Trump U: puffery defense rejected and class certification granted in 2 cases

Posted on February 28, 2014 by rtushnet

Cohen v. Trump, 2014 WL 690513, No. 13–cv–2519 (S.D. Cal. Feb. 21, 2014)

Cohen brought a putative class action against Donald Trump based on Trump’s involvement with “Trump University.”  Allegedly drawn in by Defendant’s name and reputation, Cohen attended a free preview event, then paid $1,495 to Trump University to attend a real estate retreat, where he subsequently purchased a “Gold Elite” program for $34,995.  He alleged that misrepresentations led him to pay for these programs, specifically that the programs would give access to Donald Trump’s real estate investing secrets; that Donald Trump had a meaningful role in selecting the instructors for Trump University programs; and that Trump University was a “university.” His RICO claims used mail and wire fraud as predicate acts.  I won’t discuss the RICO-specific issues, but the court declined to dismiss the complaint.

Of note, the court rejected Trump’s argument that the statements at issue were nonactionable puffery.  Cohen’s allegations centered on the relationship, or lack thereof, between Trump and Trump University rather than Trump’s claims of general program quality.  Puffery involves a general statement that’s extremely unlikely to induce reliance; “misdescriptions of specific or absolute characteristics” are actionable.  Though many of the ads contain puffery, Cohen’s challenges related to Trump University delivered the specific or absolute characteristics of (1) Donald Trump’s involvement; and (2) an “actual university.”

Trump also made an argument that trademark law protected him, since Trump University was allegedly just a brand—no one would think that Michael Jordan made the sneakers bearing his name, or that Fred Astaire taught classes at the Fred Astaire Dance Studio.  First, Trump lacked legal support for his claim.  In any event, even the hypotheticals were distinguishable, given the extensive allegations that Trump made repeated representations as to his participation with Trump University beyond lending his name to the institution. The ads featured Trump’s signature, with statements such as “I can turn anyone into a successful real estate investor, even you.—Donald Trump.”

Nor did the court strike Cohen’s allegations that included slogans/puffery; he was challenging ads that, while they included puffery, at least created factual issues as well. Anyway, there was no indication that the statements created a serious risk of prejudice, delay, or confusion of the issues. Likewise, the court declined to strike allegations about government agency investigations into Trump University and about TU’s Better Business Bureau rating, since the investigations were potentially probative of Trump’s knowledge and intent to defraud.

Makaeff v. Trump University, LLC, 2014 WL 688164, No. 3:10–cv–0940 (S.D. Cal. Feb. 21, 2014)

The court here certified some consumer protection class claims against Trump University, though rejected nationwide classes. The Court certified a class and five subclasses of residents of California, New York and Florida who purchased a Trump University 3-day live “Fulfillment” workshop and/or a “Elite” program within the applicable limitations period who hadn’t received a full refund.

Plaintiffs alleged materially false representations in ads and the Trump University free preview, which led the named plaintiffs to pay anywhere from $1,495 for a three-day fulfillment seminar up to $35,000 for the “Trump Gold Elite Program.”  The following misrepresentations were allegedly common and pervasive in the materials: (1) Trump University was an accredited university; (2) students would be taught by real estate experts, professors and mentors handselected by Mr. Trump; and (3) students would receive one year of expert support and mentoring.

Plaintiffs alleged a campaign of free previews and ads throughout the US.  While the content varied, all of the marketing materials uniformly referred to the business as “Trump University” and uniformly claimed that Donald Trump was integrally involved in the teaching of students at Trump University. For example, print ads included quotes such as “I can turn anyone into a successful real estate investor, including you,” and “I’ll show you how”; the TU website used a large photograph of Mr. Trump and the message: “Are YOU My Next Apprentice? Prove it to me!”; marketing emails said “76% of the world’s millionaires made their fortunes in real estate … I’m ready to teach you how to do it too”; and print ads and letters signed by Mr. Trump told prospective customers that they would be shown real estate strategies by Mr. Trump’s “hand-picked experts.”

In order to get attendees at the free preview to pay for more, TU allegedly promised participants that they would learn Trump’s secrets from Trump’s hand-picked instructors over the course of a one-year apprenticeship. Transcripts of the preview and initial three-day program included numerous repetitions of the claim that Mr. Trump hand-picked the instructors and mentors.  Plaintiffs alleged, however, that this was untrue.  Trump’s interrogatories only identified four people he picked, and they developed TU course materials; the instructors and mentors were selected by TU representatives.

Those who paid for the $1495 seminar were allegedly promised a three-day seminar and a year of “expert interactive support,” but received a three-day infomercial and a phone number for a “client advisor.” Rather than teaching concrete real estate information, the seminars tried to get customers to buy the Trump Gold Elite Program for $34,995 to get the “full education.” TU representatives allegedly pressured customers to raise their credit card limits to purchase Trump Elite Programs.

As for that Gold Elite package, participants were allegedly promised unlimited mentoring for an entire year, but TU wouldn’t pay mentors for more than six one-hour mentoring sessions per consumer.

The common evidence included TU’s name (changed in 2010 to the Trump Initiative); TU ads that used “recognizable signs to appear to be an accredited academic institution” including a school crest; and evidence that TU was never accredited and was pressed by the New York Board of Education to cease any claim to being a “university” in 2010.  

In addition, TU’s Playbook directing how seminars should be advertised and conducted was the key common evidence of the allegedly standardized, tightly controlled schemes with the goal to up-sell students.  The Playbook provided sales and advertising guidelines, including tips and scripts to help pitch TU products and services, e.g. representations that the instructor was “hand-picked” by Donald Trump, as well as talking points for use in one-on-one sales sessions.  All TU members were required to use the Playbook.  Also, the PowerPoints used by instructors varied, but shared common messages: the Trump University logo and an image of Donald Trump; statements that the instructors were “hand-picked” or “hand selected” by the Donald Trump or the “TU founders;” and advertising for the three-day fulfillment seminar, one-year apprenticeship program, or Trump Elite packages. “A small sampling of transcribed TU seminar recordings indicates that several instructors made key statements at issue here, including the alleged misrepresentation that instructors were ‘hand-picked’ by Donald Trump and students would receive one year of unlimited mentorship.”

Numerosity was easy, as was adequacy (with respect to all but one named plaintiff).  Commonality requires “the capacity of classwide proceedings to generate common answers” to common questions of law or fact that are “apt to drive the resolution of the litigation” per Dukes. Dissimilarities within the proposed class can impede common answers. Here, plaintiffs alleged that all the class members suffered financial loss after exposure to deceptive ads. The common questions were: (1) whether Defendants misrepresented that Trump University was an accredited university; (2) whether Defendants misrepresented that Donald Trump was heavily involved in TU and “hand-picked” the TU instructors; and (3) whether Defendants made misrepresentations about the “yearlong” mentoring and interactive support.

Defendants argued that TU student experiences varied by program, price, contract, content, market, teacher, mentor and resulting individual performance, and that not all instructors or representatives used the Playbook or spoke directly from TU talking points or scripts. But verbatim recitation from a script isn’t required for commonality. “[T]he tightly orchestrated promotional campaign exposed class members to the alleged deceptive and misleading representations that are at issue here.” The class procedure could determine whether misrepresentations were made and whether they were material.

Defendants argued that the named plaintiffs weren’t typical because they bought at different prices, saw different ads, and received different benefits from the TU programs.  Nope.  Each proposed class representative purchased TU’s three-day fulfillment seminar for anywhere between $750 and $1,495, along with additional TU programs and services. Their purchases were sufficiently typical; the nature of the claims was the same, and was based on conduct not unique to the class representatives. “The fact that each Plaintiff may have seen a different advertisement, or no advertisement at all, does not defeat typicality.” The key in determining typicality and predominance is “determining the scope of the advertising and promotions and whether it is likely that all class members were exposed to the allegedly material misrepresentations.”

Predominance: here the court analyzed each claim separately.  First, the usual California statutory claims: Defendants argued that there weren’t proved misrepresentations, and that ads and promotional materials changed frequently, making it unlikely that all of the putative class members were exposed to the same representations. But the record contained “substantial evidence of common misrepresentations made to all putative class members,” as identified above.

Individualized showings of reliance and causation aren’t necessary as long as class members were exposed to the allegedly misleading ads.  After Mazza, without a massive ad campaign, the class has to be defined to include only members exposed to the challenged ads. Defendants argued that there weren’t any scripts or uniform promotional materials containing material misrepresentations, and that verbal representations had to be individually assessed, preventing any presumption of reliance. True, there wasn’t a massive ad campaign, but there was evidence that the campaign here was “uniform, highly orchestrated, concentrated and focused on its intended audience.”  This made it highly likely that each member of the putative class was exposed to the same misrepresentations. “There is substantial evidence that class members paid for TU seminars for reasons that track the advertising and promotional information provided in the highly orchestrated campaign.” Thus, the court found that members of the California class were likely to be deceived.

The NY and Florida consumer protection subclasses showed predominance for similar reasons. “With small differences in wording, all three states [California, New York and Florida] appear to employ the same causation and reliance standard [in their unfair trade and competition laws].”

The court also certified two subclasses for financial elder abuse.  California’s law applies when someone gets property from an elder or dependent adult “for a wrongful use or with intent to defraud,” and an elder is 65 or older.  Florida’s law applies when there are willful violations of Florida’s Deceptive and Unfair Trade Practices Act that victimize a senior citizen, which is someone 60 or older. Since these were premised on the same acts as the consumer protection law violations, common questions predominated.

Defendants argued that individualized determinations would be required on damages, since the court would need to determine what value each student actually received from the program. Individual damages don’t defeat certification as long as the plaintiff can present a likely method for determining class damages.  Plaintiffs sought the amount paid, plus interest, using defendants’ records for distribution. This proposed method of calculating damages didn’t defeat predominance or render the case unmanageable.

However, the nationwide common law causes of action for breach of contract/implied covenant of good faith and fair dealing, fraud, and unjust enrichment failed. Plaintiffs had to show uniformity or at least groupability for the 50 states’ laws.  This required an extensive analysis of state law variances. Plaintiffs proposed nine common law classes; the court found that common issues didn’t predominate. They provided a survey of the applicable common law of the 50 states and proposed verdict forms for the subclass causes of action. But the proposed verdict forms “gloss over the differences in the elements of each cause of action among the 50 states…. It is insufficient to merely refer the district court to densely worded articles, graphs, and charts pertaining to each state’s laws.” 

The court thought there were too many differences in the substantive law.

However, plaintiffs established superiority for the five claims for which they showed predominance.  Though the NY AG recently sued TU, that didn’t defeat superiority as to the NY claims, since it hadn’t yet resulted in restitution, an injunction, or other relief.
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FTC wins big against diabetes treatment claims

Posted on February 27, 2014 by rtushnet

Federal Trade Commission v. Wellness Support Network, Inc., 2014 WL 644749, No. 10–cv–04879 (N.D. Cal. Feb. 19, 2014) (magistrate judge)

The FTC sued Wellness and its principals Robert Held and Robyn Held for false advertising and deceptive practices in the sale of their Diabetic Pack and Insulin Resistance Pack (the same product sold under two names).  Diabetes is a debilitating disease affecting over 10% of US adults, and insulin resistance is a mechanism by which it does its damage by keeping blood glucose levels too high.

Defendants advertised the products as containing vitamins, minerals, and botanical extracts, formulated into three components: the Glucose Support Formula, the Vitamin-Mineral Formula, and the Calcium-Magnesium Formula.  Wellness stopped using those names in 2011, but it continues to sell essentially the same products under similar names, including Glucose Support Formula and the other two combined under the name Life Support Formula.  Wellness stopped advertising the Diabetic Pack as such, but still sells it, and continued to advertise the individual components, including “Glucose Support.” 

Robert Held formulated the product “on the basis of scientific studies he found on the Internet.” Defendants claimed that the products assisted in the dietary or nutritional management of diabetes by providing nutrients which typical diabetics lack. After subtracting money returned to customers, Wellness’s sales revenue for the products between 2004 and 2012 was nearly $2.2 million.  Robert and Robyn Held developed all the advertising and marketing, including the website, though verifying accuracy was Robert’s job.

Wellness used keywords, metatags, and AdWords to promote its website. Its keywords included “alternative diabetes,” “diabetes control,” “cure diabetes,” “cure for diabetes,” “diabetic cure,” “remedies diabetes,” “natural diabetes cure,” and “diabetes treatment.”  Most of its ads were pay-per-click, a marketign campaign designed by Robert Held.  Though outside contractors managed the campaigns, Robert chose the keywords and AdWords.  Some of the more successful ads made claims such as:

Clinically Proven Natural Solution

To Diabetes With A 90% Success Rate…

Reverse the Effects of Diabetes

Money Back Guarantee

The website “consistently highlighted the Products’ ability to lower blood sugar levels and reduce dependency on medication and emphasized the existence of scientific proof demonstrating these benefits.”  It also contained testimonials from putative customers claiming to have freed themselves from high blood sugar and insulin use.  These testimonials also referred to a low carb diet recommended as part of the Diabetic Pack regimen.  There were numerous references to science and scientific studies, such as the headline, “Nobel Prize Winning Technology Validates WSN Diabetic Pack Ingredients.”  The Diabetic Pack allegedly worked because it “operate[d] at the cellular level.”

An online marketing survey conducted for defendants indicated that the main reason that consumers landed on the website was that they were looking for information about natural remedies for diabetes and about how to control their sugar levels.

Defendants never conducted scientific studies to establish the products’ effectiveness.  Instead, their claims were based on studies about the individual ingredients.  Robert Held also testified that he believed the products worked because people told him that the products worked for them, but he didn’t know how many had told him that.  From 2004-2007, defendants received about 384 complaints: some said the product wasn’t working and others said their doctors didn’t support its use.

In 2005, the FDA sent a letter warning that it considered the Diabetic Pack to be a drug and that defendants’ claims didn’t comply with the FDCA.  In 2006, the FDA sent another warning letter.  In 2007, the FTC sent a Civil Investigation Demand, culminating in this case.

The FTC asserted two causes of action, one for the Diabetic Pack and one for the Insulin Resistance Pack.  Diabetic Pack: Defendants deceptively claimed that the Pack was an effective treatment for diabetes; that it reduced or eliminated the need for insulin and other diabetes medications; that scientific studies proved that it was an effective treatment for diabetes; and that it was clinically proven to cause an average drop in blood glucose levels of 31.9%. Insulin Resistance Pack: defendants deceptively claimed that the Pack reversed insulin resistance, managed insulin resistance, and preventd diabetes; that scientific studies proved that it was an effective treatment for insulin resistance; and that it was clinically proven to cause an average drop in blood glucose levels of 31.9%.

The defendants offered several defenses, all of which the court rejected.  First, the court accepted the FTC’s diabetes/insulin resistance expert, who testified about what experts would consider substantiation with respect to the claims at issue: sufficiently large, controlled, randomized, double-blind trials, using the same dosages and formulations in defendants’ products.  The expert didn’t review defendants’ advertising or attempt to determine whether they actually made the challenged claims, but that wasn’t his job and didn’t make his opinions unreliable.  Defendants’ expert, by contrast, didn’t address the claims the FTC challenged, so his opinions weren’t relevant, and his methodology wasn’t reliable.  Defendants wanted the court to consider his opinions with respect to individual liability—since he testified that the products were useful, they weren’t trying to “hoodwink” customers.  But his opinions still weren’t based on reliable scientific methodology, even if they were relevant to the Helds’ knowledge or belief (and of course intent isn’t required to violate the FTCA).

Defendants argued that the FTC’s claims needed to take into account the FDA’s regulations for medical foods.  That wasn’t the issue in the case, though.

Defendants also argued that the FTC’s claims violated the First Amendment. Citing Pearson v. Shalala, 164 F.3d 650 (1999), defendants argued that Central Hudsonapplied.  But Pearson was inapposite.  There’s no right to make false or misleading advertising claims; Pearson is about “regulations that limit or ban whole categories of speech,” not enforcement actions against particular deceptive speech.

Defendants then tried the argument that the APA barred the FTC’s claims because the FTC is seeking to make new rules through adjudication rather than complying with the procedures that govern rulemaking under the APA. Nope.  Agencies can have case by case enforcement policies.  While an agency may abuse its discretion when it makes a “prospective pronouncement of a broad, generally applicable requirement [in an adjudication], without application of the requirement to the parties before the [agency],” here the FTC was relying on well-established rules and legal theories in suing based on Sections 5 and 12.  It wasn’t trying to announce through adjudication any broad new rule.

Now, for the claims themselves: to show a claim has been made, the FTC must show either that it was explicitly stated, or that, from a reasonable consumer’s perspective, the ad gives the net impression that the claim has been made.  A court can determine this net impression, and ads capable of being interpreted in a misleading way should be construed against the advertiser.

Under this standard, the court found that defendants made the challenged claims.  As to “effective treatment for diabetes,” the court disagreed with defendants’ argument that their claims related only to the ingredients and not to Diabetic Pack.  “Any reasonable consumer reading the description on Defendants’ website of how Diabetic Pack works would conclude that the scientific studies relating to the Foodform® ingredients also establish that Diabetic Pack is effective in treating diabetes.”  Likewise, the ads claimed that Diabetic Pack reduced or eliminated the need for insulin and other diabetes medicine, “notwithstanding references to diet and exercise or disclaimers advising consumers that they should use the Diabetic Pack under medical supervision and should continue to take their prescribed medication.”  The pay-per-click ads expressly promised a “drug-free” “solution” to diabetes, and the website stated that one of Diabetic Pack’s “breakthrough benefits” is “less dependency on medications.”  This was reinforced by the testimonials. 

The disclaimers warning consumers to continue to take their medications didn’t help.  For example, the website had the following Q and A:

When starting on the WSN Insulin Resistance Pack can I stop using other medications I am taking for my insulin resistant condition?

You should continue to take any medications that have been prescribed by your physician. As your symptoms begin to reverse … you should inform your physician about what is happening and that you want to reduce the amount of medications you are taking accordingly. Working together with your physician, you can continue to reduce any medications you are taking, and in some cases, completely eliminate the use of all medications.

This was hardly a disclaimer: it gave “the strong impression that [consumers’] need for insulin or other diabetes medications will be reduced as a result of using the Diabetic Pack.”

Misleadingness: The FTC has the burden of showing inadequate substantiation, but doesn’t need to have clinical studies showing the product doesn’t work.  Establishment claims have to be substantiated as claimed; the appropriate level of substantiation for non-establishment claims depends on context, including “1) the type of claim; (2) the product; (3) the consequences of a false claim; (4) the benefits of a truthful claim; (5) the cost of developing substantiation for the claim; and (6) the amount of substantiation experts in the field believe is reasonable.”  The claims here were of both types; the court found all misleading because they lacked a reasonable basis, and the establishment claims were actually false.

The FTC’s expert used the same substantiation standard for both establishment and non-establishment claims, because experts in the field would require “consistent results from well-designed and well-conducted studies in representative human populations that directly assess the specific therapeutic effects at issue” in either case, because the claims were disease-specific treatment or prevention claims. Even when defendants didn’t directly say “studies prove,” they made claims about “treatment of a serious health condition where the consequences of adopting a particular course of treatment may be significant,” both in benefits and risks (for example, discontinuing diabetes medication).  The evidence showed that the claims lacked adequate substantiation, and that defendants’ cited studies didn’t support the claims. Among other things, many of the studies were in vitro or in animals, not in humans; the single-ingredient studies had weaknesses such as insufficient size, lack of placebo or other controls, and testing of much larger doses than are found in defendants’ products; and other well-designed studies produced inconclusive or negative results.

Of course the claims were material.  They were express and health-related, both of which are presumptively material.

The court then found individual liability for Robert Held and Robyn Held.  Injunctive relief against individuals on the basis of corporate acts or practices is available where: “1) [the] corporation committed misrepresentations or omissions of a kind usually relied on by a reasonably prudent person, resulting in consumer injury, and 2) [the individual] participated directly in the acts or practices or had authority to control them.”  For restitution, the FTC must also show knowledge of the deception. This standard requires that the individual “had actual knowledge of material misrepresentations, [was] recklessly indifferent to the truth or falsity of a misrepresentation, or had an awareness of a high probability of fraud along with an intentional avoidance of the truth.” But it doesn’t require intent to defraud.

The only issue here was whether the Helds had the necessary knowledge. FTC v. Garvey, 383 F.3d 891 (9th Cir. 2004), found a spokesperson hired to appear in weight-loss infomercials not individually liable.  He was given samples of the product a few weeks before filming, and his wife lost significant weight using the product, and he also received booklets about the product from the manufacturer. Because of his first-hand anecdotal evidence and the purported scientific evidence provided by the manufacturer, the 9th Circuit held that he lacked the requisite mental state, given that he was merely a hired spokesperson and thus should only be held to a duty to examine the material from the perspective of a reasonable layperson.

FTC v. Medlab, Inc., 615 F. Supp. 2d 1068 (N.D. Cal. 2009), reached the opposite result as to a different individual.  There, the individual defendant also claimed to have personally used the product and lost 18 pounds.  But he was “deeply involved in designing the composition of the products and composing the representations at issue” in the case. He continued to place misleading ads even after the FTC initiated a “red flag” campaign warning of “bogus claims” in his advertisements. And his own weight loss didn’t address whether one could, as the ads claimed, lose weight without dieting or exercising, or whether there were clinical studies showing that users could expect this result.

As in MedLab, there was  “extensive and undisputed evidence that Robert Held was at least recklessly indifferent to the truth or falsity of the representations.”  He wasn’t trained as a scientist or doctor but decided on the composition of the products based on internet research.  He and Robyn Held developed all the ads together, including claims that scientific studies supported the products’ effectiveness, so he had sufficient knowledge to support individual liability.

Robyn Held argued that she justifiably relied on her father Robert’s conclusions, but “no reasonable fact finder could conclude that she was anything but reckless.” She wasn’t involved in formulating the products, but she was a co-owner of the company, played a significant role in running it, and was extensively involved in creating the deceptive ads. She was also aware that the composition of the products was based on Robert’s internet research, that Robert had no formal medical or scientific training that qualified him as an expert on the treatment of diabetes, and that the products were never scientifically tested. Thus, both were personally liable.

The district court had broad discretion to order restitution and/or a permanent injunction where a violation of the FTC Act has been established. Courts often award the full amount lost by consumers, not just defendants’ profits.  The court found that the FTC was entitled to nearly $2.2 million in restitution, based on Wellness’s net sales.

The court declined to exclude reorders from its calculation, though defendants argued that these consumers were obviously satisfied.  “A presumption of actual reliance arises once the Commission has proved that the defendant made material misrepresentations, that they were widely disseminated, and that consumers purchased the defendant’s product.”  Reorders don’t negate reliance on misrepresentations, absent evidence that repeat customers didn’t rely on the ads, of which there was none.

The court also agreed with the FTC’s proposed reporting requirements, despite defendants’ argument that they had no history of regulatory violations.  Nonetheless, the reporting requirements were reasonable.  The FTC “is not limited to prohibiting the illegal practice in the precise form’ existing in the past.” Rather, the FTC may “fashion its relief to restrain other like or related unlawful acts.” “These fencing in’ provisions are needed to prevent similar and related violations from occurring in the future,” as long as they have a reasonable relationship to the actual unlawful practices.  Reasonability requires consideration of “(1) the seriousness and deliberateness of the violation; (2) [the] ease with which the violative claim may be transferred to other products; and (3) whether the respondent has a history of prior violations.”

Here, both defendants were personally involved in serious violations of the law over many years.  The reporting—here, changes in title or role in the business, for 20 years—was necessary to monitor their compliance.  The actually proscribed conduct was limited to representations related to the violations established by the FTC.
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How Many Wrongs Make a Copyright?

Posted on February 27, 2014 by rtushnet

This has tangential relevance to the Innocence of Muslims case (of which more soon).  I’ve written more directly about that case at the district court level, but this forthcoming publication deals with the idea of providing more protection to victims of revenge porn via changes to copyright:

Rebecca Tushnet, How Many Wrongs Make a Copyright?
Minnesota Law Review, Forthcoming

Abstract:     

Derek Bambauer’s provocative paper argues that, because the remedies available to people who suffer unconsented distribution of intimate images of themselves are insufficient, we should amend copyright law to fill the gap. Bambauer’s proposal requires significant changes to every part of copyright—what copyright seeks to encourage, who counts as an author/owner, what counts as an exclusive right, what qualifies as infringement, what suffices as a defense, and what remedies are available. These differences are not mere details. Among other things, incentivizing intimacy is not the same thing as incentivizing creativity. Bambauer’s argument that copyright is normatively empty and already full of inconsistencies and exceptions does not justify such profound changes. Bambauer’s true target is § 230 of the Communications Decency Act, which protects online intermediaries from liability stemming from users’ violations of others’ privacy. Copyright claims aren’t subject to § 230, so his proposal hopes to force intermediaries to do more in revenge porn cases. But the case for requiring more from intermediaries to protect privacy should be made on its own merits, not by distorting copyright law.

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Deciding substantial similarity on a motion to dismiss

Posted on February 26, 2014 by rtushnet

Klauber Bros., Inc. v. Bon-Ton Stores, Inc., 2014 WL 657953, No. 13–1672 (2d Cir. Feb. 21, 2014)

Klauber appealed from the dismissal of its copyright claim against Bon-Ton.  It argued that the district court erred in finding no substantial similarity as a matter of law between the parties’ lace-waistband underwear.  The court of appeals affirmed the grant of the motion to dismiss; a district court can resolve an infringement case as a matter of law if “no reasonable jury, properly instructed, could find that the two works are substantially similar.” And where, as here, the works in question are attached to the plaintiff’s complaint, the district court may “consider the similarity between those works in connection with a motion to dismiss, because the court has before it all that is necessary in order to make such an evaluation.”
Klauber’s design
Bon Ton’s design

 
The court of appeals’ independent review revealed that the designs didn’t have a substantially similar aesthetic appeal. Yes, they had similar elements—curling sprigs, leaves, and flowers—placed in a similar spatial arrangement. But each element had differences, too:

For example, the sprigs in Klauber’s designs are long, winding, and delicate, while the sprigs in Bon-Ton’s design are shorter and more compact; the leaves in Klauber’s designs all have a distinctive indentations and vary in shape and size, while the leaves in Bon-Ton’s design have no indentations and are uniform in shape and size; and the flowers in Klauber’s designs are buds growing upward away from the nearest border, while the flowers in Bon-Ton’s design are blossoms growing downward towards the border.

“The accumulation of these differences gives Bon–Ton’s design a substantially different ‘total concept and overall feel’ than Klauber’s designs.”  Klauber’s designs were “delicate and ornate, with the dominant element being the semicircles formed by the curling sprigs,” while Bon-Ton’s design “conveys a more rudimentary and abstract feel, with the dominant element being the straight portions of the sprigs.”  No reasonable juror would regard the works’ aesthetic appeal as the same.  (Under the surface here, there are significant idea/expression issues and concepts of what the protectable “aesthetic appeal” has to be here to avoid protecting ideas.)
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Horror retellings of children’s classics

Posted on February 25, 2014 by rtushnet

Transformative works of the day: horrific retellings of children’s classics.  Are You My Mother? (a chilling story of self-delusion and parental feeling gone wrong);  If You Give a Mouse a Cookie (“He’s going to ask for a glass of milk/and you will give it to him,/because you are incapable of acting in your own best interests.”); The Runaway Bunny(“‘If you become a fisherman,’ said the little bunny,/‘I will become a rock on the mountain, high above you./Better to be a stone and insensible to all things/than to stay here with you. Better to be a stone.’”); Oh, the Places You Went; The Gifts of the Giving Tree; The Hunger of the Caterpillar.  Really brings to light the shared thematic concerns of horror and children’s books.  Now if only someone will do the opposite and do the kid’s book version of Flowers in the Attic. 

No, I have more to say: several friends immediately reacted to The Runaway Bunny retelling with “this book was already creepy; this just makes the subtext text.”  I think that making subtext text is transformative, but doctrinally this reaction might be thought to create a problem because of cases like Salinger. What this retelling is, is interpretive—perhaps a better word than transformative in this context; interpretation has a long history as recognized fair use.  And we don’t find interpretations unfair just because other people have read the work and had a similar reaction.
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Credit score service is credit repair service because of its ads

Posted on February 24, 2014 by rtushnet

Stout v. FreeScore, LLC, No. 10-56887 (9th Cir. Feb. 21, 2014)

The court of appeals reversed the dismissal of Stout’s putative class action against FreeScore under the Credit Repair Organizations Act (CROA). The district court concluded that FreeScore is not a “credit repair organization” as defined in the CROA. The court of appeals reversed because FreeScore, “through the representations it made on its website and in its television advertising, offered a service, in return for the payment of money, for the implied purpose of providing advice or assistance to consumers with regard to improving the consumer’s credit record, credit history, or credit rating.”

FreeScore is an online “provider of credit scores, reports and consumer credit information.”  Its website says a lot about the importance of staying out of financial trouble, the importance of knowing one’s credit score to staying out of financial trouble, etc.  E.g.:

See your Credit Report & FREE Credit Scores online today and start your climb to financial freedom… Now more than ever, you need to ensure your Credit Report is clean. Lending standards are extremely strict. Poor Credit Scores and a damaged Credit Report could put your dreams of home ownership, a new car or even a new career on hold today – and haunt you for years to come. You can’t afford to bury your head in the dirt when it comes to your credit any longer.

I’m omitting a lot, but it goes on in this vein extensively, and juxtaposes these statements with offers to enroll in its service so that users can “see what lenders see,” “[G]et your complete credit picture,” etc.  FreeScore’s reports allegedly allow users to spot errors “so you can quickly address incorrect information,” “[g]et your Scores to negotiate your best mortgage, auto and loan interest rates,” etc.  TV ads tout FreeScore as some sort of way to address the problem of being hounded by creditors, though the direct statements are in the vein “you can’t fix errors on your credit report if you haven’t seen it… [K]nowing your credit score could be the difference between being down there, and being up here.”  The tagline: “Life costs more without FreeScore.”

FreeScore also talks a bunch about FICO scores, including

[H]ow can you deal with or improve a FICO® score? It’s a long process that starts with knowing more about all the details of your overall financial situation. Many people take years to micromanage their accounts, attempting to repair a damaged credit score, and many find that the best solution is preventative credit maintenance. Learning to manage your credit starts with getting informed about your credit. That means utilizing services like credit monitoring to find out what may be changing in your credit history report; those changes can have an immediate effect in your credit score.

FreeScore requires an initial fee (which must be authorized at the time of an initial 7-day “free” trial), plus $29.95/month.  The fine print at the bottom of the enrollment page that Stout used stated that FreeScore provided tools for monitoring credit information, but that “FreeScore and its benefit providers are not credit repair service providers and do not receive fees for such services, nor are they credit clinics, credit repair or credit services organizations or businesses, as defined by federal and state law.”  The enrollment page also enumerated the “benefits” of membership, and explained that “Knowing All 3 Credit Scores Gives You the Power to Negotiate the Best Rates Possible.”

The district court held that FreeScore wasn’t a “credit repair organization” because it didn’t promise to improve consumers’ credit.  It promised to provide a credit score, but it was up to the consumer to improve it.

The court of appeals first turned to the plain language of the CROA, which was part of a statute that Congress intended courts to construe broadly to fulfill its remedial purpose.  The CROA defines a credit repair organization as:

[A]ny person who uses any instrumentality of interstate commerce or the mails to sell, provide, or perform (or represent that such person can or will sell, provide, or perform) any service, in return for the payment of money or other valuable consideration, for the express or implied purpose of –

(i)         improving any consumer’s credit record, credit history, or credit rating; or

(ii)        providing advice or assistance to any consumer with regard to any activity or service described in clause (i). (emphasis added)

Congress also found that consumers had been harmed by certain advertising and business practices of some credit repair companies, particularly consumers “of limited economic means and who are inexperienced in credit matters.”  The purposes of the statute were to ensure that prospective clients were provided with the information necessary to make informed decisions, and to protect the public from “unfair or deceptive advertising and business practices by credit repair organizations.”

FreeScore “falls squarely within the CROA’s definition.”  A covered person need not actually provide credit repair services to do so.  Instead, it need only “represent that it can or will sell, provide, or perform a service for the purpose of providing advice or assistance to a consumer with regard to improving a consumer’s credit record, credit history, or credit rating.”

FreeScore’s ads represented that it provided a service “for the purpose of assisting a consumer in improving the consumer’s credit record, history or rating.”  Citing an FTC case, the court held that the proper inquiry was to examine the “overall net impression” of an ad “to determine what message a viewer may reasonably ascribe to it.” 

Here, FreeScore did more than provide credit reports.  It advertised that its report allows consumers to “[s]pot damaging inaccuracies on [their] Free Credit Report at a glance so [they] can quickly address incorrect information dragging down [their] Credit Scores,” that it will “keep an eye on [consumers’] Credit Reports at all three bureaus 24/7 so [they] don’t have to,” and that “[i]nstant email alerts notify you when critical changes appear on your Credit Report so you can make corrections fast!” The TV ad similarly claimed “FreeScore.com even sends me an alert when there’s any change to my credit report.” “FreeScore clearly states that the express purpose of credit monitoring, through services such as email alerts, is so that steps may be taken to improve credit: ‘Learning to manage your credit starts with getting informed about your credit.’”

Further, FreeScore affirmatively represented that its services could improve, or help improve, consumers’ credit record, history, or rating.  FreeScore’s FICO page asks, “So how can you deal with or improve a FICO® score?”  It continues, “many find that the best solution is preventative credit maintenance.” The page concludes, “Learning to manage your credit starts with getting informed about your credit. That means utilizing services like credit monitoring to find out what may be changing in your credit history report; those changes can have an immediate effect on your credit score.”  Thus, FreeScore claimed both explicitly and implicitly that its services could improve or assist in improving consumers’ credit records.  Of course, FreeScore’s “self-serving disclaimer” was ineffective, given its own representations.

Comment: The FTC’s rule is that lawyerly parsing of the kind that might avoid a perjury conviction isn’t enough for an ad.  Juxtaposing so many words about improving credit scores with FreeScore’s services clearly implies that the service will help raise scores.

The court continued: “FreeScore offers services aimed at improving future creditworthy behavior with prospective promises of improved credit. It advertises on FreeScore.com that consumers must ‘ensure [their] Credit Report is clean,’ ‘[s]pot damaging inaccuracies’ on their credit reports, and ‘start [their] climb to financial freedom’ by utilizing the services it offers.” Its TV ad stated that consumers who used FreeScore would be able to “fix errors on [their] credit report,” and that credit scores can determine whether consumers can “get a loan, a better interest rate, or a new job.”

FreeScore said it only promised to provide information, not to “improve” a consumer’s credit.  But FreeScore’s ads clearly went beyond providing information.  It even recommended a course of action to consumers: use FreeScore.com to “[s]pot damaging inaccuracies,” and use “[i]nstant email alerts … so [they] can make corrections fast!”  FreeScore wasn’t just selling data—it was giving advice about what consumers could or should do with the data.  “The overall net impression communicated by FreeScore.com is that in order to ‘repair a damaged credit score,’ the ‘best solution’ is to ‘utilize[e] services like credit monitoring,’ which ‘can have an immediate effect on your credit score.’”  (Note that the “immediate effect” language might look to a lawyer like it was referring to the errors, but that’s not what a reasonable consumer targeted by such services would likely take away.)

Other cases have found similarly with respect to defendants that promised things like “personal credit analysis.”  As with those defendants, “FreeScore, while not actually providing credit repair services, has represented that it can or will sell, provide, or perform a service for the purpose of providing advice or assistance to a consumer with regard to improving a consumer’s credit record, history, or rating.”  Literal alteration of historical records isn’t required to be a credit repair organization. FreeScore’s ads gave the net overall impression that its services would improve consumers’ credit.
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Lay mis/understandings of copyright

Posted on February 24, 2014 by rtushnet

What do people think about copyright? Over at Jotwell, Andres Guadamuz reviews Lee Edwards et al, Isn’t it just a way to protect Walt Disney’s rights?: Media user perspectives on copyright, 16 New Media & Soc’y (2013) (paywall). The article looks very interesting.  I was struck by this description from the review; it’s probably familiar/intuitive but this time it gave me an idea:

Another interesting finding is that users tended to describe downloading and file-sharing as something transitory, for example, to be done while there are no legal alternatives, or to be performed while you do not have enough money to purchase content legally. Similarly, the delay between a TV show being distributed in the US and Europe was identified by participants as an important factor driving piracy levels up. Users also seemed to be more comfortable with sharing content with friends and family, than to widespread and indiscriminate file sharing online.

I’ve long been a fan of Viviana Zelizer, and these descriptions of incompletely commodified relationships strike me as structurally similar to other relationships to the market she describes, where market transactions are appropriate for some circumstances and nonmarket for others, and this helps constitute a self distinguishable from the market while also involved in and shaped by it.  Of course, here copyright owners are really really unhappy about that, but I think her approach might offer some useful insights.  What will be private and/or uncommodified in the brave new copyright world?
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Dividing the spoils: soured Afghan deal brings TM, CFAA claims

Posted on February 24, 2014 by rtushnet

Global Fleet Sales, LLC v. Delunas, 2014 WL 634075, No. 12–15471 (E.D. Mich., Feb. 18, 2014)

“This dispute arises out of the pursuit of business opportunities in the Islamic Republic of Afghanistan in the wake of the NATO campaign against the Taliban and the subsequent souring of the business relationships established to execute those opportunities.”  Plaintiffs, collectively RMA, sued defendants Leonard Delunas and Mohammad Wahab for various business torts.

The plaintiffs provide products and services for infrastructure in conflict-plagued countries.  Delunas was allegedly hired to serve as a country manager for RMA in Afghanistan, charged with procuring registration of RMA Afghan entities and holding shares of those companies for the beneficial interst of RMA.  Wahab was a friend and associate of Delunas, and listed as a corporate officer and shareholder of record of the Afghan entities, but allegedly held the shares as a trustee.

In late 2001, which is to say after September 11, 2001, the RMA plaintiffs and Delunas, who worked in construction/engineering services/construction, started to discuss business opportunities that they expected to arise in post-conflict Afghanistan.  RMA hired Delunas, allegedly under an agreement that “Delunas was to manage the operations of the RMA Afghan Entities” and not engage in other business; he was thus to get 25% of the net profits, and would reimburse RMA for up to 25% of net losses.  RMA alleged that Delunas breached in various ways, such as advancing himself funds and pursuing corporate opportunities for his own personal benefit.  Despite RMA’s termination of their agreement, Delunas allegedly continued to hold himself out to current and prospective customers as RMA’s authorized representative.  He ran a website that directed actual or prospective customers or suppliers who wish to contact the RMA Group’s current Country Manager in Afghanistan to Delunas’s email address, not the actual current Country Manager. The website formed the basis of the Lanham Act and CFAA claims on which I will focus.

On the Lanham Act claims, the court began by distinguishing §43(a)(1)(A) false association claims from §43(a)(1)(B) false advertising claims.  The complaint alleged that Delunas’s website implied continued affiliation with RMA by listing his contact info for those seeking to do business with the RMA Afghan Entities and with RMA Group companies in other countries where Delunas was never employed nor affiliated with in any capacity.  (Lurking issue: is this extraterritorial application of the Lanham Act?  If the website solicits business in the US and other countries, how should we think about that?)

Defendants, amazingly, challenged standing, which in the Sixth Circuit is governed by the reasonable interest test.  Defendants argued that the plaintiffs lacked standing because the complaint alleged that the official RMA site was owned by the RMA Group, which isn’t an actual entity.  But the plaintiffs alleged that they were among those comprising the RMA Group, which gave them a reasonable interest.  There was also “a reasonable basis for believing that the interest is likely to be damaged” by the defendant’s alleged false association or false advertising, because of the allegedly attempted diversion.

Defendants argued that there was no false association, because he actually is affiliated with the entities listed on the offending website; the complaint alleged that he was a 25% shareholder in the Afghan entities. But the complaint pled that his ownership interest had terminated.  And the complaint sufficiently pled likely confusion:

The Complaint alleges that Delunas is operating a website that suggests to all who view it that he is the RMA Group’s Country Manager in Afghanistan and that directs inquiries to his email address instead of the email address of the current Country Manager. The website references contracts performed by the RMA Plaintiffs’ companies and displays icons of companies with which the RMA Plaintiffs conduct business. Such allegations do, in fact, permit the Court to infer that confusion is likely.

Anyway, confusion is a fact question, and dismissal on that ground should be rare.

For similar reasons, the false advertising claim survived.  “In this Court’s opinion, advertising the services, contracts, and customer relationships of another as one’s own to deceive customers into believing that ‘RM Asia’ performed work actually performed by the RMA Group Plaintiffs constitutes a false or misleading statement of fact concerning the services and commercial activities advertised on the internet.”

However, the CFAA claim failed.  It was based on Delunas’s continued use and operation of the website post-termination.  The complaint plainly alleged that the plaintiffs had no affiliation with or control of the website.  Although the plaintiffs vaguely implied that they once owned the site, the complaint didn’t allege that they did own or control it.  An entity lacking ownership and control “simply has no basis for granting or withholding authorization to the website.”  The CFAA doesn’t apply when the defendant accesses a computer not owned by the plaintiff.

Some contract-related and tortious interference claims survived.  However, allegations of “repeated abusive telephone calls” to the plaintiffs’ current Afghanistan country manager, allegedly threatening him with arrest and prosecution if he stayed in country, along with allegations of instigation of a meritless and spurious complaint against a non-party country at the Afghanistan Ministry of Justice, were insufficient to allege tortious interference with prospective economic advantage.  Unjust enrichment claims also survived, pled in the alternative to the contract-based claims.

The court then turned to plaintiffs’ motion for a preliminary injunction. They sought an order requiring defendants to discontinue operating the offending website, restore control of it and its server to plaintiffs, turn over emails and other communications that passed through it, and return various documents. 

Plaintiffs argued that they showed likely success on the merits because of actual customer confusion.  They pointed to emails Delunas forwarded to the current Country Manager during a brief thawing in tensions.  The emails sought services from the RMA plaintiffs, but were sent to Delunas (who uses the same email he used when the Country Manager of Afghanistan), not to the actual Country Manager. Though the complaint stated a cause of action, this wasn’t enough to show likely success because of “the number of important factual discrepancies between the parties’ positions regarding the ownership of the RMA Afghan Entities.”

Without that, the RMA plaintiffs didn’t show irreparable harm.  They alleged that they’d lose “good will, client trust, confidence and confidentiality and competitive advantage,” but didn’t show that such harm was actual and imminent.  Their delay until November 2013 in moving for a preliminary injunction, when Delunas allegedly ceased his affiliation with them in March 2011, was damaging.  That was a year after filing the complaint and six months after amending the complaint. Delay alone may preclude a finding of irreparable harm.

The RMA plaintiffs argued that courts can presume irreparable harm from likely success in showing confusion.  But it’s not clear that this rule survived eBay, and even if it did, “it would be inappropriate to apply the presumption in this case given the lingering factual questions surrounding ownership of and right of access to the website as well as the lengthy delay in seeking injunctive relief and the possibility that monetary damages would sufficiently rectify any harm the RMA Group Plaintiffs experience while the Court is able to adjudicate this dispute on the merits.”
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Informal administrative inquiry doesn’t preclude lawsuit over "organic"

Posted on February 24, 2014 by rtushnet

Brown v. Hain Celestial Group, Inc., 2014 WL 556732, No. C 11–03082 (N.D. Cal. Feb. 10, 2014) (magistrate judge)

Plaintiffs sued Hain alleging that it marketed its “Avalon Organics” and “Jason” cosmetic products as organic when they were not made predominately from organic ingredients, in violation of the California Organic Products Act of 2003 (and therefore violating the usual California laws as well).

Hain moved for summary judgment on the ground that the California Department of Health (CDPH), the agency responsible for enforcing COPA, determined in a February 2013 enforcement decision that the Jason and Avalon Organics labels complied with COPA. The magistrate judge disagreed: CDPH’s inquiry was informal, based only on ex parte submissions from Hain, and merely decided not to pursue the matter further.

Plaintiff Brown sued in 2011 as part of several lawsuits filed against manufacturers of personal care products for violations of COPA, at which point a deputy director at the CDPH contacted plaintiffs’ counsel and asked for copies of the lawsuits.  Plaintiffs didn’t intend to submit an administrative complaint.  Then, the chief of the Food Safety Inspection Unit contacted Hain about its COPA compliance, saying that the CDPH “recently received a complaint alleging that cosmetics sold by your company do not comply with the COPA.”  The letter asked for a written response asking for a list of all products sold as “organic” (etc.), labels, formulations, and evidence of organic certification for every ingredient listed as organic.

Hain’s counsel replied with the requested information (basically, though among other things Hain disagreed that its products would be within the scope of COPA or that COPA was unpreempted) about its reformulated products.  Hain discontinued certain “organic” products, and contended that the only ones left were made with at least 70% organic materials as of late 2011.  Haim then moved to dismiss plaintiffs’ claim as preempted by federal law, but the court rejected that argument.

Nothing happened with CDPH between September 2011 and January 2013, at which point Hain’s counsel asked what was going on.  Hain’s counsel sent additional information and made further arguments to the CDPH (including that the Avalon products just used “organic” in its brand name, and that Jason products used “pure, natural, organic” as a tagline, and not to identify the products or to highlight particular ingredients on the principal display panel—um, I’m sure that affected consumer perception a lot). 

The CDPH then sent Hain a short “notice of resolution,” saying that the CDPH reviewed the documentation sent in response to its letter.  It said “The Avalon Organics® and Earth’s Best and Jason brands were not found to represent the products as ‘organic’, or to use the word ‘organic’ to identify ingredients or modify content on the Principal Display Panel (PDP).”  Then it noted Hain’s voluntary actions to change the labels/certifications. “We appreciate the efforts you have taken to address this inquiry and consider the matter resolved.”

Plaintiffs first learned of the inquiry in 2013, when Hain’s counsel provided plaintiffs’ counsel with the CDPH’s February 2013 notice of resolution.  At that point, plaintiff’s counsel contacted the CDPH, and included two court orders interpreting COPA as prohibiting any use of the term “organic” (etc.) on the principal display panel of cosmetic products that contain less than 70% organic ingredients.  The relevant person at CDPH responded that he was not dealing directly with organic issues and typically did not discuss letters issued to another firm with counsel not representing the firm that received the letter.  Plaintiff’s counsel said that if the CDPH was treating the lawsuits as administrative complaints, then it should discuss them with him, since he was the complainant’s attorney.  CDPH responded that “CEH opted to file these lawsuits instead of referring the alleged violators to CDPH for investigation.”  Later, CDPH said that the “complaint” language in its letters was just standard; that plaintiffs publicized their lawsuits in the media before letting CDPH know and that CDPH had to ask for the complaint; and that “[t]hese facts make it very difficult to argue that you are a complainant.”

COPA gives the CDPH authority to enforce the organic regulations and provides for a complaint procedure.  The AG or other state attorneys may also bring suits, and there is also a private right to sue for injunctive relief.

The magistrate judge determined that the February 2013 notice of resolution wasn’t a determination that Hain’s labels didn’t violate COPA.  Instead, it was only an informal notice of a decision not to pursue further action, and didn’t preclude plaintiffs’ COPA claim. The inquiry was informal on its face, and the process that followed was also informal.  Hain’s initial submission was ex parte, and then nothing happened for 18 months until Hain asked and was able to speak to someone at CDPH and supplement its response.  The fact that the agency considered only Hain’s ex parte submissions further indicated its informality.  And the CDPH clearly considered only the labels Hain submitted—the reformulated ones, not all the ones at issue in this case, which included products that didn’t contain 70% organic ingredients.  Finally, the informality was bolstered by the agency’s post-notice communications to plaintiffs’ attorney that he was not a complainant and was not entitled to know the details of a response made to Hain.

Hain argued that plaintiffs’ inability to present evidence or argument was irrelevant, since members of the public didn’t have a right to participate in things like a DA’s decision not to prosecute or the state bar’s decision not to revoke a lawyer’s license but are still bound by that.  (Um, no, they’re not in a subsequent civil suit for violation of the relevant legal duties?)  Hain argued that both CDPH and plaintiffs sought to advance the same “primary right” to compliance with COPA, and thus claim preclusion applied.  But this wasn’t a formal adjudication, as required for claim preclusion.

Hain argued that the CDPH adjudication didn’t require a trial-like process, since no due process right of plaintiffs was involved, and CDPH is the state agency charged with enforcing COPA, doing the same thing as plaintiffs acting as private AGs.  Plaintiffs conceded that certain administrative enforcement proceedings conceivably could preclude private persons acting as private AGs from pursuing a claim in a separate civil action.  But here, “the agency process and resulting notice did not have the procedural safeguards and formality of an agency decision.”  It didn’t consider any information other than what Hain submitted, and it didn’t involve any independent evaluation of the products or ingredients.  Indeed, the notice of resolution made a factual error: its statement that the labels “were not found to use the word ‘organic’ to identify ingredients or modify content on the Principal Display Panel (PDP)” is wrong in that “even Hain’s limited production of labels to CDPH included both labels that explicitly identified organic ingredients and ones that identified some organic content on the PDP. For example, as Hain concedes, a number of labels submitted to CDPH included claims that the products are made with ‘Organic Oils.’”  In context, the mistakes bolstered the judge’s conclusion that this wasn’t a true enforcement action but just an informal inquiry.  Plaintiffs identified numerous pre-2011 products referring to specific organic ingredients, and also disputed present compliance with COPA’s 70% requirement (and a few other issues). 

These were just not the kind of facts justifying claim preclusion.  Even cases not involving the removal of benefits (which Hain argued justified more process) still offered opportunities for public participation. Hain analogized to USDA premarket approval of labels—which is preemptive of claims for misleading advertising.  “But those cases involve an elaborate statutory and regulatory scheme and regularly-followed administrative procedures.  There are no cases construing an administrative inquiry like this—triggered by a ‘complaint’ and involving only an informal ex parte submission of information by the alleged wrongdoer and no apparent investigation—as a binding agency decision.”

Hain also argued that the CDPH’s decision not to refer the case for investigation or prosecution had preclusive effect. But the statute permitted a private right of action for injunctive relief “[n]otwithstanding the provisions of [the provision that allows the California Attorney General or a district attorney to bring an injunctive-relief action].”  There were lots of reasons CDPH might not have continued—“Lack of resources, lack of information, and the ongoing lawsuits in state and federal court are a few possible reasons.”

Further, plaintiffs were not judicially estopped from contesting the notice on the ground that they triggered the inquiry. The record didn’t support that argument; CDPH asked for the complaint and didn’t include plaintiffs in its inquiry.
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rigorous falsity standard in sophisticated market defeats false advertising claim

Posted on February 21, 2014 by rtushnet

Kwan Software Engineering, Inc. v. Foray Technologies, LLC, No. C 12-03762, 2014 WL 572290 (N.D. Cal. Feb. 11, 2014)

Plaintiff (here VeriPic) and defendant both sell digital asset management software to law enforcement.  VeriPic and Foray both sell software that allows users to determine real distances/heights etc. from a photo.  Also, Foray’s software can validate whether a piece of digital evidence has been manipulated or altered between the time it is entered into the system and a later time when a user wishes to make use of that piece of digital evidence. VeriPic’s software allows the user to validate not only whether digital evidence has been altered since it was entered, but also whether the digital evidence has been altered from the moment the picture was originally taken.

VeriPic sued Foray for false advertising and copyright infringement (and related claims).  The court here rejects them.

The state and federal false advertising claims were judged by the same standard, meaning that the analysis of the FAL and UCL claims used the explicit/implicit falsity divide (as consumer FAL/UCL claims do not).  First, the court rejected VeriPic’s survey, since it looked at digital photo usersin law enforcement.  However, most of the respondents were unfamiliar with the relevant software programs, though they used some form of photo evidence in their work.  More importantly, they weren’t the relevant audience for the targeted ad claims, which were made in response to requests for proposals, in direct emails, and displays at trade shows. VeriPic didn’t show that photo users would see those materials.  So the survey wasn’t shown to be reliable or relevant.

Thus, VeriPic had to make a claim for explicit falsity, a “rigorous” standard requiring a statement to be “unambiguously false,” analyzed in its full context.  The fact that statements were made to sophisticated consumers with background knowledge/expertise is relevant here, as are industry standards.

VeriPic first challenged Foray’s claims that it could “authenticate” digital evidence, arguing that authentication required assessing whether there’d been any alterations since the photo was taken, not just since the photo was entered into the software system.  The latter, VeriPic argued, was known as “integrity.”  VeriPic relied on industry guidelines (known as SWGIT guidelines).  But those guidelines showed that “authenticate” had different meanings dependent on context.  In some contexts, authentication requires a human observation, and neither party can provide that.  In other contexts, “authentication” means being able to “discern if a questioned image is an accurate representation of the original data by some defined criteria.”  But this was closely related to the concept of “integrity.”  The SWGIT guidelines therefore defined “Forensic Image Authentication” as a type or subset of “integrity” process.  Plus, Foray showed that the digital asset management software industry uses the term “authentication” when referring to the ability to ensure the “integrity” of images.  This included three other competitors, as well as VeriPic’s own website FAQ.  Though VeriPic claimed that its “true authentication” was better than “acquisition authentication” (which was all Foray could provide at the relevant time), it was still using the term “authentication,” not “integrity.”

VeriPic’s only evidence of purchasers using the term in its chosen manner was one RFP, which stated that “[b]y ‘Authentication’ we specifically mean the examination of the photos at the time it is imported into the system to look for signs that the photos were edited by photo editing software PRIOR to import into the system and PRIOR to acquisition of the photo into the system.”  But, the court pointed out, this RFP found it necessary “to provide an express definition of how it was using the term and to bold and capitalize the word ‘prior’ to make clear” its meaning, suggesting that it wasn’t using a common definition of “authentication,” or at the very least that there’s some other definition of the term that needed to be distinguished.  Nor did VeriPic’s expert testimony support its proposed definition as the only industry definition.  Thus, summary judgment was appropriate.

VeriPic challenged another statement: “While some vendors may claim they are ASCLD or SWGIT compliant, no other digital evidence management system vendor complies with the SWGIT workflow shown above. ONLY the Foray ADAMS solution meets this requirement!”  VeriPic argued that this workflow was one of four example workflows and thus wasn’t a requirement, and that “only” was literally false because VeriPic complied too.

As to “requirement,” the statement wasn’t literally false in context.  The example workflow at issue was the only one that involved a digital asset management system; the guidelines said that the examples weren’t exhaustive, though.  Foray’s use of “requirement” was consistent with the meaning that its software was one known way of complying with the standards.  The OED defines “requirement” as “something wanted or needed,” and Foray’s use of the word “merely conveys that its software uses a series of steps known to be wanted or needed by the example workflow—i.e, consistent with it, as it is written.” 

As for the “only,” it was undisputed that the example workflow contemplated making copies of the images whenever an image was viewed or processed. VeriPic contends that making copies isn’t as good at protecting the integrity of the evidence; instead VeriPic provides enhancement tools that don’t make copies. While this might be a good idea, “VeriPic’s product cannot be literally consistent with the workflow—rendering Foray’ statement unambiguously false—where its product allows user to deviate from the steps listed in that workflow.”  Summary judgment for Foray.

The court also rejected VeriPic’s copyright and copyright-related claims.  VeriPic alleged that Foray obtained VeriPic’s software in 2008 and copied it.  Foray’s employees testified that they observed the use of VeriPic’s software, but never obtained a copy of the software or the source code.  VeriPic’s evidence was a 2005 email from Lynn Slaughter, a Foray sales representative, to other Foray employees. The email stated: “I will be getting a VeriPic DVD at the CBD conference that I will send in to the office. (Our client will bring me one …).”  This was insufficient to create a genuine dispute of fact on access.  VeriPic failed to provide any evidence that Slaughter did get a copy; the only record evidence was Slaughter’s testimony to the contrary.

Plus, Foray provided evidence of independent creation in 2005, with a source code expert who reviewed the 2005 software and the current version and found no changes to the parts of the code VeriPic claimed had been copied.

The DMCA claim failed because there was, likewise, no evidence of circumvention.  So did the contributory infringement/inducement claims.

As for VeriPic’s claim for inducement of breach of contract, VeriPic argued that Foray intentionally encouraged and assisted VeriPic’s customers to breach their end user licensing agreements by allowing Foray employees access to and use of VeriPic’s copyrighted works.  Two Foray employees said that VeriPic customers allowed them to view VeriPic’s software while the customers were using the program, but testified that they never directly used the software. “VeriPic fails to explain how merely allowing a third party to view VeriPic’s software while the customer is using it is a breach of the end user license agreements.”  None of the cited provisions of the EULA barred allowing a third party to view the software while it is in use.

VeriPic also cited the Slaughter email, but there was no evidence she got the disc, and in any event there was no evidence that the client mentioned in the email was a party to the EULA.
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