taking control: Honeywell TM, ad claims lose, (c) continue

Posted on September 2, 2014 by rtushnet
Honeywell International Inc. v. ICM Controls Corp., No. 11–569, 2014 WL 4248434 (D. Minn. Aug. 27, 2014)
Honeywell sued ICM for patent infringement, copyright infringement, violation of the Lanham Act, and violation of state law.  (I will ignore the patent issues.)  The claims relate to ICM’s sales of allegedly “direct knockoffs” of four Honeywell combustion control products used for controlling heating appliances.  The products are two “oil primary controls,” which control the fuel oil for an oil-based furnace, water heater, or boiler; and gas ignition controls, ditto for gas.  Honeywell sells oil primary controls in residential and light commercial markets as OEM and replacement units; the gas ignition controls are only replacement units.
ICM received summary judgment on Honeywell’s false advertising claim, which challenged ICM’s advertising of its combustion control products as “Made in the USA.”  ICM’s expert reports indicated that a significant part of the manufacturing of the relevant products—including the final assembly—occurs at a facility in Syracuse, NY. So does conceptualization, design, testing, and other production activities also occur there. Some foreign components are incorporated into the products, but their value ranged from between 10.4 and 23.8 %, depending on the product.  The foreign materials cost ranged between 33.6 and 80.2 %, and with labor and other costs added in, ICM’s expert placed the foreign content of various ICM products at between 19.4 and 52.9 %.  Honeywell argued that “Made in the USA” (along with  “100% American Made” and “American Made”) was a false designation of origin.
“The standard for proving literal falsity is rigorous” and “only an unambiguous message can be literally false.” (Ambiguity, the court determined, was a question of law, whereas falsity was a question of fact; falsity by necessary implication wasn’t at issue.)  In the context of this case, the court found “Made in the USA” not unambiguous enough to be literally false.  The FTC has guidelines for US origin claims, but Lanham Act plaintiffs have to show literal falsity/misleadingness, not merely violation of FTC guidelines, so the court wasn’t going to look at whether the products violated the FTC guidelines.  (This finesses an extremely difficult question: when the government sets a standard, aren’t consumers likely to believe that producers are complying with the government standard, whatever it is, even if they don’t know the details of the standard?  They could then be deceived by an idiosyncratic definition.)  Plus, the FTC’s own policy statement showed that “Made in the USA” was not unambiguous enough to support a literal falsity theory.  The statement requires, at a minimum, that “the final assembly or processing of the product must take place in the United States,” because that’s so important to consumers.  But beyond that threshold the FTC considers other factors, “including but not limited to the portion of the product’s total manufacturing costs that are attributable to U.S. parts and processing; and how far removed from the finished product any foreign content is.”  The FTC doesn’t have a fixed proportion, but says it’s evaluated on a case by case basis. Thus the phrase was not sufficiently unambiguous to find literal falsity here, where there was no dispute that final processing and assembly occurred in the US.  (Plus, other laws use different definitions to identify a country of origin.)
Without literal falsity, Honeywell lost because it couldn’t show misleadingness; it didn’t offer consumer or market research showing the relevant consumers’ understanding of the phrase. Honeywell offered the testimony of a professor of marketing, who opined that “contractors,” who the parties treat as the relevant consumers, “are likely to believe” that a “Made in the USA” claim “implies that 100% of the product and its components are manufactured” in the United States.  But Honeywell didn’t show that the professor conducted any research on actual contractors or had any relevant experience with them.  That wasn’t enough. 
Nor could Honeywell rely on FTC studies about general consumers’ perception of the phrase, performed in 1991 and 1995. Those studies “do not address what a contractor in the present-day understands by the phrase and whether that understanding is inconsistent with ICM’s use of it.”  Plus, the FTC itself acknowledged that many consumers just had a general sense of what the phrase “Made in the USA” means rather than a highly specific view of how to evaluate costs, processing, etc.  Beyond the final processing requirement, “a customer’s understanding of the accuracy of a U.S. origin claim would depend on the product and the type of content that was foreign sourced”—and Honeywell lacked evidence about that.
ICM also prevailed against Honeywell’s trade dress infringement claims.  Honeywell claimed an interest in a combination of identified elements.  For one product, and representatively, they were: 
• a gray case;
• a raised and ridged circular bezel formed out of the case, located on the left side of the “face” of the product;
• a red circular reset button set inside the raised/ridged bezel;
• a black-and-white label with an orange warning bar immediately to the right of the red button;
• an LED indicator light nestled in the housing and located between the thermostat and flame-sensor connections along the right side of the unit; and
• the location and order of the thermostat and flame sensor quick-connect terminals on the right side of the unit.

Honeywell controllers
The court began by acknowledging the striking similarity between the Honeywell and corresponding ICM products. But copying is often ok, and the Supreme Court has cautioned against overprotecting trade dress, especially product designs and configurations.  Honeywell had the burden of showing nonfunctionality. If the feature affects the cost and quality of the article, it’s functional; if the feature would put competitors at a significant non-reputation-related disadvantage, it’s functional—but competitive necessity isn’t required in non-aesthetic functionality cases.
Comparison between Honeywell and ICM
For each product, the elements identified by Honeywell were part of components on the exterior of the controllers, each of which served a function.  “[T]he case serves to protect the internal components, the reset button is used to reset the device, the raised bezel protects the button, the label provides information (including manufacturer identity) or warnings, and the LED light operates as an indicator.”  However, Honeywell argued that its trade dress covered “the gray color of the case, the red color of the reset button, and the location relative to each other of the various components on the external body of the unit”—which reduced to shape, color, and configuration. 
The court found that a reasonable jury couldn’t find that Honeywell met its burden of overcoming the presumption of functionality. Honeywell sought to show that there were other design choices and thus no competitive necessity.  But “TrafFix makes clear that treating the competitive necessity test as the sole and comprehensive gauge—without consideration of the purpose, use, cost, and quality aspects relevant to the primary inquiry—is error.”
Though Honeywell’s witnesses called the shape, color, and configuration “arbitrary,” they weren’t using it in the trademark sense, but merely meant that multiple options existed for the particular shape, color, or configuration at issue.  “Critically missing from the evidence that Honeywell puts forward in its opposition to ICM’s motion is a demonstration that its claimed trade dress is not essential to the use or purpose of the products and does not affect their cost or quality.”  Though it emphasized the feasibility of alternative designs, it did not show that those designs didn’t have cost or quality consequences compared to the Honeywell designs.  Nor did it show that the design elements were selected with an eye to identification and individuality rather than utility. This failure of proof warranted summary judgment.
The court also commented that “common experience confirms the functionality of many of the elements that make up Honeywell’s claimed trade dress. For example, although alternatives may be possible, black and gray are common choices for housings for technical equipment, especially equipment meant to be in the background, so that they do not stand out.”  The use of common use of red and orange to draw attention suggests that “their use for an important button or warning label serves a function. Common sense also suggests manufacturing, storage, and transportation efficiencies of simple shapes, such as a generally rectangular shape for the overall product or for a round button.”  Plus, some design constraints come from the locations where the controllers are mounted, the wiring needed, and the install space.  But Honeywell didn’t provide evidence showing its product configurations and shape didn’t stem from those requirements.
Other competitors’ designs
Given that the controllers were “little more than a set of ‘individual functional components’ that have been “combined in a nonarbitrary manner to perform an overall function,” Honeywell couldn’t claim that the overall trade dress was nonfunctional.  Moreover, had Honeywell shown that the claimed elements didn’t affect cost or quality, it still wouldn’t have shown that control over these “basic colors and shapes, as well as their nondescript combination” didn’t put competitors at a non-reputation-related disadvantage. This wasn’t like the “eccentric” use of green-gold on a laundry press pad, “the unexpected placement of red on a shoe’s outsole that contrasts with the upper part,” or the “purposefully-striking contours of a Ferrari.” Honeywell didn’t show that the possible variations were “sufficiently great in number—especially in light of the size, installation space, and wiring constraints for controllers—that they would not significantly disadvantage competitors.”  Though Honeywell showed alternative designs from other competitors, “some do not differ so significantly as to make it clear that no concern of an infringement claim would exist.”
If the court accepted Honeywell’s configuration as valid trade dress, “the overall appearance of practically any everyday appliance or piece of generic equipment would meet the nonfunctionality test, because as long as the item is large enough or has at least a few external components, some variation in the configuration is bound to be possible.”  Other producers would be entitled to the same protection, and new entrants would quickly face an “undue burden” to steer clear of predecessors.  For example, if Honeywell could protect having “thermostat and flame sensor quick-connect terminals on the right side,” competitors would be limited to the other three sides, which would then run out.  “That burden seems especially onerous when imposed on suppliers of technical equipment for mundane applications that are purchased almost exclusively, if not entirely, for the functionality that they provide.”
Note: Honeywell also styled its infringement claim as a false advertising claim, alleging that the similar appearance created the false impression that ICM’s products were affiliated with Honeywell and violated §43(a)(1)(B).  The court didn’t think that trade dress infringement should be styled as a false advertising claim, and questioned the validity of “construing a product’s appearance as a ‘statement of fact’ that can form the basis for a claim under subsection (a)(1)(B).” Color or shape can absolutely be statements of fact—for example, that’s what it means to say that green on a soda can signifies that it contains lime/lime flavor and thus green is descriptive for lime soda—but I agree that restating the trade dress claim as one for false advertising doesn’t help.  The standard for “does this configuration constitute a statement that this product comes from Honeywell?” should be the same as “is this configuration a valid trade dress?”
Honeywell also sought to exclude the testimony of ICM experts, including that of Adam Vaczek, who would opine on the copyright infringement claims that remained in the case.  Honeywell alleged that the installation manuals and product labels of ICM’s accused products infringed copyrights.  Vaczek had over 30 years of experience in the HVAC industry as a service technician and service manager for a large contractor, with considerable exposure to installation manuals and product labels. He opined that Honeywell’s manuals and labels “contain little, if any content that is unique to Honeywell or that is not determined by the features or functions of the controls themselves. The organization of the information contained in the manuals and labels is standard industry information, common directives, fact-based communications, methods of operation and universally shared graphics. Many of the instructions and methods, use simple ways to convey factual messages.”  He concluded that the manuals’ chapter headings and organization followed a typical format; that the manuals’ content was factual, dictated by the features of the control, and used industry-standard lanuage; and that the labels too were functional and standard in the industry.  In the second part of his report, he identified differences between the parties’ works and opined that the similarities resulted from product features or industry standards.
Honeywell argued that Vaczek wasn’t a copyright expert and thus his testimony wasn’t relevant.  Substantial similarity requires both extrinsic and intrinsic analysis, the first of ideas and the second of expression.  (Pause to note how weird and wrong this is.)  Factual works may have thinner or thicker copyrights; and any copyrighted work includes unprotectable elements.  Merger and scenes a faire, for example, identify standard features that everyone is free to use.  Given this law, the court found that Vaczek’s report was not admissible in its entirety, to the extent that it went to the intrinsic test.  Expert opinion evidence may be considered in connection with the extrinsic test for substantial similarity, because it depends on objective criteria, but it can’t be used to show or rebut similarity of expression under the intrinsic test.  Vaczek’s conclusions such as “The visual impression of these two manuals is different,” “The chapters in the S8610U manual and sections in the ICM290 manual differ in length, width and layout,” and “The ICM290 and Honeywell S8610U manuals contain different content and overlapping content is presented differently,” went too far.  (Even critics of the extrinsic/intrinsic divide for expert testimony might not disagree with this conclusion as long as the factual discussion comes in; Mark Lemley’s criticisms, I think, go to other problems with the division.)
The first part of Vaczek’s report was admissible and covered most of the same facts.  That part was relevant to the strength and scope of the protected elements in Honeywell’s works, including the application of merger and scenes a faire.  Vaczek’s discussion of information that needed to be in the manuals and labels in light of the products’ functions and industry expectations was “especially relevant as some of the registrations of the items at issue reflect that the copyright interest is in the compilation of the information.” Vaczek’s experience gave him specialized knowledge about the functional, technical, and other requirements for content included on the works, which would help the jury. However, Vaczek was not a linguist and didn’t have experience drafting manuals or labels, so his claims that there were “limited ways” to say something, the words used are “simple ways to convey the message,” or the language uses the “most basic words” were not appropriate opinions. The court would carefully oversee the presentation of his testimony.
The proposed expert testimony of Professor Justin Hughes didn’t fare as well, despite his impressive qualifications and experiences. The report explained, among other things, that (1) facts and data do not prevent copyrightability; (2) analysis of “concepts” is not relevant to copyrightability; (3) “uniqueness” is not relevant to copyrightability; and (4) use of common expressions and terms do not prevent copyrightability. Honeywell argued that his report merely stated his understanding of the law, which guided his analysis of Vaczek’s report, and didn’t instruct the jury on the law.  “But the analysis that Professor Hughes proffers is inextricably linked with his articulation of the nature of copyright law and his opinion about its correct application. The entire thrust of his analysis is an identification of the copyright law that should apply and an assessment that Mr. Vaczek’s opinions disregard the law or are irrelevant in light of it.”  Allowing him to testify would impermissibly invade the province of the court and the jury. Honeywell didn’t show that he had technical or industry expertise that would enable him to challenge Vaczek’s opinions about how much functional and other requirements drive the content of the manuals and labels at issue.

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#1 with a bullet: Nutribullet wins false advertising claim, but its green isn’t inherently distinctive

Posted on August 28, 2014 by rtushnet

Homeland Housewares, LLC v. Euro-Pro Operating LLC, 2014 WL 4187982, No. CV 14–03954 (C.D. Cal. Aug. 22, 2014)
Homeland and Euro-Pro compete in the home blender market. Homeland sells three Nutribullet products: Classic, Sport, and Pro.  Euro-Pro sells Ninja blenders, including the Nutri Ninja Pro, which is sold near Nutribullet blenders on retailers’ shelves.  Homeland challenged a comparison chart, “Nutri Ninja v. Nutribullet,” with lists of various features: “Nutrient & Vitamin Extraction,” “900 Watts,” “21,000 RPMs,” “Finer Consistency,” “Ice Crushing,” “Pulse Technology,” “Sip & Seal Lids,” and “Fits in Cupholders.”  The chart indicates that the Nutri Ninja Pro operates at 900 Watts, produces 21,000 RPMs, has ice crushing capability, has pulse technology, has sip & seal lids, and fits in cupholders, but that the Nutribullet does not.  Homeland alleged that each of these factual assertions was false as to each product in its line.
In addition, the Nutri Ninja Pro package says “# 1 MOST POWERFUL*,” which Homeland likewise contended was false. The asterisk corresponded to a small-print disclaimer on the bottom of the box, which states: “ *Based on wattage of single serve blenders and nutrition extractors MSRP under $100.”  (Here’s a related case against Euro-Pro for making a “More Powerful” claim with a similarly hidden small print limitation.)  Homeland also argued trade dress infringement.
Homeland sought a preliminary injunction.  On false advertising, Euro-Pro argued that the comparison chart covered only the Nutribullet Classic, since it was undisputed that three statements (900 watt motor, 21,000 RPMs, and “sip and seal”) were false if applied to the Sport and Pro.  The court agreed with Homeland that the comparison chart covered each Nutribullet model.  Nutribullet is prominently displayed on the packaging of all three, and is the dominant feature.  A consumer viewing the products would “naturally consider each to be a ‘NUTRIBULLET.’”  But the chart didn’t differentiate, with the effect of lumping them all together.
Euro-Pro argued that the products were displayed near each other, and that consumers would resolve the contradiction between Euro-Pro’s chart and the statements on a Nutribullet Pro box by concluding that the statement must refer to a different model.  Shifting the burden to the consumer to investigate was inconsistent with the Lanham Act’s consumer protection function, and was also unrealistic.  The parties agreed that the products were often sold alongside many other competing brands.  “[T]here is strong reason to doubt that a typical consumer would make a one-to-one comparison between the features of the parties’ products and then have the realization Euro–Pro envisions.” Having trusted the Nutri Ninja Pro statements and concluded that it was superior, they might not bother to seek out the Nutribullet models.
Euro-Pro argued that the chart only referred to the lower-end Nutribullet because Homeland’s trade dress claim only alleged infringement of the Classic trade dress, which uses a green background, unlike the Sport and Pro.  The court disagreed—the shared background color didn’t establish that the reference to Nutribullet in the chart would cause a consumer to understand that the comparison was limited to only one model.  Nor did the price differences between the under-$100 Nutri Ninja and Classic versus the over-$100 Sport and Pro clarify matters.  The price range, from about $90 to $130, wasn’t so great that the reference could only be to the Classic.
Because the chart claimed to cover each Nutribullet model, it was literally false. The statements were plainly material.  “Indeed, that the statements relate to key factors informing consumer decisions is evidenced by the fact that Euro-Pro itself felt the features were significant enough to consumers to highlight prominently in comparing its goods to those of its competitor.” And given the direct competition, “there is little basis for doubt that Homeland is likely to be injured as a result of the false statements in the form of diverted sales or diminished goodwill.”
Thus, Homeland was likely to succeed on the merits on the wattage, RPMs, and “sip & seal” functionality claims, though the record was presently insufficient on the other allegedly false statements on the packaging.
The court then found that Homeland showed likely irreparable harm.  Damage to goodwill qualifies as irreparable harm.  (No Herb Reed citation?)  Euro-Pro effectively accused Homeland of making inferior products, which self-evidently would tend to diminish consumer goodwill.  Plus, Euro-Pro’s claim that the Pro and Sport lacked features that Homeland’s packaging specifically claims to have “carries the implication that Homeland is lying about its product’s features, an assertion with obvious reputational consequences.”
The balance of equities and the public interest also favored an injunction.  The injunction didn’t require immediate recall and would allow Euro-Pro four months to liquidate its inventory and phase in new packaging.
No relief was warranted on Homeland’s trade dress claim, however. Homeland failed to show inherent distinctiveness or secondary meaning.  The packaging wasn’t inherently distinctive, which required a “design, shape or combination of elements [ ] so unique, unusual or unexpected in this market that one can assume without proof that it will automatically be perceived by customers as an indicator of origin” (quoting McCarthy).
Nutri Ninja

Nutribullet Classic
Homeland alleged that Euro-Pro infringed by copying “(a) phraseology (“Nutri,” “Pro,” “Extractor,” “Watts”), (b) layout of texts and pictorial elements, (c) selected orange lettering, and (d) most conspicuously, its depiction of a blender with an inverse container against a predominantly green background, showing a cornucopia of fruits and vegetables in similar position[s].”  Setting aside the vagueness of some of this description, “Homeland’s trade dress claim fails because most of the elements it contends comprise its trade dress are not, in fact, arbitrary or unexpected given the nature of the product.”  “Nutri,” “watts,” “extractor,” and “pro” all described or implied aspects of the product.  “Nor is the presentation of an arrangement of fruits and vegetables behind the blender arbitrary given that the product’s primary function is to create drinks by blending fruits and vegetables.”  The “inverse container” was just an image of the product itself, which, like other similar products, operates with the container upside down.  The green background wasn’t arbitrary given Homeland’s emphasis in its marketing on the nutritional benefits of the product.
Nor was there convincing evidence of secondary meaning.  Homeland’s only evidence was its claim to have spent “several hundred million dollars on advertising and promoting the NUTRIBULLET line of kitchen appliances and associated trade dress to single itself [out] as the producer of the NUTRIBULLET line.” But the effectiveness of the advertising is the key, and Homeland offered no evidence that its ads effectively created a secondary meaning for its trade dress, or even that its ads were focused on the packaging trade dress instead of promoting the Nutribullet products themselves.

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What does reputational harm mean? Lessons from Apple v. Samsung

Posted on August 28, 2014 by rtushnet
Apple, Inc. v. Samsung Electronics Co., No. 12-CV-00630 (N.D. Cal. Aug. 27, 2014)
Others will doubtless have much to say about the patent-specific aspects of this case, but I want to talk about what the court said about the relationship between alleged injury to reputation from (patent) infringement and irreparable harm.  Apple won some patent infringement claims against Samsung and sought a permanent injunction, which requires a showing of irreparable harm with a “sufficiently strong causal nexus” to the infringement.  Without the causal nexus, the patentee will suffer the same harm with or without an injunction.
Apple argued that Samsung’s infringement would cause it irreparable damage to its reputation as an innovator, similar to the harm suffered by the patentee in Douglas Dynamics, LLC v. Buyers Products Co., 717 F.3d 1336 (Fed. Cir. 2013). Apple also argued that it would suffer irreparable harm from sales-based losses.
The court first brushed aside Apple’s contention that its allegations of reputation-based harm ought to excuse it from showing a causal nexus with the infringement, since irreparable harm to the patentee’s reputation “necessarily” flows from infringement. The Federal Circuit has made clear that a causal nexus is always required, since it’s actually part of establishing irreparable harm.  We want to distinguish irreparable harm caused by infringement from irreparable harm caused by “otherwise lawful competition,” with reputational harm as well as other types of harm.  “For example, it is possible that Apple’s reputation as an ‘innovator’ could be harmed if Samsung’s noninfringing features are perceived as innovative, but that would not justify an injunction.”
So, Apple argued that an injunction was necessary to avoid irreparable harm to its “reputation and brand.” Samsung’s infringement allegedly harmed Apple’s reputation “by tainting Apple’s reputation as an innovator, by leading customers and competitors to believe that Apple is not entitled to enforce its patent rights (even when it prevails on its infringement claims), and by disrupting Apple’s attempts to maintain exclusivity over its patented inventions.”  While the court found that Apple established that it had a reputation for innovation among consumers that could be the subject of damage, that wasn’t enough. 
Apple argued that the appearance of its patented innovations in “competing and allegedly inferior products” showed harm, along with its reputation for enforcing its IP rights and its general refusal to license its patents.  Douglas Dynamics involved similar factors, and the Federal Circuit found irreparable harm, but that case didn’t require a finding of irreparable harm whenever those factors were present.  Rather, Douglas Dynamicsrejected a district court’s refusal to find irreparable harm where there was no consumer confusion between the patentee and the infringer.  The Federal Circuit concluded that harm to a company’s reputation can occur “even absent consumer confusion.”  But it didn’t create a per se rule in cases where the patentee is an innovative company (which would be at odds with eBay/Winter).
As to the presence of patented features in competing products, Apple argued that its reputation for innovation was damaged when “customers [find] the same ‘innovations’ appearing in competitors’ [products],” including products considered less prestigious and innovative, and that the harm was particularly acute for the two patents Apple practices.  Anyway, even for the unpracticed patents, Apple continued to sell products that competed with infringing Samsung products.  But Apple didn’t show irreparable reputational harm due to Samsung’s infringement.  There was “limited” evidence of actual injury. While the evidence showed Apple’s reputation for innovation and its fierce competition with “follower” Samsung, that evidence didn’t show Apple’s reputation suffered.  There was no evidence that consumers have begun to question Apple’s role as an innovator or have difficulty differentiating Samsung and Apple products due to the infringing features.  
Indeed, Samsung persuasively argued that Apple’s reputation was extremely robust (as that of many famous brands is), making it unlikely that Apple would suffer irreparable harm due to infringement of only three patents.  Other evidence indicated that Apple’s reputation derived from products and features other than the three patents at issue. In fact, “Apple executives testified that highly publicized problems with its hardware and software have had little or no effect on Apple’s reputation.”  That demonstrably robust reputation made irreparable harm less likely.  Further, Apple didn’t show harm stemming from consumer association of Apple’s patented innovations with Samsung’s allegedly “less prestigious” products. The record indicated that Samsung’s products were also reputable, in contrast to the the infringing products in Douglas Dynamics, which were of substantially inferior quality to those sold by the patentee. (I’m still confused about this patent dilution theory, by the way.) 
In addition, Apple did license [redacted] to competing smartphone companies, while the patentee in Douglas Dynamics had never licensed the infringed patents, “so it was reasonable to conclude that an injunction would prevent those features from appearing in competitors’ products and eroding the patentee’s reputation for innovation.” By contrast, Apple’s claim to harm to its reputation as an innovator would be undermined by the presence of the patented features in licensed non-Apple products even with an injunction.  These licenses were the result of litigation settlements/patent pools etc., unlike the Samsung infringements here, but “[c]onsumers are unlikely to understand that certain features appear in competing products due to licenses as opposed to unauthorized infringement.” The licensing made any consumer perception of exclusivity unlikely, regardless of its reasons.

Nor did Apple show a causal nexis between the specific patents at issue and the alleged harm.  The patents at issue covered three features in complex phones containing many different inventions.  A causal nexus requirement may more easily be satisfied with relatively simple products, but here the products were “extraordinarily complex and multi-featured.”  There was not much to show that Apple’s reputation as an innovator was related to the patented/infringing features; Apple didn’t even practice one of the patents.
Apple also argued that, without an injunction, it could lose its reputation for enforcing its IP rights.  “Apple provides no evidence that smartphone consumers make purchasing decisions based on Apple’s reputation for enforcing its intellectual property rights.”  Further, Apple is a vigorous IP enforcer across the country, and it didn’t show a causal nexus between these three patents and any perception of slack IP enforcement.  (Rather the contrary, I’d imagine.)
The court then found that lost market share and downstream sales didn’t entitle Apple to an injunction. The parties’ competition affects downstream sales because of “ecosystem” effects, where one company’s customers will continue to buy that company’s products and recommend them to others.  Being forced to compete against infringing products can be irreparable harm, so the parties’ direct competition weighed in favor of finding irreparable harm. But Apple still needed to show a causal nexus between harm and infringement.  Samsung heavily criticized Apple’s conjoint analysis purporting to show consumer demand for the patented features (e.g., its implausible conclusion that the patented word correction feature was worth $102 for a $149 phone), and pointed out that none of the patented technologies appeared in an independent review of online smartphone advertising.  So Apple didn’t meet its burden of showing a causal nexus. 
The court also addressed an issue that comes up in Lanham Act cases: if a jury ultimately awards damages, does that mean that no injunctive relief is allowed because the harm is demonstrably reparable with money damages?  No, the jury’s ability to put a number on the harm Apple suffered doesn’t necessarily mean that number captured the full extent of Apple’s harm, including irreparable harm stemming from sources other than lost sales (e.g., market share).  There is, however, an inherent tension between showing the likelihood of market harm and its incalulability.  Comment: While one approach would be to resolve that tension by finding that market harm isn’t irreparable, courts haven’t been willing to say that outright even if some cases achieve that practical result. 
Ultimately, Apple failed to prove that the infringing features drive consumer demand for the accused products. 
Query: How would this analysis work in a design patent case, where damages are assessed based on the entire product?  If a patentee is entitled to the profits from the entire article, is it also entitled to measure irreparable harm by the sales potential of the entire article?  If not, why not?
Turning to the other injunctive relief factors, the court considered whether Apple’s alleged harms can be quantified.  Other cases have found damages inadequate for lost reputation, but they all involved evidence.  Here, Apple didn’t offer evidence that its reputational harm couldn’t be remedied.  (I haven’t reviewed the records of the cited cases, but I wonder how truly evidentiary that evidence was.)  However, Apple did offer evidence that it couldn’t completely quantify the ecosystem effects of purchases of infringing phones. Thus, lost sales would be hard to quantify and remedy with damages. But that still didn’t show a causal nexus between infringement and harm. Irreparable harm remains an independent requirement for an injunction; thus, to award an injunction here would “ignore the Federal Circuit’s warning that a patentee may not ‘leverage its patent for competitive gain beyond that which the inventive contribution and value of the patent warrant.’”
The ease of designing around/removing the infringing features showed that the balance of hardships favored Apple. The public interest favors the enforcement of patent rights, but also product choice.  The narrowness of Apple’s proposed injunction here meant less threat to product choice, and Samsung’s design-around remedy might spur innovative alternatives to the patented features.  Thus, the public interest favored Apple.
Weighing all the factors, a permanent injunction was inappropriate.

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overstating competitor’s relationship with FTC target could be defamatory

Posted on August 28, 2014 by rtushnet
Broadspring, Inc. v. Congoo, LLC, 2014 WL 4100615, No. 13–CV–1866 (S.D.N.Y. Aug. 20, 2014) (by my classmate, the Honorable Jesse Furman)
“This is a lawsuit between bitter rivals in the online advertising industry.” Broadspring sued Congoo and two of its executives, CEO Nashed and Senior VP of Business Development Cosentino, principally alleging a defamatory campaign against it. Congoo counterclaimed for false and misleading statements to Congoo’s clients.  The court dismissed the counterclaims and a tortious interference claim against Nashed, but let other claims proceed.
The parties operate online ad networks that connect advertisers with websites (publishers).  They put their advertisers’ ads on publishers’ websites, taking money from the advertisers and paying publishers for the space.  The networks pay either on a CPM basis—a fixed amount for every thousand impressions  an ad receives—or on a revenue share basis, giving the publisher a percentage of the network’s revenue.
Cosentino created a webpage in 2013 on squidoo.com, which allows users to create pages, aka “lenses,” on subjects of their choice.  Using the pseudonym “Recruiterman,” and using personal details that didn’t match Cosentino’s actual details, he created a page about online advertising and marketing businesses.  The page provided his commentary on 13 different ad networks, including Broadspring and Congoo, without disclosing his relationship to Congoo.  Initially, the page stated that “many of [Broadspring’s] advertisers appear to be continuity programs (re-bill offers) where the advertiser gets the customer to enter their credit card for a free trial and the[n] makes it tough to cancel. I’d be careful here.”  
Cosentino emailed Nashed a link to the page, generating Nashed’s response “Ingenious!”  Later, Nashed sent another email with negative statements about Broadspring: “it looks like Broadspring was formerly Mindset Interactive, a notorious spyware company. Mindset was eventually shut down by the [FTC] and Sanford Wallace, their founder, known as ‘Spamford Wallace’ was banned from online activity for 5 years.”  Nashed concluded that “[o]ur publishers should know about [Broadspring’s] background.” Cosentino performed some “Google searches of [his] own,” and then revised the Lens that same day, with text nearly identical to that of Nashed’s email:
A simple Google search shows that Broadspring was formerly Mindset Interactive, a notorious spyware company. Mindset was eventually shut down by the FTC in 2005 and Sanford Wallace, their founder, known as “Spamford Wallace” was banned from online activity for 5 years. In Nov 2006, Broadspring’s shareholders then launched the notorious ringtones company, New Motion, dba Atrinsic. Atrinsic had $17mm in financing (from various unknown investors), became public through a shady reverse-merger. They settled 3 years ago with 6 million users scammed: [link to FTC site no longer works; FTC proceeding here.]
Cosentino disseminated the page, and similar statements, in various ways: he posted links to it in discussion threads on other sites under false names; he emailed links directly to publishers, including Intermarkets.net, the New Hampshire Union Leader, the New York Daily News, and Geology.com; and he pseudonymously reposted many of the statements on the page in a discussion thread on another website (concluding that “Publishers who work with these guys simply have zero critical thinking or care[ ] about their audience”) even though Squidoo “locked” the page, making it inaccessible to the public.
Previously, Congoo and Geology.com had agreed that Congoo had the exclusive right to serve ads “with a thumbnail image and/or a title and/or a description and/or a call to action” on Geology.com, terminable on 90 days notice. But in early 2013, without either party terminating the agreement, Geology.com began to run Broadspring ads as well as the Congoo advertisements. Cosentino called Geology.com’s principal Hobart King and told him that he could “get in trouble running those ads,” that Broadspring had “gotten in trouble for spyware” and that it had been “in court over something.” Cosentino emailed King a link to the Squidoo page, which he told King he could read to “get a review on Broadspring ads and other ad networks.”  Geology.com then terminated its dealings with Broadspring; King testified that this was “mainly” because he was “concerned about what he had read [on Squidoo, and [because he] was concerned about spyware.”
The court first found that, under relevant choice of law principles, California’s law supplied the rule of decision for Broadspring’s defamation claim, given Broadspring’s California domicile and New York’s relative lack of interest in the case; though NY has an interest in protecting its citizens’ First Amendment rights, no defendant was a citizen or resident of that state. (There was an actual conflict because NY protects opinions more strongly than California.)
Defendants argued that the Squidoo Lens was constitutionally protected opinion, and that they were protected by the “substantial truth” defense. This was not enough to merit summary judgment in their favor. For fact versus opinion, California courts ask “whether a reasonable fact finder could conclude the published statement declares or implies a provably false assertion of fact.”  The court found no question that the statements at issue imply provable statements: “Broadspring was formerly Mindset Interactive,” which was “shut down by the FTC in 2005.” Prefacing this claim with a statement that this fact was revealed by “[a] simple Google search” did not render it constitutionally protected opinion.  (The court doesn’t ask whether providing a citation matters, though other courts have suggested that links to sources can matter for defamation purposes.)  Likewise, the statement that  “Sanford Wallace, their founder, known as ‘Spamford Wallace’ was banned from online activity for 5 years,” implies the provable assertion that Wallace founded either Broadspring or Mindset Interactive.  The Squidoo Lens was more than a non-actionable ranking.
The substantial truth defense fared no better.  The burden of pleading and proving truth is on the defendant, and not changed on the theory that Broadspring was a limited purpose public figure—it didn’t become such merely because Congoo itself created a controversy about Broadspring.  Congoo didn’t show truth; the evidence instead suggested falsity.  Neither Broadspring nor Mindset was ever sued or “shut down” by the FTC; Wallace was investigated for his marketing and software distribution practices, and Wallace was a third-party software distributor of Mindset’s. The investigation resulted in a default judgment against Wallace and his corporation, but neither Broadspring nor Mindset was named as a defendant. Broadspring exited the software distribution business voluntarily, motivated by the difficulty of policing the behavior of third-party distributors such as Wallace.  “Even further from the truth” was the claim that Wallace was the “founder” of Broadspring or Mindset.  Defendants argued that they were “connected” as “business partners.”  But the difference between that and being a founder is far greater than the slight inaccuracy in details permitted by California law.
Though Nashed and Congoo didn’t author the Squidoo Lens, a reasonable jury could conclude that Nashed took a “responsible part” in the Lens’s publication based on the e-mail exchange between Cosentino and Nashed and the updated version of the Lens.  And “given the nature of the statements, Cosentino’s and Nashed’s senior roles at Congoo, and the fact that the two communicated about the Lens using their company e-mail addresses, a reasonable jury could hold Congoo liable for the allegedly defamatory statements on a respondeat superior theory.”
On to the Lanham Act claim: Is this “commercial advertising or promotion”? The court used a formulation of the Gordon & Breach test that, consistent with Lexmark, didn’t require competition, but only “(1) commercial speech, (2) made for the purpose of influencing consumers to buy defendant’s goods or services, and (3) … disseminated sufficiently to the relevant purchasing public.”  Defendants contested (3), but the court disagreed. The key to sufficient dissemination is whether the challenged representations “are part of an organized campaign to penetrate the relevant market.”  Isolated disparaging statements aren’t enough, but the breadth of dissemination isn’t dispositive; “the primary focus is the degree to which the representations in question explicitly target relevant consumers.”  Cosentino admitted that he emailed links to the Lens to four publishers, and he continued to send those and other publishers links to similar statements even after the Lens was locked.  Based on that, plus Nashed’s statement that “[o]ur publishers should know about [Broadspring’s] background,” a reasonable jury could conclude that the challenged statements were part of an organized campaign to penetrate the market.
The court also declined to find a failure to show causation or damages. At a minimum, there was a factual issue on Geology.com’s termination of its relationship with Broadspring.  Plus, Broadspring doesn’t have to prove actual sales diversion in order to obtain injunctive relief.  (Citing Johnson & Johnson v. Carter–Wallace, Inc., 631 F.2d 186, 191 (2d Cir.1980) (“Likelihood of competitive injury sufficient to warrant a § 43(a) injunction has been found in the absence of proof of actual sales diversion in numerous cases.”). How does that work with irreparable harm, these days?)
Tortious interference: There wasn’t evidence that Nashed had any contact with Geology.com, so he was kicked out of that claim.  But a reasonable jury could find Cosentino and Congoo liable for using wrongful means (defamation) to interfere with the relationship. What about defendants’ legitimate economic interest, given Congoo’s exclusive contract with Geology.com?  “The means with which Congoo was permitted to protect its economic interest … were limited to those not otherwise illegal, and here a reasonable jury could conclude that Defendants’ authorship and dissemination of the Lens—the very acts that allegedly caused Geology.com to terminate its relationship with Broadspring—constituted defamation and Lanham Act false advertising.”
Congoo’s counterclaims for tortious interference and unfair competition alleged that Broadspring made false and misleading statements to Reader’s Digest and Geology.com. Broadspring allegedly told these publishers that its ads (“creatives”) were much “cleaner” than Congoo’s, and failed to disclose—as required by FTC guidelines—that they were ads, and thus no “cleaner.” It also allegedly told the publishers that Broadspring offered a higher CPM than Congoo, when it often didn’t.  As a result, the publishers allegedly sold Broadspring space on their sites, breaching Congoo’s exclusivity agreements.
The court ruled that Congoo failed to offer evidence that Broadspring’s conduct was “improper,” as required for tortious interference, or that it acted in “bad faith,” as required for unfair competition.  The phrase “cleaner creatives” has a broad definition that could mean many things, including lack of visual clutter or respectability of advertisers, and there was no evidence that the publishers understood it as Congoo interpreted it.  Broadspring’s statements about CPM were “at most, non-specific, boastful statements regarding the superiority of its product, statements that are non-actionable under unfair competition law.”

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Presumed irreparable: 3d Circuit applies eBay to all Lanham Act claims

Posted on August 27, 2014 by rtushnet

Ferring Pharmaceuticals, Inc. v. Watson Pharmaceuticals, Inc., — F.3d —-, 2014 WL 4194094, No. 13–2290 (3d Cir. Aug. 26, 2014)
This case had an INTA amicus brief making the trademark bar’s strongest arguments for Lanham Act exceptionalism, which here means not applying eBay/Winter to Lanham Act cases and presuming irreparable harm upon a showing of likely success on the merits.  The Third Circuit here rejects that position, entrenching the lack of a circuit split—though there’s still a cert petition pending in Herb Reed (the INTA amicus here is similar in its argument).  I’m inclined to think trademark expansionists are hoist on their own petard here (dragging false advertising along with)—having emptied the concept of “goodwill” of any meaning other than “I own it,” the story that likely harm to goodwill is inherently irreparable/unmeasurable makes much less intuitive sense.  You have to know what goodwill really is before you can see irreparable harm to it.
Ferring appealed from the denial of a preliminary injunction against Watson, with whom it competes in the market for prescription progesterone, a hormone that helps women become pregnant and maintain pregnancies and that is useful in assisted reproduction (ART).  Historically, progesterone is injected intramuscularly, which is painful and not FDA-approved.  (Actually the court says “patients consider [the shot] painful”—really?  Shouldn’t we take their word for it?)  Ferring and Watson developed vaginal inserts to deliver progesterone.  Ferring’s Endrometrin is in capsule form, applied 2 or 3 times a day.  Watson’s Crinone is a gel delivered by an applicator, applied once daily.  They’re the only vaginal progesterone inserts for ART that are currently FDA-approved.
Ferring sued Watson based on two presentations made by Watson in September 2012.  Watson hosted presentations about Crinone by Dr. Silverberg, a paid consultant. The presentations were streamed online.  Ferring objected to (1) Silverberg’s reference to a “Black Box” warning on Endometrin’s package insert (“a black box warning showing the efficacy has not been demonstrated with … patients 35 years of age and older”); (2) his discussion of a patient preference survey comparing Crinone and Endometrin; and (3) his alleged mischaracterization of the results of certain studies of Endometrin’s effectiveness in women over the age of thirty-five.
Black box: A black box warning is “of special note in the medical community, as it signifies that medical studies indicate that the drug carries a significant risk of serious or life-threatening effects.”  While Endrometrin’s package insert states that “[e]fficacy in women 35 years of age and older has not been clearly established,” it’s not a black box warning.  Dr. Silverberg was alerted to the error after the first webcast, and didn’t say it again in the second (and certified to Ferring and the district court that he wouldn’t repeat it).
Patient preference: Dr. Silverberg told the audience that “94 percent of patients thought that Crinone was easier to incorporate into their daily lifestyle, probably because it’s given once a day compared to three times a day for Endometrin, 82 percent thought that it was more convenient, or I’m sorry, that may be 88 percent, 94 percent thought that it was more comfortable to use Crinone than the Endometrin.”  (During the second webcast that last 94% on comfort became 84%.)  However, the study was not head to head; as the slide Silverberg used stated, these results were derived from a “tally of yes/no questions about whether CRINONE was easy to incorporate into a daily lifestyle, was convenient, and was comfortable to use.”  Thus the women were not actually comparing the products.  Again, Dr. Silverberg certified that he wouldn’t repeat this mistake.
Effectiveness in women over 35: Dr. Silverberg said that “efficacy has not been demonstrated with … Endometrin for patients 35 years of age and older,” but Endometrin’s package insert actually states that “[e]fficacy in women 35 years of age and older has not been clearly established.”  Dr. Silverberg also discussed two studies on the use of the two drugs in women over 35, and said “We know that efficacy has been established for Crinone in patients under the age of 35 as well as over the age of 35. Schoolcraft’s analysis of the Doody study and also our study found the exact same thing.”  (The language in the second webcast was different but to the same effect, and also said that the Schoolcraft study “show[ed]” that Endrometrin was “not found to be efficacious for women over the age of 35.”) 
The Schoolcraft study actually concluded that “Endometrin was well tolerated and provided successful luteal support in poor prognosis patients” such as “those older than 35”; however, it also included a comparison chart indicating that Crinone had higher pregnancy rates than Endometrin for participants over 35.  The Doody study was a comparison study and found that “[n]o clinically meaningful differences were observed across the three treatment groups in pregnancy rates or live birth rates,” and that “Endometrin provides a safe, well tolerated, and effective method for providing luteal phase support in women undergoing IVF.”  Dr. Silverberg certified that, in future presentations, he will limit his statements on the efficacy of Endometrin for women over 35 in accordance with the package insert.
Because the district court found that Ferring wasn’t entitled to a presumption of irreparable harm and didn’t present sufficient evidence to show likely irreparable harm, it found that Ferring was not entitled to a preliminary injunction. The district court also addressed Ferring’s likely success on the merits, stating that it wasn’t clear that Watson’s allegedly false statements were “completely unsubstantiated” because Watson demonstrated that at least some support did exist, but the court didn’t find it necessary to make a ruling on that.
Preliminary injunctions require showing (1) likely success on the merits, (2) irreparable harm, (3) a balance of equities favoring the plaintiff, and (4) that an injunction is in the public interest.  The absence of any element makes a preliminary injunction inappropriate.  Ferring argued that irreparable harm could be presumed in Lanham Act comparative false advertising cases. Although the Third Circuit had never applied such a presumption, several other circuits had.  (Citing a 9th Circuit case presuming actual deception and harm from deliberate falsity, not irreparableharm; this will bring trouble.  There are many reasons a court might believe that harm at some level was going to occur if consumers were confused; that it could not yet quantify that harm at an early stage of the case; and also that this harm could ultimately be measured in money damages—or, if not, a permanent injunction could be appropriate once all the evidence was in.  Thus, a presumption of harm should be distinguished from a presumption of irreparable harm; one goes to the nature of the party’s claim and its ultimate burden of proof while the other is about procedure in advance of a final disposition.)
The court of appeals began with the Second Circuit’s reasoning, which was that:
A misleading comparison to a specific competing product necessarily diminishes that product’s value in the minds of the consumer. By falsely implying that Advil is as safe as Tylenol in all respects, AHP deprived McNeil of a legitimate competitive advantage and reduced consumers’ incentive to select Tylenol rather than Advil. This is analogous to a Lanham Act trademark dispute. An infringing mark, by its nature, detracts from the value of the mark with which it is confused.
The court of appeals also cited the related rationale from the Seventh Circuit that “it is virtually impossible to ascertain the precise economic consequences of intangible harms, such as damage to reputation and loss of goodwill, caused by such violations.”  So: (1) the harm is inherent in the false comparison, as in trademark cases; and (2) the harm is irreparable because it’s virtually impossible to quantify in money damages.  The Third Circuit, before eBay and Winter, repeatedly applied a presumption of irreparable harm in trademark cases, on the same rationale (which then reduces to difficulty quantifying damages).
But then the Supreme Court spoke.  Courts of appeals have followed by rejecting the presumption of irreparable harm in copyright and patent cases, even though eBay didn’t expressly reject that particular part of the Federal Circuit’s approach.  eBaymade clear that “broad classifications” and “categorical rules” were inappropriate, and that courts should use traditional principles of equity.  As the Second Circuit held, “eBay strongly indicates that the traditional principles of equity it employed are the presumptive standard for injunctions in any context.”
What does this mean for the Lanham Act?  Well, the injunctive relief provision of the statute “is premised upon traditional principles of equity, like the Patent Act’s. Accordingly, we should interpret this nearly identical wording in the same way.”  There’s no evidence from the language that Congress intended a major departure from the long tradition of equity practice.  And eBay’s reasoning doesn’t seem limited to patent cases.
Ferring argued that eBaywas different because patents are property and the Lanham Act does not create property rights, especially with respect to false advertising.  Relatedly, as David Bernstein and AndrewGilden have argued, patent/copyright injury can generally be measured in monetary terms by looking at usurpation of a market, injury to goodwill and reputation “is real but difficult to measure in dollars and cents,” per McCarthy. 
Nope.  eBay did not reason that patent cases were somehow unique, but rather that equity has rules.  “It follows that a court is not free to depart from traditional principles of equity merely because it believes such a departure would further a statute’s policy goals, such as, in the case of Lanham Act claims, compensating plaintiffs for harms that may be difficult to quantify.” Given the language of the Lanham Act, there was clear congressional intent to require courts to grant or deny injunctions according to traditional principles of equity.  (I find it interesting that the court of appeals doesn’t engage directly with this property v. goodwill argument; although scholars have been investigating this topic for a while, courts are poor in language explaining what goodwill might be.)
Winter further supported this conclusion.  Winter rejected the Ninth Circuit’s possibility of harm standard; if a possibility of irreparable harm is too lenient, then a presumption of irreparable harm without any showing at all is also too lenient.  We need to remember that injunctive relief is an “extraordinary remedy” requiring a “clear showing” of entitlement to such relief.  (Random thought: this change in procedure, which is across the board and highly defendant-friendly, has the practical result of coming close to the proposals copyright/trademark restrictionists were making around fifteen years ago,when expansion looked completely unchecked, that liability should be limited to damages in many infringement cases, allowing the defendant’s speech to continue.  Politics being what it is, it turns out that it’s not speech but a general skepticism of claims brought against businesses that has done the job.)
Ultimately, “[a] presumption of irreparable harm that functions as an automatic or general grant of an injunction is inconsistent with [traditional] principles of equity”: likelihood of irreparable injury, competing claims of injury, and the public consequences of this extraordinary remedy.
The court of appeals then affirmed the district court’s finding that Ferring failed to show irreparable harm. Dr. Silverberg promised not to make the challenged statements again, and they’ve been removed from the web.  Ferring argued that it offered a declaration from a licensed reproductive endocrinologist stating that doctors would be less likely to prescribe a drug if they believed Dr. Silverberg’s statements, and that Watson was still making claims for the superiority of Crinone over Endrometrin in patient preference surveys.
The court of appeals found no clear error.  Although only Dr. Silverberg, not Watson, promised not to repeat the offending statements, “Ferring has adduced no evidence that there is any risk that any Watson representative will make such statements, especially in light of the fact that Watson has conceded that certain of these statements were inaccurate, and that all of the statements at issue here were made by Dr. Silverberg.”  Ferring’s declaration was speculative and didn’t assert that the endocrinologist or other doctors had actually prescribed Endrometrin less frequently as a result of Dr. Silverberg’s allegedly false statements.
Ferring argued that a defendant can’t moot a case simply by ending its violative conduct, but must bear the heavy burden of showing its conduct has been totally reformed.  But mootness and irreparable harm are different questions.

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I’ll give you four factors, and the last three don’t count: Lovelace film is fair use

Posted on August 27, 2014 by rtushnet

Arrow Productions, LTD. v. Weinstein Company LLC, No. 13 Civ. 5488 (S.D.N.Y. Aug. 25, 2014)
Someday I might stop blogging copyright fair use and trademark defendant wins on the pleadings, but today is not that day.  Also, I appreciate the court’s avoidance of smutty puns; given the topic, not all judges would have remembered to respect the person whose story this case is ultimately about.
Arrow, which owns the copyright to Deep Throat and marks for DEEP THROAT and LINDA LOVELACE, sued Weinstein for copyright and trademark infringement based on the movie Lovelace, a biography of Linda Lovelace, Deep Throat’s star.  The court characterized Deep Throat as a “famous pornographic film replete with explicit sexual scenes and sophomoric humor.”  The plot features a woman who can’t achieve orgasm until a doctor tells her that she can only achieve orgasm by performing oral sex because her clitoris is in her throat.
Lovelace, by contrast, is a biographical film that “provides a two-pronged look at the tragic life of Linda Lovelace.”  It documents her marriage to Chuck Traynor, her decision to enter the pornography business, and her development into a cultural icon. “Then, the film provides a behind-the-scenes depiction of Lovelace’s life that focuses on the physical and emotional abuse that Traynor inflicted upon her, and the manner in which he coerced her into participating in Deep Throat and its subsequent marketing.”  The film shows how Lovelace, once the most famous pornography star in the business, became an outspoken critic of pornography.  It has no pornographic scenes or even nudity.
Arrow identified three scenes in Lovelace copied from Deep Throat.  Deep Throat “opens with Lovelace driving down the road in a blue Cadillac” while the credits roll.  This scene has music but no dialogue.  Lovelace provides “a behind-the-scenes depiction of the filming of this scene,” roughly thirty minutes into the film.  The Cadillac is red; the film depicts Lovelace struggling with nerves and uncertainty while the director tells her to “Just drive and pretend we’re not here,” which she ultimately does.
The second scene was Deep Throat’s second scene (and first pornographic scene).  Lovelace arrives at home to find a man performing oral sex on her housemate, Helen, in the kitchen. Lovelace says to Helen, “that’s a pretty sight. I hope that I’m not interrupting anything,” then when says she’s not, begins to put away some groceries.  Helen asks Lovelace for a cigarette and asks the man, “mind if I smoke while you’re eating?”  In Lovelace, this scene is recreated about halfway through and shown during a red-carpet screening of Deep Throat.  Lovelace sits with Hugh Hefner, watching the film and discussing her future, intercut with shots of the recreated scene.  There are no groceries in the recreated scene, and Lovelace is complaining to Helen about her inability to achieve orgasm, saying “there’s got to be more to sex than a lot of little tingles. There’s got to be bells ringing, dams bursting, or bombs going off.”  Helen asks, “you want to get off or wreck a city,” causing the screening audience to erupt in laughter.  Later in the film, during the behind-the-scenes part of the story focusing on Lovelace’s suffering, this scene returns, with the detail that during the screening, Hefner asks Lovelace to perform oral sex on him in an apparent quid pro quo.
The third scene was the pivotal diagnosis scene.  In Deep Throat, Lovelace meets with Dr. Young, “an eccentric and quirky man [who provides] no evidence that he is an actual doctor apart from his title. His office is in his home and he is assisted by a young nurse, who also doubles as his sexual companion.”  He starts the consultation blowing bubbles with a children’s toy.  Lovelace tells Dr. Young that there must be more to sex than “little tingles” and that she wants “to hear bells, bombs, and dams bursting.” Dr. Young performs a vaginal exam, using a telescope and his fingers.  He then determines that her clitoris is actually in her throat. This diagnosis makes Lovelace cry; Dr. Young consoles her and encourages her to try deep throating him with the encouragement, “try it. You’ll like it.” “A pornographic scene ensues and Lovelace is finally able to achieve an orgasm.”
In Lovelace, this scene appears in a behind-the-scenes account of its filming.  The first half (diagnosis) is filmed one day, and the second (sexual content) is filmed on the next.  Lovelaceshows the performers as well as the directors and producers in the frame.  Dr. Young doesn’t conduct a full physical exam, though the bubbles, key dialogue, and Lovelace crying are the same as in Deep Throat.  When the first day of filming ends, Traynor is aggravated and intimidates Lovelace; the producers decide to get him out of the way for filming the pornographic parts of the scene.  Lovelaceshows the directors and producers in the frame for that second half as well.  One of the producers jokes, “we’re all gonna win Oscars.”  Dr. Young ejaculates prematurely in what’s clearly the first take; the surprised producers mock him.  Lovelace sheepishly asks, “I’m really sorry, did I do something wrong?” The producers and director reply, “no…no…no.”
To the defense: fair use is a mixed question of law and fact, but fair use can be determined on the pleadings despite the requisite caution.  The factual record here was “complete” and discovery wouldn’t help.  (This is because the only issue for which extrinsic evidence might be developed would go to a market for copyright-owner-licensed biographies; because such a market is legally irrelevant, nobody cares.)  “All that is necessary for the court to make a determination as to fair use are the two films at issue—Deep Throat and Lovelace.”
Purpose and character of the use: A use listed in the preamble to §107 is presumptively fair.  Bill Graham explained that “[b]iographies in general and critical biographies in particular, fit comfortably within these statutory categories of uses illustrative of uses that can be fair.”  Thus, Lovelace, a critical biographical work, was entitled to a presumption of fair use.  Lovelace’s use or recreation of three scenes from Deep Throat was transformative, “adding a new, critical perspective on the life of Linda Lovelace and the production of Deep Throat.” (Note the implicit, and entirely correct, rejection of the folly and detour of Salinger v. Colting’s suggestion that criticism of an author wasn’t transformative of a work; providing insight on Linda Lovelace and providing insight on Deep Throat are linked and neither can nor should be distinguished for purposes of fair use analysis.) 
The three scenes were recreated to focus on a defining part of Lovelace’s life: her starring role in Deep Throat. Two of the scenes provided a behind-the-scenes perspective to show Lovelace’s apprehension and unfamiliarity during filming.  The scenes were “markedly different from the originals—they include actors playing the parts of the director, producers, sound directors, and videographers as well as entirely new dialogue surrounding the filming of the shots.” But, “most importantly,” Lovelace portrayed Lovelace as a vulnerable amateur. Whereas the driving scene in Deep Throat doesn’t meaningfully advance the plot but just allows the display of the credits, Lovelace makes the driving scene important to establish the theme of Lovelace’s anxiety and amateurism.
Likewise, the infamous Dr. Young scene was split in two and became “a behind-the-scenes account of its young, inexperienced, and susceptible star,” stripped of the sexually explicit part of Dr. Young’s physical exam as well as of the pornographic components of the scene.  Dialogue was copied, but as Bill Graham said, “it is both reasonable and customary for biographers to refer to and utilize earlier works dealing with the subject of the work and occasionally to quote directly from  such works.”  Dividing the scene in two allowed Lovelace to highlight Lovelace and Traynor’s fraught relationship, furthering the most important plotline in the film—“Traynor’s control, abuse, and manipulation of Lovelace.”
As for the scene with Helen, it too had an “entirely different context.” The recreated scene appeared before a screening audience, with different dialogue and a different set, but more importantly “an entirely different purpose.”  Lovelace removed the nudity and instead juxtaposed the positive response to the film with Lovelace’s suffering, a central theme of the film.
That Lovelace was made for profit was of little significance.  Nor was the creative nature of the copied work, even though that favored Arrow. Factor three basically asks whether the defendant took no more than necessary given its purpose.  The three scenes at issue last about four minutes, out of a 61-minute running time for Deep Throat; “each scene, as discussed above, serves a distinct and important purpose in telling the story of Linda Lovelace.”  Thus Lovelace didn’t copy more than necessary.  Nor did it copy the core of Deep Throat.  The “heart” of Deep Throat was pornographic depiction of deep throating, while Lovelace was a critical biography.  “[G]iven that the two films have entirely different purposes, it is impossible that defendants could have copied the core of Deep Throat.”  Factor three favored fair use.
Factor four: Courts must consider harm to derivative markets, but only “if the market is traditional, reasonable, or likely to be developed and is not a protected transformative use.” A copyright owner’s willingness to license transformative uses can’t prevent others from entering fair use markets.  “Lovelace could not supplant demand for Deep Throat, because the two films have entirely different subjects—one is a pornography and the other is a critical biography.”  As for derivative markets, Arrow alleged that it licensed Deep Throat for Inferno, a film that was also to be a biography of Linda Lovelace, but that Infernolost funding when the press began to report on the production of Lovelace.  That doesn’t matter because Lovelace was transformative.  (RT: Indeed, the evidence of a lost market in Cariou was much more persuasive, and still didn’t count.) “[P]laintiff cannot prevent defendants from entering this fair use market.”
Fair use as a matter of law.  (Sadly, though, the court declined to award attorneys’ fees to defendants, stating that the claims weren’t “so unreasonable” as to merit a fee award.  I know this is a big production company and all, but until courts are willing to pull the trigger on fees for claims this obviously unwinnable, they’ll keep getting made.)
Now to trademark infringement and dilution.  Rather than going the Rogers/noncommercial use absolute exemption route, the court chose an approach that is in some ways even stronger: it rejected the claims as insufficiently pled as a matter of law. For infringement, Arrow alleged that defendants infringed by “advertising and distributing Lovelace, a movie whose title infringes upon plaintiff’s Linda Lovelace mark, and advertising and promoting Lovelace by repeated mention of plaintiff’s ‘Deep Throat’ movies and mark.”  Further, the complaint alleged that defendants’ “use of ‘Lovelace’ and ‘Deep Throat’ are false designations of origin which are likely to cause confusion, to cause mistake and to deceive as to the affiliation, connection or association with plaintiff as to the origin, sponsorship, or approval of Lovelace by plaintiff.”
But Arrow failed to plausibly allege that consumers were likely to be confused. These were mere conclusory labels.  Arrow didn’t offer any reason that consumers would believe that Arrow was involved with Lovelace’s production.
So too with dilution (both blurring and tarnishment).  Arrow alleged that Lovelace was “likely to cause dilution by blurring the distinctiveness of plaintiff’s famous marks Linda Lovelace and Deep Throat” and “likely to cause dilution by tarnishment by harming the reputation of Plaintiff’s famous marks Linda Lovelace and Deep Throat.”  These conclusory allegations merely recited the elements of the cause of action, without any factual basis for a claim of impaired distinctiveness or tarnished reputation of the marks.  (I remain interested to see how one could allege facts supporting a dilution claim, particularly blurring.)

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Bring me my (bonded) leather: deceptiveness claims were just opinion

Posted on August 26, 2014 by rtushnet

Design Resources, Inc. v. Leather Indus. Am., 2014 WL 4159991, No. 1:10CV157 (M.D.N.C. Aug. 19, 2014)
DRI sued defendants LIA and Ashley under the Lanham Act and the North Carolina Unfair and Deceptive Trade Practices Act.  Dr. Nicholas Cory was a research scientist and the director of LIA, which was a trade association representing leather sellers in the US. Dr. Cory headed LIA’s research laboratory. The core of the case was statements Dr. Cory made to a trade magazine, Furniture Today, about “bonded leather.”  (Previous discussion, with comment from someone who thinks LIA’s hands aren’t clean.)
“Leather” traditionally means upholstery derived entirely from the hide of an animal. There’s alsy a product called bycast/bicast, “generally lower quality leather coated with polyurethane and printed with a pattern to appear as it is genuine leather.”  Bonded leather was originally a synthetic material with leather fibers glued together to form a complete layer. DRI created a new version by attaching leather fibers, not a complete layer, under/behind a synthetic furniture covering consisting of a polyurethane face. DRI sold this new product under the name NextLeather®.  (Given the facts of this case, it seems to me that this registration is problematic.)
DRI contacted Dr. Cory in 2006 to ask if NextLeather could be labeled as leather in the US. Without a physical sample, Dr. Cory responded, “ABSOLUTELY NOT!” be labeled as leather and that it would have to be called “Bonded leather,” “Reconstituted leather,” or “Not leather” under the applicable FTC regulations. Dr. Cory offered to have his lab perform a chemical analysis to determine the percentage of leather fibers used in NextLeather, which was a requirement for labeling bonded leather under FTC regulations.
In 2006, defendant Ashley began running ads with the caption “Caveat Emptor.”  One asked, “Is It REALLY LEATHER?” The said “[s]ome upholstery suppliers” were “using leather scraps that are mis-represented as leather; adding a denim barrier to this material and using it for bicast, and as corrected grain leather in locations where you would expect top grain.” The ad concludes: “Know What You Are Buying” and “REMEMBER … The Overseas Manufacturer Has NO Liability In The U.S.A. YOU DO!”  Ashley contended that it wasn’t aware that DRI sold bonded leather until over two months after the first ad ran, and also argued that its ad was referring to a Chinese product consisting of “glued-together leather ‘scraps’ for backing material” as opposed to NextLeather’s “ground-up leather ‘shavings.’”  DRI nonetheless argued that the ad specifically targeted it and accused it of violating the law, at a time coinciding with a criticial industry meeting where retailers make many purchasing decisions.

In 2007, Ashley asked Dr. Cory if it could market and label a bonded leather product similar to NextLeather as bonded leather. Dr. Cory responded it would be deceptive to label such a product as bonded leather. At Ashley’s request, Dr. Cory conducted an interview with Furniture Today to warn of the potential confusion from labeling these new products (consisting of leather scraps glued to the underside of a synthetic cover) as bonded leather.  
DRI’s claims against LIA stemmed from two Furniture Today articles.  One was by Joan Gunin, titled “Chemist fears confusion over imitators may hurt category.” The article states: “‘To call it “leather” is outright deception, outright fraud,’ said Cory, director of the Leather Research Laboratory at the University of Cincinnati, of bonded leather. ‘It’s not real leather…. It’s a synthetic that has leather fibers glued to the underside.’”  The other was by Susan M. Andrews, titled “For consumers’ sake, let’s not call it ‘bonded leather.’” Dr. Cory is quoted as stating “calling these products bonded leather ‘is deceptive because it does not represent its true nature. It’s a vinyl, or a polyurethane laminate or a composite, but it’s not leather. If you tar and feather someone, does that make them a chicken?’”  Dr. Cory didn’t refer to DRI or NextLeather by name, but one article mentioned an unaffiliated product, Oekopelle.  Furniture Today published at least 13 other articles about bonded leather during this period, none quoting Dr. Cory but many focusing on the deceptive nature of the “bonded leather” label.
Meanwhile, in 2007, the FTC requested public comments on its Leather Guides, which provide that “[a] material in an industry product that contains … bonded leather and thus is not wholly the hide of an animal should not be represented, directly or by implication, as being leather.” LIA submitted comments seeking to clarify whether the practice of adhering leather fibers to the bottom of a synthetic product (as opposed to leather fibers glued together to form a continuous layer) could be marketed as bonded leather. In 2008, the FTC declined to change the Leather Guides, concluding that their provision requiring disclosure of the leather fiber content gave adequate information to consumers.
The court granted summary judgment to LIA because Dr. Cory’s statements weren’t false or misleading.  First, as to the Gunin article with its “outright fraud”/“not real leather” statements, the court noted that the Leather Guides “unambiguously prohibit representing bonded leather as simply ‘leather,’” and DRI admitted that describing NextLeather by the unqualified term “leather” would be both false and misleading. “[I]n light of the governing FTC Leather Guides’ provisions, no reasonable juror could find the above quote literally false.”
DRI argued that the necessary implication of Dr. Cory’s statements was that it was deceptive and fraudulent to sell bonded leather as such because the phrase contains the word ‘leather.’”  But this wasn’t a necessary implication.
DRI then argued misleadingness, claiming that “many [customers] refused to purchase bonded leather due to their perception that they could face legal liability for selling it.” But the evidence—two depositions—failed to show consumer confusion.  One deponent, Silver, testified that consumers generally “weren’t confused about the product [bonded leather],” but “[retailers] got this controversy and stuff in the thing you’re being deceptive. They didn’t want to get involved in it.”  His references to confusion about bonded leather didn’t link Dr. Cory’s statements to confusion.  (As stated, that’s an error of law: the question of whether the statements were misleading concerns whether the statements would likely confuse a reasonable consumer.  If similar statements elsewhere caused DRI’s harm, that’s a damages issue; it doesn’t make these statements not misleading.)  Regardless, even testimony about one retailer, Macy’s, being confused wasn’t enough to show that Dr. Cory’s statement misled a “substantial portion of consumers.”  The other deposition didn’t identify any potential customer who was confused by or based a purchasing decision on Dr. Cory’s statements.  Summary judgment for LIA.
As for the Andrews article, which stated that “calling these products bonded leather ‘is deceptive because it does not represent its true nature,’” DRI argued that this was literally false because FTC regulations were clear and Dr. Cory knew that the labeling was lawful.  The court found Dr. Cory’s statement to be nonactionable lay opinion.  The article “clearly and accurately described the composition of bonded leather,” and wasn’t a discussion of legal standards generally or NextLeather specifically. Rather, the article stated that, “[t]he term ‘bonded leather’ is convenient shorthand within the industry, but it’s bound to confuse consumers who are likely to hear only the word ‘leather.’”  “The disclosed facts and larger context of the article demonstrate that Dr. Cory was giving his opinion on how a customer would perceive the term bonded leather.”  His claim that customers would be deceived wasn’t like a factual, falsifiable claim.  (Hunh?  I understand that, considered as legal opinion, the statement’s not actionable, but it is blatantly obvious how a claim about consumer understanding of a term could be tested and verified or falsified.  A better understanding: in the context of the article, he’s clearly giving an opinion about deceptiveness to consumers rather than claiming that he’s verified this deceptiveness with empirical evidence, and the audience for Furniture Today would understand the nature of his claim.)
Again, there was no necessary implication that it was deceptive and fraudulent to sell bonded leather as such because the phrase contains the word ‘leather.’”  Even assuming that Dr. Cory was offering a legal conclusion about NextLeather’s labeling under the FTC Guides, “[a]bsent a clear and unambiguous ruling from a court or agency of competent jurisdiction, statements by laypersons that purport to interpret the meaning of a statute or regulation are opinion statements, and not statements of fact.” Dr. Cory spoke while the FTC was considering the issue, so summary judgment was also appropriate with respect to this article.
Ashley’s Caveat Emptor ad: DRI again argued falsity by necessary implication because the ad warned potential purchasers of bonded leather to be aware of “leather scraps that are misrepresented as leather,” but DRI never labeled NextLeather as leather alone.  But this argument rested on the unproven assumption that Ashley’s reference to bonded leather referred specifically and exclusively to NextLeather.  To reach DRI’s conclusion, the reader would have to infer that the ad referred to “bonded leather” instead of bicast or similar products; a Furniture Today article so characterized Ashley’s ads (“Ashley is urging buyers to ‘be aware’ of bonded leather.”), and an expert report indicated that informed readers of the ads understood them to be about bonded leather, but the Furniture Today article explicitly mentioned a number of other companies making bonded leather.  Given that explicit falsity requires that a reader “recognize the claim as readily as if it had been explicitly stated,” the leap to NextLeather was too far.
Nor could DRI prove implicit falsity. Deponent Greenfield said that Ashley’s ads “opened our eyes” and that “everyone was talking” about the ad/bonded leather, but he viewed the ad as Ashkey’s opinion.  And he didn’t link bonded leather to NextLeather in a way that indicated consumers would perceive them as synonymous. Silver did testify that the ad was misleading and frightened people into not buying, but didn’t identify any specific potential customer who was deceived, and he admitted that he didn’t know about other furniture industry companies’ operations.  Summary judgment for Ashley.
The state law claims similarly failed, whether analyzed under North Carolina or Washington law.  Among other things, DRI didn’t show that the Ashley ads proximately caused a legally cognizable injury to DRI’s business.
DRI also alleged negligent misrepresentation on the theory that by providing advice via email to DRI, Dr. Cory owed DRI a duty of care in rendering such advice that Dr. Cory breached by: (1) “failing to disclose and concealing his allegiance to his other clients and the leather manufacturing industry members of LIA”; (2) taking a “public position contrary to the advice he had given to DRI”; and (3) “calling DRI a fraudster after it followed his advice.”  But there was no authority for the proposition that “a testing facility owes a legal duty to refrain from expressing opinions (arguably) contradicting advice given to a prior client.” Without a legal duty owed, there could be no claim.

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Consumers can’t be forced to use nonexistent arbitration proceeding

Posted on August 26, 2014 by rtushnet

Jackson v. Payday Financial, LLC, No. 12-2617 (7th Cir. Aug. 22, 2014)
The Seventh Circuit reversed the district court’s holding that it could not hear consumer claims against payday lenders doing business from a tribal location.
Martin Webb was an enrolled member of the Cheyenne River Sioux Tribe and owned/did business with the other defendant entities. Defendants made short-term loans using the internet, allegedly in violation of Illinois civil and criminal statutes. The district court held that the loan agreements required that all disputes be resolved through arbitration conducted by the Cheyenne River Sioux Tribe on the Cheyenne River Sioux Tribe Reservation, located within the geographic boundaries of South Dakota.
After further proceedings, the district court concluded that, although written tribal law was available to the public and thus to the consumers if they investigated, the arbitral mechanism detailed in the agreements didn’t exist. Thus, the court of appeals held, plaintiffs’ action shouldn’t have been dismissed because the arbitral mechanism specified in the agreement was illusory. The court of appeals also rejected defendants’ alternative argument that the loan documents require that any litigation be conducted by a tribal court on the Cheyenne River Sioux Tribe Reservation. Tribal courts “have a unique, limited jurisdiction that does not extend generally to the regulation of nontribal members whose actions do not implicate the sovereignty of the tribe or the regulation of tribal lands.” Because there was no colorable claim of tribal jurisdiction, exhaustion in tribal courts wasn’t required.
The defendants charged approximately 139% in interest each year; the $2,525 loans received by plaintiffs cost approximately $8,392. The loan agreements recite that they are “governed by the Indian Commerce Clause of the Constitution of the United States of America and the laws of the Cheyenne River Sioux Tribe” and are not subject “to the laws of any state.” Unless the plaintiff opts out within sixty days, any disputes arising from the agreement “will be resolved by Arbitration, which shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of this Agreement.” Arbitration would be conducted by either “(i) a Tribal Elder, or (ii) a panel of three (3) members of the Tribal Council.” The consumer doesn’t have to pay fees or travel to the reservation but may participate by phone or video.
To the court of appeals, the case turned on whether the Tribe had an authorized arbitration mechanism available to the parties and whether the arbitrator and method of arbitration required under the contract was actually available. As plaintiffs argued, “[t]ribal leadership … have virtually no experience in handling claims made against defendants through private arbitration.” The district court found that “[t]he intrusion of the Cheyenne River Sioux Tribal Nation into the contractual arbitration provision appear[ed] to be merely an attempt to escape otherwise applicable limits on interest charges. As such, the promise of a meaningful and fairly conducted arbitration [wa]s a sham and an illusion.” The district court referenced a similar case, Inetianbor v. CashCall, Inc., 962 F. Supp. 2d 1303 (S.D. Fla. 2013), where the arbitrator selected was a tribal elder who wasn’t a lawyer, had no training in arbitration, was a co-member with Webb, and was the father of an employee of one of Webb’s companies. Arbitrators should be free of bias and conflict of interest. As the district court concluded, “No arbitration award could ever stand in the instant case if an arbitrator was similarly selected, nor could it satisfy the concept of a ‘method of arbitration’ available to both parties.” This kind of selection wasn’t a “method” in any reasonable sense of the word.
The arbitration clause was a specialized forum selection clause whose validity had to be analyzed under some sovereign’s law. As a choice of law matter, the court of appeals looked to the choice of law clause in the loan agreements, which referred to the laws of the Tribe. Though there was no tribal precedent on forum selection clauses, tribal courts borrow from tribal law where necessary. So to federal law it was.
(In a footnote, the court noted a “more-than-colorable” argument that the choice of law clause shouldn’t be enforced and Illinois law ought to govern. According to the Illinois AG (amicus), the loan agreements violated Illinois public policy, which included a policy against “provisions requiring plaintiffs to adjudicate claims in a distant, inconvenient forum where, as in this case, the clause is embedded in contracts ‘involving unsophisticated consumers in small transactions in the marketplace without any real opportunity to consider [whether to accept the clause].’” Further, the plaintiffs noted that the contracts violated Illinois public policy against usury because they exceed the allowable interest rate under state law. Small consumer loans were exempted from this requirement if they complied with Illinois’s Consumer Installment Loan Act. But defendants weren’t entitled to this exemption because they weren’t licensed in the state and didn’t contend that they otherwise complied with the other consumer protections in the law, such as the protection against transfer of debt to an unlicensed owner. However, the court of appeals found it unnecessary to decide the issue, since the result was the same under anyone’s law.)
Under federal law, “[t]he presumptive validity of a forum selection clause can be overcome if the resisting party can show it is ‘unreasonable under the circumstances.’” This occurs if (1) the forum selection clause was the result of fraud, undue influence or overweening bargaining power; (2) if the selected forum is so “gravely difficult and inconvenient that [the complaining party] will for all practical purposes be deprived of its day in court[]”; or (3) if enforcement of the clauses would contravene a strong public policy of the forum in which the suit is brought, declared by statute or judicial decision.
Under this standard, enforcing the forum selection clause would be unreasonable. While the agreement provides for arbitration by “either (i) a Tribal Elder, or (ii) a panel of three (3) members of the Tribal Council,” the record clearly established that such a forum didn’t exist. The Tribe “does not authorize Arbitration,” it “does not involve itself in the hiring of … arbitrator[s],” and it does not have consumer dispute rules. “[A]n illusory forum is unreasonable.”
If the choice of law provision in the contract was invalid, Illinois law would then govern the validity of the choice of forum provision. Illinois also used the concept of reasonableness; the prima facie validity of a forum selection clause was defeated by the unreasonableness of this one. “[T]he clause was not the product of equal bargaining: It imposes on unsophisticated consumers a nonexistent forum for resolution of disputes in a location that is remote and inconvenient.” The usual criteria for evaluating a forum selection clause didn’t work well because they presupposed that the designated forum actually existed and was available to resolve the underlying dispute.
The related concept of unconscionability was helpful here: the choice of forum provision was both procedurally and substantively unconscionable, applying general law that was not preempted by the FAA. It was procedurally unconscionable because the Tribe lacked rules for conducting arbitrations or even for selecting arbitrators. Plus, the court of appeals agreed with amicus FTC that “[t]he inconsistent language in the loan contracts, specifying both exclusive Tribal Court jurisdiction and exclusive tribal arbitration without reconciling those provisions, also ma[de] it difficult for borrowers to understand exactly what form of dispute resolution they [we]re agreeing to.” Plus, defendants’ claims concerning the scope of tribal jurisdiction, as well as their invocation of an irrelevant constitutional provision, “may [have] induce[d] [the Plaintiffs] to believe, mistakenly, that they ha[d] no choice but to accede to resolution of their disputes on the Reservation.” Substantively, the dispute resolution mechanism set out in the loan agreements didn’t exist. “[T]here simply was no prospect ‘of a meaningful and fairly conducted arbitration’; instead, this aspect of the loan agreements ‘[wa]s a sham and an illusion.’”
The FAA didn’t preclude this conclusion. Defendants argued that the FAA preempted arbitrator bias arguments because arbitrator bias is a defense that applies only to arbitration. The court of appeals disagreed. “The arbitration clause here is void not simply because of a strong possibility of arbitrator bias, but because it provides that a decision is to be made under a process that is a sham from stem to stern.” The contract language indicated a process “conducted under the watchful eye of a legitimate governing tribal body,” but that was in fact impossible. “It hardly frustrates FAA provisions to void an arbitration clause on the ground that it contemplates a proceeding for which the entity responsible for conducting the proceeding has no rules, guidelines, or guarantees of fairness.” Likewise, there was no preemption of Illinois rules on unconscionability on the ground that they had a disproportionate impact on arbitration agreements; the court of appeals was just applying general forum selection rules.
The FAA also provides that a court can designate arbitrators if there’s a failure to name them, but that provision assumes that the only infirmity was the unavailability of a particular arbitrator or class of arbitrators. “Here, however, the likelihood of a biased arbitrator is but the tip of the iceberg.” The court couldn’t save the process by substituting an arbitrator in the absence of supervision by the Tribe or rules for arbitration. Substituting an arbitrator when the parties have agreed to arbitrate makes sense. But “[t]he contract at issue here contains a very atypical and carefully crafted arbitration clause designed to lull the loan consumer into believing that, although any dispute would be subject to an arbitration proceeding in a distant forum, that proceeding nevertheless would be under the aegis of a public body and conducted under procedural rules approved by that body.”  (Atypical, really?)  Parties can agree to arbitrate even if the initially designated arbitrator or the rules might change.  The “auspices of a public entity of tribal governance” was a basic part of the bargain, for which there was no substitute.  As a result of this unconscionability, the forum selection clause was unreasonable.
The court of appeals then rejected the defendants’ alternative argument that the forum selection clause required any litigation to be conducted in the courts of the Cheyenne River Sioux Tribe. I’m not going to go into detail on that part; here’s some interesting commentary from an Indian law perspective, focusing on the dangers the opinion poses for tribal sovereignty more generally.

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Reading list: music copyright and similarity judgments

Posted on August 25, 2014 by rtushnet

Carys J. Craig & Guillaume Laroche, Out of Tune: Why Copyright Law Needs Music Lessons.  Well worth reading in full.  Here’s some choice bits:
[Lucy Pollard-Gott] found that, as listeners became more familiar with a given theme and listened to varied versions of that theme, both musicians and non-musicians were more able to identify elements of “theme structure” in variations. In plain language, the better someone knows a musical theme, and in a context where she is asked to compare that theme to another, the more likely it is she will draw a link between the two themes and deem them to be related, even when the two themes are somewhat dissimilar yet loosely share some common musical features.
This finding has tremendous implications for the lay listener test. First, it suggests that the recognition of similarity is an acquired skill, not a stable binary yes/no response. Rather, nocan become yes over time and repeated listenings, to a point where the two themes need not be particularly alike in order for connections to be drawn between them. Second, it suggests this process is unidirectional; while no can become yes over time, yes cannot become no. Once points of similarity are drawn, a listener cannot go back to a state of mind in which those connections do not exist. … It is all too simple to create the conditions that favour a finding of recognizable similarity.
Thus, the question of “recognizability” of one work in another is not has objective as the lay listener test purports to be; quite the contrary, one can train people to hear connections between melodies, given sufficient time. This does not bode well for composers falsely accused of infringement where there is merely coincidental similarity, even where there are notable differences in the musical themes or expressive details that the composer might point to as evidence of independent creation.

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Coffee’s for classes: 7th Cir. reinstates class action over instant coffee

Posted on August 25, 2014 by rtushnet
Suchanek v. Sturm Foods, Inc., No. 13-3843, 2014 WL 4116493 (7th Cir. Aug. 22, 2014)
Sturm entered the market for Keurig-compatible individual coffee pods (K-Cups) once patent protection expired, but according to plaintiffs they jumped the gun. The Seventh Circuit reversed the district court’s denial of class certification as an abuse of discretion, reasoning that under its approach consumer class actions could never be certified.  (This is a feature not a bug of the basid defense-side arguments, of course.)
Sturm’s own marketing studies indicated that users consider coffee brewed in Keurig machines to be high-quality, contributing to the high price of both the machine and the K-Cups.  Until 2012, Keurig held a patent over the K-Cup filter technology, so Sturm turned to a substitute in 2010 that used the external K–Cup design “but whose innards were entirely different.”  Among other things, it didn’t have a filter.  Sturm, selling as Grove Square Coffee (GSC), intended to gain a first-mover advantage in the post-patent landscape.
But without a filter, Sturm couldn’t use fresh coffee grounds, so it decided to use instant coffee instead.  That’s “essentially, small chunks of freeze-dried brewed coffee that dissolve and are reconstituted when hot water is added to them.”  Keurig customers didn’t expect instant coffee, and Sturm’s consultants warned that “use of the word ‘instant’ is a real nono” and should be avoided “if at all possible” in marketing the product to Keurig owners. The packaging stated in small font that it contained “naturally roasted soluble and microground Arabica coffee,” but did not use the better-known name for soluble coffee, instant coffee. The packaging didn’t say that the contents over 95% instant coffee with only a tiny bit of microground coffee mixed in.
Front of package: “Naturally roasted soluble & microground Arabica coffee”

“Great Coffee. Plain and Simple.” with neighborhood coffee shop narrative

Coffee Lover’s Bill of Rights/”highest quality Aribica beans, roasted and ground to ensure peak flavor”

The packaging, as indicated by images included in the opinion (yay!), showed that “like many of the premium Keurig coffee products shelved nearby, the front of the GSC package contained an image of K–Cups with fresh roasted coffee beans and the admonition that the GSC product was intended ‘[f ]or use by owners of Keurig© coffee makers.’” Sturm’s objective was to make the product “look like the Keurig product in box style.”  The package included a “quality promise” indicating that the coffee was “made with some of the world’s highest quality Arabica beans, roasted and ground to ensure peak flavor, then packaged to lock in optimum freshness.”  But it didn’t disclose that, except for a trivial amount of microground coffee “dusting the instant chunks,” it was not ground beans.  One version of the package stated that its contents “recaptured [the] rich, traditional cup” that is “savored … in neighborhood coffee shops.”  At some point, Sturm added “instant” to the packaging, but the record didn’t clarify whether this new packaging was ever distributed or how widely.  In addition, the package included a warning: “DO NOT REMOVE the foil seal as the cup will not work properly in the coffee maker and could result in hot water burns.”  But this warning didn’t seem designed to protect consumers: “Except as a measure designed to ensure that the user did not view the true contents of the pod, this makes no sense: the presence or absence of a foil seal on top would have no effect on the risk of burns or the use of the cup.”
What result did this packaging have? “Numerous expert surveys in the record concluded that few consumers understood the true nature of the GSC product.” One survey showed participants photos of the GSC product on shelves near other Keurig-related products, then allowed them to look over images of the box for 30 seconds.  Only 14% of participants said the product contained instant coffee. Sturm’s own expert using another methodology found that only one in 151 test participants equated the term “soluble and microground” with the term “instant and microground.” A third expert asked survey participants to score the product on a scale of 1 to 10 on various measures based on its packaging, with “1” being least likely and “10” being most likely. “When asked whether participants expected GSC to contain instant coffee, the mean answer was 1.61. Asked whether the GSC product filtered ground coffee just as other Keurig-compatible coffee products did, participants essentially said yes, recording an average score of 9.26.” And that didn’t even get to the percentageof instant in the blend. Comment: Basically, if this wasn’t deceptive, then nothing short of a black-is-white untruth—tea in there instead of coffee—would qualify.
Sturm was not casual in marketing GSC.  It heeded its consultants’ warning not to use “instant,” and conducted focus group testing to see if participants would notice anything funny.  One test reported that participants didn’t notice differences between Keurig-licensed K-Cups and GSC in terms of weight or the fact that the GSC cup “emitted a distinct rattle when shaken.” Even when these differences were pointed out, participants “did not equate [those differences] with quality.”  Sturm sold GSC at “near-premium” prices, about 10% less than Keurig products.  “This had the dual benefit of reaping a high profit and forestalling consumer suspicions. As one executive admitted candidly, ‘If you actually got the price too low, people would perceive it as poor quality.’”  Comment: This is an excellent example of the misleading nature of the price signal in many circumstances!   The GSC cup was 3-4x as expensive as typical instant coffee, which can just be spooned into hot water.  Plaintiffs’ expert concluded that “only a very ‘price insensitive’ consumer, or one who was misled, would use a $100 brewer [the Keurig machine] to heat water to make instant coffee.”
The public reaction to GSC was “awful.”  The day after the product launched in Wal-Mart, Sturm sent around an email directing that the legal department, not quality control or sales, be immediately informed about any complaints about it.  More:
One retailer, Discount Coffee, informed Sturm that “[GSC] has been the poorest performing introductory product that we have had in our 12 year history.” Several purchasers brought their complaints to the Better Business Bureau. Although a few comments were favorable, the vast majority were negative and many “extremely negative,” according to [defendant] Treehouse’s general counsel…. To mitigate the negative reviews, Sturm encouraged employees to write fictitious favorable reviews online; the marketing department even offered to supply the language.
When customers—including one of the named plaintiffs—complained, Sturm told them that GSC wasn’t instant coffee, but rather “a high quality coffee bean pulverized into a powder so fine that [it] will dissolve.”  This was false except for the “microground” coffee that constituted less than 5% of GSC.  Plus, it falsely implied that coffee is made by dissolving ground beans in water, but actually coffee is made when hot water extracts oils and other solids from the ground coffee bean.  (Given all this, you can see why, even setting aside the legal implications of the district court’s rulings, the court of appeals thought that, if any consumer protection class action could succeed, it would have to be this one.  If not, fraud in general consumer goods has simply been legalized.)
All this resulted in four separate lawsuits consolidated into one, seeking classes covering a total of eight states.  The district court was concerned that online purchasers wouldn’t be similarly situated to in-store purchasers; the plaintiffs offered to exclude online purchasers and the court proceeded on that assumption (but see below).
The district court erred in two primary ways: first, it failed to recognize that a common question was whether the GSC packaging was likely to mislead a reasonable consumer. Second, it applied too strict a test for predominance.
Commonality: a single common question will do, though a mere violation of the same provision of law at the defendant’s hands isn’t enough (Wal-Mart).  Conduct common to members of the class is critical.  Not every question must be common: “It is routine in class actions to have a final phase in which individualized proof must be submitted. … [I]f commonality of damages were also essential, ‘then class actions about consumer products are impossible.’”  Here, the class claims derive from a single course of conduct by Sturm: GSC’s marketing and packaging. Also, the same legal standards governed every class member’s claim: the relevant state laws all require proof that a statement is either literally false or likely to mislead a reasonable consumer.
The district court, when it found that there were no common questions, “overlooked the fact that the question whether the GSC packaging was likely to deceive a reasonable consumer is common. The claims of every class member will rise or fall on the resolution of that question.” (Citing Amgen Inc. v. Conn. Ret. Plans & Trust Funds, ––– U.S. ––––, ––––, 133 S.Ct. 1184, 1191, 185 L.Ed.2d 308 (2013), in the continued saga of “securities cases affecting other class action law despite the big differences between them.”) 
Some of the district court’s wrong turns included its holding that the class lacked commonality because some class members might have purchased the later package that used “instant.”  Yet “many others purchased and allegedly were deceived by the old package. Tens (perhaps hundreds) of thousands of the original packaging units already had been distributed by the time the packaging was altered.”  Plus, the record was unclear about how widely the new packaging was distributed.  Minor overbreadth problems justify amending the class definition, not denying certification.
The district court also concluded, based on no cited evidence in the record, that the proposed class included a “great number of members who for some reason could not have been harmed by the defendant’s allegedly unlawful conduct.”  Certification does not require proof that every class member has been harmed.  If very few were harmed, that’s not an argument for refusing certification; it’s an argument for certifying the class and then entering a judgment exonerating Sturm.  The cases on which the district court relied were different: they involved classes defined to include as members people who could not have been harmed, not weren’t harmed.  For example, an antitrust plaintiff class can’t include people who bought the product at issue before the defendant possessed market power, because they couldn’t have been harmed by the alleged abuse of market power.  Online purchasers might properly be excluded if they couldn’t have been deceived by the packaging—but the court noted that “[o]ften the online ‘store’ shows an image of the package that the customer can examine in detail; if that was done here, then the online group may be in essentially the same position as those who bought in physical stores.”  (Indeed, often the online store doesn’t allow you to read words on the packaging very well; similarity to familiar K-Cups and their ground coffee might well have loomed even larger in consumers’ understanding of what was inside these pods.)  Purchasers exposed to the allegedly deceptive packaging could have been injured by it, “even if it turns out later that a few were not.”
On the record, “it is apparent that this is not a case where few, if any, of the putative class members share the named representative’s grievance against the defendant. If it were, things would be different. A person whose claim is idiosyncratic or possibly unique is an unsuitable class representative.”  But here, the named representatives suffered the same injury as members of the proposed class, given the evidence of the overwhelmingly negative response to the GSC pods, including complaints and surveys.  Whether the packaging was likely to mislead a reasonable consumer is an objective question, and therefore a common one.
Rule 23(b)(3) also requires predominance and superiority; the court assessed those issues against the common question it identified (though there might be more, like Sturm’s scienter).  The district court had concluded that individual issues predominated because each class member’s claim could require individualized inquiries on causation (or reliance).  That was legal error:  
Every consumer fraud case involves individual elements of reliance or causation. As we commented in IKO Roofing, a rule requiring 100% commonality would eviscerate consumer-fraud class actions. And because few if any injured parties would bring suit to recover the paltry individual damages available in most consumer fraud cases, such a rule would undermine enforcement against “tortious harms of enormous aggregate magnitude but so widely distributed as not to be remediable in individual suits,” in direct contradiction of Rule 23(b)(3)’s purpose. The importance of the class action device in vindicating the rights of consumers is one reason why the Supreme Court held that “[p]redominance is a test readily met in certain cases alleging consumer … fraud,” among others.
For consumer fraud class certification, a court should first rigorously analyze whether the plaintiffs’ damages can be measured across the entire class.  Here, they can be: “for example, plaintiff’s damages might be computed by taking the difference between the actual value of the package she purchased (instant coffee) and the inflated price she paid (thinking the pods contained real coffee grounds).” 
After damages, the court should turn to Rule 23(b)(3), which deals with class members’ interests in controlling individual litigations.  The court should compare the difficulty and complexity of the class-wide issues to those of the individual issues. “The class issues often will be the most complex and costly to prove, while the individual issues and the information needed to prove them will be simpler and more accessible to individual litigants.”  Where technical expertise and costly expert testimony, as well as extensive discovery, is important to the first stage of liability (whether a product was defective or a representation misleading), class treatment can be appropriate, with individual issues “readily determined” in individualized follow-on proceedings.  On remand, the district court could find superiority “because no rational individual plaintiff would be willing to bear the costs of this lawsuit.”  Given that reality, a class action has to be pretty bad before it can be inferior to no litigation at all.  If the class prevails on the common issue, reliance and causation could be straightforwardly assessed for each purchaser—or more realistically, a settlement would quickly ensue.
After superiority, the court should assess whether the class allegations are “satisf[ied] through evidentiary proof.”  This can include “survey or other evidence suggesting the relevant common traits of the class members, expert testimony supporting the classwide allegations, or analysis of the relative costs of prosecuting the class and individual issues in the case.”  The ultimate issue is whether classwide resolution would substantially advance the case.
Here, the plaintiffs alleged that Sturm deceived consumers by telling them that the GSC pods contained freshly ground coffee, when at most 5% of the pod did so, and by concealing the fact that the product was overwhelmingly instant coffee.  This was a lot like the facts of Pom Wonderful.  However, the court of appeals wasn’t directing the district court to certify the class on remand; that decision was for the district court in the first instance.  (But will the district court take the hint?)
Finally, the court of appeals reversed the district court’s grant of summary judgment against the eight putative class representatives. The district court found that the GSC packaging wasn’t likely to mislead a reasonable consumer and that none of the individual plaintiffs put forth evidence that he or she was deceived. The district court’s analysis of misleadingness was wanting.  It said only: “The Court has seen the packaging at issue—Plaintiffs bring it to each hearing—and finds that it is not designed to mislead consumers. It says what it is.”  That bare conclusion apparently assumed that only literal falsity can be misleading, which is not so (and, RT here, apparently assumed that intent is required to violate consumer protection law, also not so).  “Moreover—ironically—it appears the district court itself was confused about the product: the court’s analysis reveals that it failed to understand that ‘soluble’ coffee and ‘microground’ coffee are not the same thing.”
There were genuine issues of material fact for each of the individual plaintiffs on whether the packaging was likely to mislead a reasonable consumer, given Sturm’s conscious avoidance of the word “instant” and package design resembling Keurig products; testimony from several plaintiffs that they were misled; many statements on the package implying that the product was premium fresh (unbrewed) coffee; failure to disclose that the product was little more than instant coffee; and at least three independent expert surveys, all employing different methodologies, that found consumer confusion. The district court also didn’t take each individual plaintiff’s claims seriously enough:
For example, the court emphasized that Suchanek admitted that she understood the word “soluble” to mean that something is capable of dissolving. But the fact that Suchanek correctly understood the definition of that English word is not enough to throw out her entire consumer-fraud claim. Did she know that soluble coffee is instant coffee? Did she understand that the GSC product was over 95% instant? Suchanek says not. As she stated, “Keurig brews coffee…. If I was going to buy a k-cup of instant coffee, I would have used my hot water tap that has boiling water at the sink instead of buying an expensive Keurig machine.” Taking all disputed facts in the light most favorable to Suchanek, a reasonable juror could conclude that Suchanek was deceived.
Other plaintiffs who shouldn’t have been tossed out included a plaintiff who admitted that she hadn’t read the text on the packages, but testified that she was misled because of the attractiveness of the package and the picture of a K-Cup on the box.

RT: It says a lot that a district court could toss out a case with this much evidence of deceptive conduct.  I don’t think this signals an especially expansive view of class actions from the 7th Circuit; rather, as the court says, if this isn’t actionable then there is no such thing as a consumer class action.

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