  But right now I want to talk about a different argument in the brief: they say that, even assuming that Youssef had an implied license to incorporate Garcia’s performance, an implied nonexclusive license is nontransferable.  (This line of reasoning depends on the idea that Garcia could own a separate copyright in her performance, rather than a share of the copyright in the entire film by virtue of her performance; if she has a share in the entire film, then Youssef is simply her co-owner and his ability to license nonexclusively is unfettered.  Which itself is a good reason to conclude that the only viable “work” here is the film as a whole.)

If that’s so, then the reassurances of the original panel opinion and SAG that implied licenses will usually solve any failure to enter into work for hire agreements are completely wrong.  An implied license may work pretty well when a programmer writes a program for internal use at a business.  But Warner Bros. needs to license its rights to Netflix, Amazon, Wal-Mart, etc.  If all it has is a nontransferable license, then it has nothing of any value.  And remember, Petrella means there’s no such thing as a stale copyright claim.

So if a studio didn’t get a signed release from one of the extras in Titanic, the question it ought to be asking itself (and its insurers) is: Do you feel lucky?  Well, do you?  (According to SAG, that’s enough for a copyrightable performance.)

Side note: The Balganesh et al. brief also introduces a bit of error into the discussion because of the case’s unusual posture–the brief says that Youssef didn’t counternotify. But Google didn’t take down the video after Garcia’s notice, so there was nothing to him to counternotify about.  And now that the mandatory injunction requires Google to police all its sites, there’s no way to counternotify, even for the multiple non-Youssef parties who wanted to distribute the video in order to discuss its message.

Side note 2: The brief also takes a position on what would happen if Garcia were a joint author of the film that requires a resolution of what is as far as I know a novel question. If she’s an author, it says, she can file a DMCA notice based on her authorship of the film; Youssef could then counternotify because he’s also an author and thus has the right to put it on YouTube.  Perhaps she opens herself up to a 512(f) claim with her notice; but if Google honors it, the film has to stay down for 10 business days regardless of his objections.  But sending a DMCA notice requires that the sender own (or act on behalf of an owner of) an “exclusive” right. See 512(c)(3). Is a single co-owner acting alone an owner of an “exclusive” right?  My sense is that the right answer is yes, but it does raise the prospect of a co-owner getting undue leverage when another co-owner is using an online intermediary for distribution–and this wouldn’t just include YouTube, but also Amazon and other sites that might be generating substantial revenue.

What do you all think? 

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ABA teleconference on irreparable harm in Lanham Act false advertising cases

I’ll be participating in this teleconference, 12 pm EST on December 12. 

Posted in http://schemas.google.com/blogger/2008/kind#post, remedies | Leave a comment

A case peppered with TM and advertising issues

United Tactical Systems v. Real Action Paintball, Inc., 2014 WL 6788310, No. 14-cv-04050 (N.D. Cal. Dec. 2, 2014)
UTS sued RAP4 mostly over the trademark PepperBall; the court granted a preliminary injunction based on some of its claims.  Nonparty PepperBall Technologies (PBT), a dominant player in the relevant market, sold irritant projectiles called PepperBalls: “Irritant projectiles are generally small plastic spheres that contain an irritant powder that functions similar to pepper spray [but can be shot from a distance], and are primarily sold to law enforcement and military.”  PepperBall Technologies sold live rounds in a red shell, as well as other projectiles in different colors, such as green marking rounds and clear training rounds.
PBT’s PepperBall mark became incontestable.  It developed the irritant powder, and outside manufacturers assembled it into plastic shells; one manufacturer was Perfect Circle, which made most of BPT’s projectiles for nearly 14 years. More recently, PBT used a company called APON, though it wasn’t clear whether PBT ever sold APON-made projectiles.
PBT ran into money troubles.  Perfect Circle and another company, Tiberius Arms, bought PBT’s loans and formed a new company, Advanced Tactical Ordnance Systems (ATO).  Doing business as Phoenix International, ATO bought “all the tangible and nontangible assets” of PepperBall Technologies at a Uniform Commercial Code foreclosure sale, allegedly acquiring the incontestable PepperBall trademarks, goodwill, business name, and trade secrets.  UTS alleged that ATO ensured a seamless transition, retaining most employees, trainers, and suppliers. ATO thus became the supplier of PepperBall irritant projectiles, with parent company Perfect Circle continuing to manufacture PepperBall projectiles. ATO sold standard live rounds, which were all red, and maximum strength rounds, which were half-red and half-black.
RAP4 is a competitor using marks incorporating LESS LETHAL.  Its projectiles have come from various suppliers over the years, and it generally used orange shells to indicate live rounds.  (Frankly, I would think the industry would want to settle on one universal color for live rounds, to avoid dangerous misunderstandings!)  At one time, RAP4 bought irritant projectiles from SWAT, which RAP4 alleged merged with PBT, after which RAP4 sold those projectiles as PepperBall branded products—the only time it used such branding, according to RAP4.
After the foreclosure sale, RAP4 negotiated with PBT’s former COO for an exclusive dealing agreement for RAP4 to get irritant projectiles from APON, effective April 2012.  In August, RAP4 used its website and email to announce “RAP4 Resumes PepperBall Technologies Inc. Production.”  The announcement said:
RAP4 is proud to announce the acquisition of machinery, recipes, and materials once used by PepperBall Technologies Inc., the manufacturer of Less Lethal Live Rounds that are trusted by law enforcement and military units far and wide. Now we manufacture our Less Lethal Live Rounds directly, on that original machinery, and conforming with the original specifications, to provide our customers with improved quality control uninterrupted supplies. With the inspiring success and service-proven track record of our Less Lethal Launchers, comes the need for high-quality, highly effective less lethal ammunition like that originally manufactured by PepperBall Technologies Inc.
Earlier this year, PepperBall Technologies Inc was liquidated and foreclosed by their creditors. RAP4 acted immediately through acquisition and resume [sic] the machinery, recipes, and materials required to continue production of our Less Lethal Live Rounds. That means we have direct oversight of quality control, and the ability to keep producing those less lethal rounds that have proven themselves as invaluable tools time and again. [….]
With PepperBall Technologies Inc.’s equipment, recipes, and standards integrated into our manufacturing, we will be able to offer even more innovations … and an uninterrupted supply of the less lethal rounds that our police and military customers need!
The post had pictures of RAP4’s new projectiles, which used red and red-black to indicate standard and maximum strength live rounds. A day later, RAP4 issued “clarifications” stating that “The Original Recipe and machinery to produce pepperballs was acquisitioned by RAP4 and RAP4 is now able to manufacture the original pepperball under the name of RAP4 Less Lethal.” The clarification also acknowledges that “Pepperball Technology is Forclosed [sic]” and “[a]ll rights to the name Pepperball belong to the new owners, which is Phoenix International.”  A few days later, after a C&D from ATO, RAP4 sent out another email and added another statement to its website:
RAP4 Less Lethal Live Rounds are produced by the original OEM manufacturer that once produced for PepperBall Technologies Inc. In 2012 PepperBall Technologies Inc. was liquidated and foreclosed and now PepperBall Technologies Inc. and brands belong to Phoenix International LLC. Because of this reason, RAP4 and original OEM manufacturer have been able to team up and have improved the formula and process for making Less Lethal Live Rounds. Now RAP4 is able to guarantee the highest-quality product and provide continuous availability!
Disclaimer:
— RAP4 is not associated nor affiliated with PepperBall Technologies Inc. and brands. All rights to the PepperBall Technologies Inc. and brands belong to its new owner.
— RAP4 live rounds are NOT made by the current PepperBall Technologies Inc.
Both ATO and RAP4 received communications from customers and others indicating that they believed that (1) RAP4 had purchased PepperBall Technologies, and (2) RAP4 made and sold PepperBalls. RAP4 allegedly told customers over the phone that it was PepperBall Technologies and that it sold official PepperBalls, and didn’t correct customers’ misunderstandings when they contacted RAP4.
Further developments: A preliminary injunction against RAP4 in Indiana was dissolved on appeal for lack of personal jurisdiction.  ATO stopped selling all-red PepperBall projectiles in late 2012.  UTS allegedly acquired ATO’s assets, including PBT’s assets.  UTS, operating as PBT, now sells half-red, half-white PepperBalls as well as half-red, half-black ones.  RAP4 continued to sell its PAVA Less Lethal projectiles, and added Peppershot Less Lethal projectiles.
On the Section 32 and counterfeiting claims, RAP4 contested whether ATO validly acquired the mark from PBT or UTS validly acquired the mark from ATO.  UTS didn’t submit a written assignment from PBT or from ATO.  Though assignments recorded in the PTO are prima facie evidence of execution, they aren’t conclusive; the Assignment Branch of the PTO doesn’t examine substance.  Without a written assignment of goodwill, could UTS be the “registrant” of the incontestable mark?  Some courts presume that marks presumptively pass to a buyer, absent contrary evidence. Others look for a writing, to ensure against accidental assignment, clarity of rights, and predictability/certainty of ownership.  Given this uncertainty, there were too many unresolved issues to find that UTS was likely to show that it was the “registrant” for purposes of Section 32/counterfeiting claims.
Section 43(a) claims don’t require a registration, only commercial injury.  Commercial injury is generally presumed “when defendant and plaintiff are direct competitors and defendant’s misrepresentation has a tendency to mislead consumers” (citing the 9th Circuit’s TrafficSchool.comdecision, with a see also for Lexmark).  Given the competition between the parties, UTS could sue under §43(a).
Turning first to false association: RAP4 argued that “pepperball” is generic, submitting “dozens of pages of online printouts from newspaper articles, online forums, etc., where people have used the terms ‘pepperball,’ ‘pepper ball,’ and ‘pepper-ball’ amongst other things to refer to irritant filled projectiles.”  Incontestability is no bar to a genericity finding, but registered marks are entitled to a strong presumption of validity.  (Query how this works where the court has just found that UTS can’t proceed under §32 at this point.)  The court found this issue “perplexing,” given evidence that other manufacturers used “Pepper Balls” to identify irritant projectiles.  RAP4’s evidence was “compelling” but “limited,” and some of it could be construed as referring to PepperBall branded projectiles in particular.  There wasn’t enough evidence to find genericity yet.
This wasn’t a “traditional” confusion case.  UTS alleged that RAP4 used the PepperBall mark in announcements, metatags, and “hidden text” on RAP4’s website.  RAP4 argued that its use was nominative, while UTS argued that RAP4 was using the mark to speak about its own products, not UTS’s.  The court correctly noted that New Kids also applies where “the defendant’s ultimate goal is to describe his own product.”
Starting with the last announcement, RAP didn’t falsely suggest it was sponsored or endorsed by the trademark holder.  However, it “implicated the source-identification function by essentially implying it was the new source of PepperBalls.”  The evidence showed confusion (note that the nominative fair use test does not have actual confusion as an element; New Kidsspecifically declined to consider evidence of actual confusion).  UTS cited a number of consumers writing things like: “I have received an e-mail from RAP 4 stating they are taking over your business. Is there any information you can give me regarding this email and the training and equipment we have been purchasing from you over the years?” and “What do you know about Pepperball going out of business and being purchased by another company called RAP4? Is this true and, if so, how would it affect us?”  And here we get to the incoherence of “misleadingness”: Tabariand New Kids involved truthful uses that allegedly implied sposnorship, but “[u]nlike Toyota Motor Sales and New Kids, UTS alleges that RAP4’s use of the PepperBall mark was misleading.”  Note: the only way this makes any sense is to read “misleading” to mean “false,” in that the information conveyed that these were the “real” PepperBalls was not true; it’s ordinarily unproblematic to say that facially true claims can be misleading, but New Kids takes that implied falsity off the table for a certain class of uses.
It was possible for RAP4 to refer to its own projectiles without using the PepperBall mark; even if it was using the mark to refer to its arrangements with APON and their purported connection to PepperBall products, “there is considerable dispute as to whether RAP4’s statements were true, even without considering the underlying implications of those statements.”  The court concluded that this was more false association than traditional trademark infringement, but found confusion to be likely.
The issue with respect to metatags and “hidden text” was more complicated.  After the Indiana TRO and after RAP4 removed the announcement, it still used the metatags “Pepperball Projectiles,” “pepper ball,” “pepperball,” “pepperballs,” and “Pepperball” on its website, as well as white text on a white background including “pepperball.”  (This is a terrible idea. Search engines ignore it, but courts don’t. There is no upside.)  UTS didn’t provide evidence about how these functioned, and RAP4 didn’t make any arguments either.  Brookfieldblessed the initial interest confusion, but recently the Ninth Circuit warned against finding confusion “when a consumer is never confused as to source or affiliation, but instead knows, or should know, from the outset that a product or web link is not related to that of the trademark holder because the list produced by the search engine so informs him.” Network Automation.  Using Sleekcraft, the court found serious questions going to the merits as to infringement from these uses.  Notably, the court found that intent favored UTS because RAP4 used the mark with knowledge that it was another’s trademark.  (Also of note: the court still used “serious questions going to the merits” as an alternative standard for granting preliminary relief, even after Winter.)
False advertising: RAP4’s announcements connected it with PBT and the PepperBall projectiles.  The literally true statement “PepperBall Technologies Inc was liquidated and foreclosed by their creditors,” combined with other statements, including remarks about RAP4’s “acquisition” of PepperBall’s equipment and technology, was likely to mislead consumers into thinking that RAP4’s new projectiles had the same qualities and key characteristics as PBT’s because they came from the same source.  RAP4 argued that its subsequent announcements and disclaimers showed no intent to palm off.  But even the disclaimers had a context; they said that RAP4’s Live Rounds “are produced by the original OEM manufacturer that once produced for PepperBall Technologies Inc.” The implication was that RAP4’s projectiles were, “for all intents and purposes, PepperBalls,” and RAP4 implied it had “improved” the PepperBall formula and quality control, but there was no evidence of this.
The other clarifications were no better. “It has come to our Attention that there has been some misinformation and confusion in relation to our acquisition of PepperBall Technology” insinuates that it had acquired PBT, as did the post title, “Clarification About RAP4’s Acquisition of PepperBall Technology[.]”  RAP4 said it had acquired “[t]he Original Recipe and machinery to produce pepperballs” even as it disclaimed rights in the name.
UTS showed that these statements were likely to deceive by presenting evidence from actually confused customers.  RAP4 argued that a survey was required, but intent to mislead can justify a presumption of likely deception.  (Given the clarity of the confusion evidence here, it might have been stronger to rely on the evidence of actually confused consumers to extrapolate to a significant number.)  The court found UTS’s evidence of intent compelling, given testimony that a key player knew that the use of “acquisition” was confusing.
Deception about RAP4’s ability to produce PepperBall quality projectiles, or better, would be material, given PBT’s strong reputation for quality and reliability.
As for likely injury, the Ninth Circuit has held that the risk of future harm to a competitor, plus the interest in consumer protection, means that competitors need not prove injury for a §43(a) violation.  But anyway, UTS showed likely injury: it sold PepperBall projectiles, and if consumers were misled, sales were likely to be diverted.
Results on the California UCL and FAL claims tracked the federal claims.
UTS also alleged willful infringement of its red and red/black trade dress.  RAP4 rejoined, sensibly, that “because irritant projectiles are used in high-stress crowd-control or military situations, a user needs to be able to quickly distinguish the ‘live’ projectiles from other types, and live projectiles are generally made ‘red’ in color so the users can distinguish them from the other kinds.”  While UTS had the burden of showing nonfunctionality, RAP4 provided evidence that red had utilitarian advantages; PBT’s training materials showed that color was used to signal product features.  RAP4’s witness testified that in “[r]ecent history, our clients do require that the colors be in red for live-fire for reason that they have already successfully train[ed] their personnel to identify by the colors used,” and that other manufacturers also used the color red and/or reddish-orange to identify live pepper-filled rounds.  UTS argued that one specific agency only asked for red so it could buy from US manufacturers, but it didn’t provide evidence for that claim, and even if true, other customers also required red. The Department of Justice even says “distinctive markings and colorings on the different shells would help to more reliably distinguish lethal from less lethal [munitions].”
What about alternative colors used by RAP4 and other manufacturers, like orange/white?  UTS submitted an email indicating that RAP4 selected the red and red/black color scheme “to compete with Pepperball[.]”  However, UTS didn’t show that other color schemes were salable to law enforcement or other customers who’ve come to rely on red. UTS argued that “the only advantage red and red/black projectiles offer Defendants is that it makes it easier for them to sell to departments already trained to use UTS’s system,” but that isfunctionality.  RAP4 would be at a commercial disadvantage if it couldn’t use red to identify live rounds, and red/black to identify extra strength rounds. 
PBT’s training materials, now UTS’s also constituted evidence of advertising utilitarian features, which was strong evidence of functionality.  The expense of manufacture was neutral, but in total UTS failed to meet its heavy burden of showing that red served no purpose other than identification.
UTS also alleged trademark dilution.  (Seriously?)  UTS failed, of course, to show federal fame.While UTS alleged that it and the prior owners of the PepperBall mark “have spent millions of dollars and fifteen years publicizing the mark and selling the projectiles at issue in this litigation with the PepperBall trademark,” it didn’t provide specific evidence of how that money was spent or when the mark became famous.  It didn’t explain why selling 23 million projectiles at at least $1 each would make the mark recognized by the “general consuming public.”
Trade secret misappropriation: UTS argued that RAP4 contracted with Conrad Sun knowing that he was a former PBT officer and picked his brain, but Sun wasn’t party to the litigation.  UTS argued that RAP4 misappropriated the formula/recipe for the projectiles; UTS’s customer list; and “market leads and market research.”  UTS didn’t show that the last category was proprietary, or that RAP4 possessed or used this information, or even that it was defined with sufficient particularity.  A client list can be a trade secret, but UTS didn’t provide information about how its lists were developed or how RAP4 misappropriated them.
As for the formula/recipes for the projectiles, PBT did develop a formula it considered secret and proprietary. Even its manufacturer Perfect Circle wasn’t allowed to know the formula other than what was on the material safety data sheets. UTS’s evidence indicated that secrecy was maintained throughout the foreclosure sale, and that the proprietary nature of the formula was critical in the foreclosure decision.  RAP4 argued that UTS failed to take reasonable efforts to protect secrecy: the contents of the powder were listed on the material safety data sheets posted on PBT’s website, and the recipies were in PBT’s patents.  Given that UTS didn’t dispute the existence of the patents, the court found no likely success on the merits.
Irreparable harm for the §43 claims: UTS relied heavily on presumptions of harm rejected by Winter, eBay, and Herb Reed.  However, lost control over reputation and damage to goodwill could be irreparable harm, even though speculative injury isn’t sufficient.  UTS established likely irreparable harm “because without such relief continued loss of control over its business reputation is likely.”  Several of the announcements were still online and uncorrected, and UTS was still receiving calls indicating confusion.  Ongoing confusion “is likely to contribute to loss of control over UTS’s reputation and goodwill.”  (If lost control is irreparable without more, then likely confusion is irreparable harm because likely confusion means lost control.  But the Ninth Circuit told us not to collapse the inquiries!)
UTS argued that it was being harmed because RAP4’s projectiles were inferior. This was hotly disputed, but UTS submitted a picture of leaking projectiles allegedly from RAP4.  If accurate, this evidence supported UTS’s lost control theory. 
So, UTS showed irreparable harm due to lost control over its reputation and goodwill.
Though RAP4 showed evidence that the prior injunction harmed it, that was its own fault, and it didn’t show that a new injunction would cause similar harm. The public interest was also served by enjoining confusing uses and misleading advertising.
The court therefore preliminarily enjoined the defendants from using “PepperBall” or “PepperBall Technologies” on or to refer to RAP4 or RAP4’s irritant projectiles; shipping, selling or filling orders for PepperBall projectiles; making any false statements, “directly or indirectly,” about UTS, ATO, PBT, or Phoenix International; and making any false statements about the availability of “authentic” PepperBall projectiles from UTS or PBT.

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