Fla district court rejects argument that “completely unsubstantiated advertising” is literally false on sj

Posted on September 21, 2020 by rtushnet

Diamond Resorts U.S. Collection Development, LLC v. US Consumer
Attorneys, P.A., 2020 WL 5514158, No. 18-80311-CIV-REINHART (S.D. Fla. Jul. 31,
2020)

Another timeshare case. (Student note topic alert!)

Defendant Newton Group Transfers sent a mailer to Samuel
Street in West Chester, Pennsylvania, believing him to be the owner of a
timeshare. The mailer said (in relevant part): “We are attempting to contact
you because our records suggest that you are an owner who may be affected by
new Timeshare Laws allowing developers to raise maintenance fees with no
restriction.” Diamond argued that this statement was literally false as to Mr.
Street, whose timeshare is in Florida, which allegedly has no such laws. The
court disagreed. (There’s an interesting, unexplored “targeted v. untargeted”
issue here—to the extent that this was an individualized pitch, I think literal
falsity should be an option, just as a salesperson who represents that a
mortgage is the right choice for a particular individual should be held to a
higher standard than a general ad touting “the right mortgage for you!” which,
in an ad directed to the world at large, is puffery.)

Anyway, literal falsity requires assessment in context. “As
the meaning of a statement becomes less clear … and it becomes susceptible to
multiple meanings, the statement is more likely to be merely misleading.”

Diamond moved for partial summary judgment on falsity,
arguing that, under Florida law and Diamond’s timeshare contracts, (1) no
timeshare managing entity can raise maintenance fees without restriction and
(alternatively) (2) even if some managing entity can do it, a developer cannot.

Housekeeping: no partial summary judgment was available for
the other defendants because the evidence didn’t establish their legal
responsibility for the mailer.

Merits: “[T]he parties agreed that the threshold question of
literal falsity depends only on the text of the Mailer.” The mailer didn’t say
that Street actually owned a timeshare, where that was located, or reference
Florida/Florida law. The mailer therefore—implicitly treating this as
nontargeted advertising, which seems appropriate on this record—couldn’t be
literally false unless “at least, in or about the fall of 2017 when the Mailer
was sent, there were no new timeshare laws anywhere in the United States that
allowed a timeshare developer to increase maintenance fees without restriction.”
There was no such evidence in the record.

Diamond attempted to rely on the testimony of the corporate
representative for Newton Group Exit, LLC, that the mailer’s mention of “new
Timeshare Laws” was referring to amendments to Florida law, but Diamond didn’t
show why that was binding on Newton Group Transfers, LLC, a separate entity,
and regardless that’s not what the mailer said. Nor did Diamond cite evidence
that Street’s timeshare fell under the terms of the contracts in the record,
even assuming that those contracts could render the mailer literally false.

Finally, Diamond tried to get the court to adopt the rule of
Novartis Consumer Health, Inc. v. Johnson & Johnson-Merck Consumer Pharm.
Co., 290 F.3d 578 (3d Cir. 2002), that “completely unsubstantiated advertising”
 is literally false, but the court declined.
Among other things, Novartis was an appeal from a grant of a preliminary
injunction; even though the movant had the burden of persuasion, a factfinder can
draw an adverse inference from the respondent’s failure to provide affirmative
evidence to refute the movant’s claim; that wouldn’t be appropriate here. I’m not sure I see the civil procedure distinction here–if anything accepting this inference for a PI seems like a bigger deal, but ok.

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FDA preemption/preclusion after Pom Wonderful: still powerful for drugs

Posted on September 21, 2020 by rtushnet

Exela Pharma Sciences, LLC v. Sandoz, Inc., 2020 WL 5535026,
No. 19-cv-00318-MR (W.D.N.C. Sept. 15, 2020)

Exela sued Sandoz for unfair and deceptive trade practices
in violation of North Carolina law; tortious interference with prospective
business advantage; and Lanham Act false advertising and unfair competition. It sought a TRO etc. forcing Sandoz to recall its L-Cysteine product.

Exela makes an FDA-approved L-Cysteine injection product,
used for high-risk patients, such as preterm or low-weight newborns and
patients with severe liver disease, as part of a nutritional supplement regimen
(aka “total parenteral nutrition” or TPN). “Aluminum is a known contaminant of
TPN solutions, and aluminum toxicity can cause serious health problems
including dementia and impaired neurologic development among others. High-risk
infants who receive TPN are particularly susceptible to harm from excessive,
toxic amounts of aluminum, as they have immature kidneys, which impairs the removal
of aluminum from the body.”

Sandoz makes an L-Cysteine product in Canada with a label
stating that it contains as much as 5,000 mcg/L of aluminum; it’s not FDA-approved.
But starting in 2014, there was an L-Cysteine shortage in the US, so the FDA
asked Sandoz to import its product under the FDA’s “shortage program,” without requiring
FDA approval. On April 12, 2016, the FDA stated that it would not bring an
enforcement action for importing the product for 6 months if Sandoz followed
certain conditions, including distributing a “Dear Healthcare Provider” letter
alongside its L-Cysteine product that explained the product, the drug shortage,
and the lack of other similar FDA-approved products. The letters had to be
reviewed by the FDA before distribution.

Sandoz sought several extensions, each of which was granted.
The last Dear Healthcare Provider letter was approved on June 21, 2019,
instructing Sandoz to ensure that the “previously reviewed Dear Healthcare
Provider letter continues to accompany [its] L-Cysteine in distribution.” Every
version of the letter stated that “there are currently no FDA-approved
L-Cysteine Hydrochloride Injection products in the United States.”

However, Exela developed an L-Cysteine product with low
aluminum levels. The FDA wanted no more than 145
mcg/L of aluminum for permanent approval. In April 2019, the FDA approved Exela’s NDA. By late May 2019, Exela had manufactured sufficient inventory to meet the
entire market demand for L-Cysteine.

Exela made “numerous efforts” to get Sandoz’s product off
the market, including repeatedly asking the FDA to act. The FDA declared
an end to the shortage in September 2019, and asked Sandoz to stop importing
its product; Sandoz complied but continued distributing its existing
inventory. Exela’s marketing team “claims to have observed customers
buying or committing to buy up to a year’s supply” even after its product received
FDA approval. In October 2019, the FDA told Sandoz to stop distribution, which
it did. However, even with Exela’s sole-approved-product status, it has less
than 20% of the L-Cysteine market while Sandoz “maintain[s] over” 80%.

The FDCA gives the FDA “complete discretion” to “decide how
and when [its power] should be exercised.” This can’t be evaded by putting a
state law label on what is really a complaint about FDCA violation. [Note that
this discussion applies only to drugs/devices; the situation for food/supplements
has more leeway for states, consistent with the lesser federal regulation to
which they are subject.]  “The test for
determining whether a state law claim is impliedly preempted is whether or not
the claim would exist in the absence of the FDCA.”

NC unfair/deceptive practices: the allegedly violative
action was selling the unapproved product and “stuff[ing]” the distribution
channels, including failing to update its 2018 Dear Healthcare Provider letter
after the FDA approved the Exela product, failing to warn its customers about
its product’s aluminum content, and misusing “its incumbent status in the
market and its huge market power and reach to block hospitals and distributors
from switching.”

The complaint fundamentally
challenged “the FDA’s decision not to bring enforcement proceedings against the
Defendant under the FDCA for importing and selling an unapproved and unsafe
drug.” That was preempted under conflict preemption, including claims about the
safety of Sandoz’s product. Even after Exela received FDA approval, the FDA
still had to account for the risk that it might not be able to meet the entire
market demand for L-Cysteine, the risk of supply chain issues during the
transition, other associated risks, and the parties’ interests (including
Sandoz’s interests in selling “inventory it created in response to the FDA’s
requests to help with the drug shortage.” Unlike failure-to-warn cases that escape
preemption, the only way to comply with state law would have been for Sandoz to
leave the market.

Similar analysis applied to the associated claims. The FDA regularly “weans unapproved products off the market once a
competing product has been approved.” In fact, it gave Sandoz only six months, not
the year it has suggested in the past; and Exela did not even allege that it had
sufficient production to satisfy the market for a significant portion of that
period.

Failing to update the “Dear Healthcare Provider” letter to
disclose the approved Exela product was also ok, even though it said “there are
currently no FDA-approved L-Cysteine Injection products in the United States.” The letters were “mandated, overseen, and preapproved
by the FDA,” and the last renewal was approved by the FDA after it approved
Exela’s product; the 2019 renewal “mandated (under threat of enforcement action)” the use of the
previously approved letter. Preemption was appropriate given that, “when a
party cannot satisfy its state duties without the Federal Government’s special
permission and assistance, which is dependent on the exercise of judgment by a
federal agency, that party cannot independently satisfy those state duties for
pre-emption purposes.” And state law likewise couldn’t require Sandoz to send
other letters “contradicting” the FDA-approved letters.

Failure to warn about aluminum content, even though the
aluminum content “far exceed[s]” the standard the FDA required Exela to meet: The
FDA didn’t set upper limits on the aluminum content of these products, and the
FDA later responded to Exela that Sandoz’s product had aluminum levels that
were “well within the standards agreed upon with FDA” and that “[i]t is thus
inappropriate to suggest that the Sandoz product is somehow unsafe.” And anyway,
“a merchant’s failure to inform its customers as to how its product compares
unfavorably to a competitor’s product” isn’t itself deceptive.

Ultimately, Sandoz “imported, marketed, and sold a product that it was
permitted by the FDA to import, market, and sell, and in quantities that did
not exceed that permission.”

Tortious interference claims fared similarly.

Lanham Act: The false/misleading representations were
similar to those discussed above. Unless an omission makes an affirmative
statement misleading, the Lanham Act doesn’t require disclosures. Although the
Dear Healthcare Provider letters were plausibly “commercial advertising or
promotion,” this was still a case where bringing a Lanham Act claim would
interfere too much with the FDCA, even after Pom Wonderful, which held
out the possibility of precluding a Lanham Act claim if “it turns on the
content” of something that has been “previously preapproved by the FDA” or
conflicts “with an affirmative policy judgment by the FDA.” Both scenarios
applied here.

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expert testimony isn’t always required for literal falsity or even misleadingness

Posted on September 16, 2020 by rtushnet

Ecore Int’l, Inc. v. Downey, No. 11-6843, 2020 WL 5501206
(E.D. Pa. Sept. 11, 2020)

The court denies Ecore’s motion in limine seeking to exclude
any evidence related to the falsity or misleading nature of its advertising for
purposes of defendant Pliteq’s Lanham Act/common law unfair competition
counterclaims. (There are about 20 claims and counterclaims “related to a hotly
contested commercial dispute between the parties.”) Ecore allegedly made false
and misleading statements about Pliteq’s “GenieMat” products and its own “QT”
products, which are competing sound dampening products: (1) claims of
equivalence as to quality, performance, and testing; (2) wrongly implying that
Pliteq’s products use a rubber cleaning and processing method involving sulfur,
and that the products accordingly have an unpleasant odor; and (3) claims that
Ecore “originated the new method of using two layers of floor underlayment,
when this is not the case.” That last sounds Dastar-problematic, but the
court doesn’t address that aspect of the claim.

Ecore argued that expert testimony was required on falsity
and likely confusion. The court agreed that lay witnesses might be able to do
so, including with the testimony of defendant Downey, “who has extensive
experience in the sound insulation field and can testify as to these issues
based on his personal knowledge and observations,” although he hadn’t been
identified as an expert on these issues.

The court noted that “[t]he type of proof needed to prove
literal falsity varies with the type of advertising claim being made,” and
further that whether expert testimony is necessary to a literal falsity claim
is also case specific, which seems all but self-evident.  Pliteq might be able to show literal falsity
of these particular claims without evidence that “requires scientific or
technical knowledge not appropriate for a lay witness.” The allegedly false statements
“do not refer to any scientific tests and do not otherwise contain such
technical implications that expert testimony would be needed to establish their
falsity. To the contrary, information regarding a product’s odor and who came
up with an idea is perfectly amenable to lay testimony.”

Second, even without literal falsity, an expert or consumer
survey isn’t absolutely required to prove deception. Courts have mentioned
“consumer surveys, market research, expert testimony, or other evidence,” even if
surveys are the “usual[]” method. [Imagine a very small market where all the
customers testify they were deceived—clearly no survey would be required.]
Without a full evidentiary record, the court wasn’t going to reject Pliteq’s
theories or prohibit Pliteq from attempting to prove its claims via lay
witnesses.

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5th Circuit reiterates stringent standard for injury in Lanham Act false advertising cases

Posted on September 16, 2020 by rtushnet

Boltex Mfg. Co. v. Galperti, Inc., — Fed.Appx. —-, 2020
WL 5506404, No. 19-20440 (5th Cir. Sept. 11, 2020)

Boltex and Weldbend sued Galperti and its Italian affiliate
for Lanham Act false advertising and state unfair competition. Galperti
counterclaimed for false advertising, false designation of origin, and unfair
competition. The court of appeals affirmed the grant
of summary judgment on all claims.

The parties make flanges used to connect equipment in the
oil and gas, petrochemical, and construction industries. ASTM standards may
require a heat treatment process to increase the carbon steel’s toughness and
ductility; normalization is one such process and it makes flanges costlier than
non-normalized flanges.

Boltex and Weldbend alleged that defendants adertise their
flanges as normalized, even though they are not. Galperti counterclaimed that
Boltex and Weldbend falsely advertised their products as American-made and
misrepresent their quality, characteristics, and technical standards. The
district court found that neither side had enough evidence of injury to survive
summary judgment.

Principles: “A claimant seeking actual damages must prove
that he has been injured in some way,” though actual losses need not
necessarily be shown. “A plaintiff must nevertheless put forth ‘competent
summary judgment evidence that indicates that consumers would have bought
[plaintiff’s] products instead of the [defendant’s products] in the absence of
the defendant[’]s[ ] allegedly false … statements.” Plaintiffs argued that
they also sought injunctive relief and disgorgement, and should have been
required only to prove likely injury. Their evidence: (1) they were direct
competitors; (2) deposition testimony from plaintiffs’ executives that defendants’
statements caused plaintiffs to lose sales; (3) customer statements the
district court deemed inadmissible hearsay; and (4) plaintiffs’ damages expert
report and testimony.

Initially, the court excluded consideration of two emails to
customers because they weren’t “advertising or promotion.” The “relevant
purchasing public” here consisted of as many as 81 customers, and there was no
evidence that the targeted two “wield outsized purchasing power.” This wasn’t sufficient
dissemination.

First, there was no precedent supporting the claim that,
because both sides were “among the market leaders … within a limited pool of
competitors, there should be a presumption that they were injured.” Second, the
deposition testimony from executives was speculative/inadmissible hearsay. One
witness speculated about losing a few customers before concluding, “I have no
idea the number of people.” Another named four customers that had allegedly
purchased defendants’ flange instead of plaintiffs’; when counsel asked how he
knew that, he responded, “I’m pretty sure we’ve been told that they placed
orders with Galperti or ULMA, because their—their customers are now requesting
it.” Statements made by customers to a Weldbend salesperson and then at some
point relayed to the executive by an unidentified source was “classic hearsay.”
Boltex’s sales manager testified that two customers told Boltex that it had
lost sales to defendants, which was also “plainly” hearsay, and the testimony
didn’t specify the reason for the lost sales/relate them to normalization. “[T]he
business records exception does not apply here because the evidence in question
is deposition testimony about supposed customer reports, not the actual
customer reports themselves.”

Testimony from a distributor who switched from Galperti to
Boltex didn’t indicate that it would have bought Boltex/Weldbend flanges
instead of Galperti’s in the absence of the allegedly false statements. An
executive at another distributor testified that they relied on Galperti’s
representations that it normalizes its flanges, and further that,
hypothetically, if they couldn’t get a flange from Galperti, they’d get it from
another core supplier. Puzzlingly, the court dismissed this as insufficiently
decisive about whether they would actually use it, and anyway there’s a fourth
“core”, nonparty supplier and some other suppliers to which any potential
diverted sales could have gone. This wasn’t enough for a “real and immediate
threat of future or continuing injury apart from any past injury.”

And plaintiffs didn’t rely on their expert report to show
causation in the district court, so they couldn’t do it now.

Counterclaims: “Because of the type of relief it sought,
Galperti was not required to prove actual injury, but had to at least prove the
likelihood of injury.” However, even that failed because Galperti didn’t offer any
evidence that would allow a factfinder to infer that the parties are
competitors in the market for U.S.-sourced flanges. Galperti doesn’t produce
flanges made in the USA; the court couldn’t see how it was likely to be injured
by not falsely advertising “made in the USA” while plaintiffs did. “[A]ny
profits Plaintiffs gain from their allegedly false advertising would not be at
Galperti’s expense unless Galperti too competes in the market for U.S.-sourced
flanges.” [Of course Galperti could be injured without participating in that
market! If some consumers trade off price/other characteristics with “made in
the USA,” then Galperti could offer an otherwise superior package and lose out in
the competition. Only if no amount of price/other feature superiority can
overwhelm “made in the USA” are the markets independent of each other. Maybe
that’s true—but that’s a different thing than what the court of appeals says.]
It also wasn’t enough to argue that some of the steel Galperti uses is of US origin.
  

There similarly wasn’t sufficient evidence on the other
alleged types of unfair competition.

 Comment: now do injury in trademark cases.

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consumer disillusionment with D isn’t evidence that deception injured P

Posted on September 16, 2020 by rtushnet

3B Medical, Inc. v. SoClean, Inc., No. 19 Civ. 3545 (KPF), 2020
WL 5440440 (S.D.N.Y. Sept. 8, 2020)

3B makes devices that automatically sanitize continuous
positive airway pressure (“CPAP”) machines using UV-C light. It sued SoClean,
which makes similar devices but use ozone as a sanitizing agent, for violating
the Lanahm Act, but failed to sufficiently plead injury. SoClean has 90% of the
market for CPAP machine cleaners, while 3B holds only 5%; the other 3
competitors also use ozone. The devices are sold as an alternative to
handwashing CPAP equipment.

The complaint alleges that ozone is a toxic gas that can
have a variety of serious health consequences to humans when inhaled, and that
defendant’s devices produce ozone at concentrations well above the limits
allowed by the FDA. Defendant’s marketing materials allegedly obscure SoClean’s
use of ozone as a sanitizing agent and mislead consumers about the health risks:

• statements that its devices use “activated oxygen,”
instead of ozone;

• statements that its devices do not use “chemicals” or
“harsh chemicals”;

• the terms “safe” and “healthy”;

• statements that its devices use the same sanitizing
process as that used in hospitals;

• statements that the charcoal filter cartridges that
accompany its devices are able to convert “activated oxygen” into “regular
oxygen”; and

• statements that its devices are closed-loop systems, out
of which no “activated oxygen” escapes.

Consumers have allegedly reported adverse experiences with SoClean’s
devices due to the devices’ use of ozone, and chose 3B’s product specifically
because it does not use ozone. 3B alleged that more consumers would learn of,
and purchase, its products if not for SoClean’s false advertising.

Under Lexmark, “a plaintiff in a false-advertising
case must demonstrate injury by way of lost sales or damage to business
reputation.” Injury can be presumed from false comparative statements. But where
the allegedly misleading advertisement “tout[s] the benefits of the products
advertised but ma[kes] no direct reference to any competitor’s products[,] …
some indication of actual injury and causation” is necessary “to ensure that a
plaintiff’s injury [is] not speculative.” This is because “injury in such cases
accrues equally to all competitors; none is more likely to suffer from the
offending broadcasts than any other.”

Although a plaintiff doesn’t need to name specific lost
customers, “some indication of actual injury” is needed to survive a motion to
dismiss. The allegations of injury here were merely conclusory and speculative.
The only specific statements from customers recommended the 3B product because
it doesn’t use ozone, which doesn’t show injury to 3B. E.g., “I owned a So
Clean cleaner and because of the ozone I developed a rash around my nose and
chin that would itch. I contacted So Clean and they told me to use wipes and I
did but the problem persisted. I also read that the ozone itself was very bad
for respiratory conditions such as COPD of which I have. Do the research. I
would no[t] recommend the So Clean device for these reasons. I decided to try [3B’s]
Lumin. No Ozone.”  [Compare the
hypothetical: “I bought the SoClean product because they promised me it was
safe and sealed so that no ozone would reach me. I’m so bummed!”]  “At most, the statements could be said to
support § 1125(a)’s causation requirement, but that requirement is distinct
from the need to show actual injury.”

What about a presumption of injury from the fact that 3B was
the only non-ozone product in the market? That wasn’t enough without implicit
reference to 3B’s products, and the market wasn’t a two-player market,
including other ozone users and handwashers. The Second Circuit has suggested,
without deciding, that the presumption might be applicable where the parties
“are direct competitors in a sparsely populated market,” but the court wasn’t
going to extend that here, where SoClean was the original market creator, and
thus wasn’t inherently diverting consumers from the plaintiff’s preestablished
market, and where there were alternatives. Given the other market players,
there was no reason to presume that the alleged misrepresentations were “targeted
at diverting consumers away from the Lumin or its associated devices. Indeed,
to allow the presumption in this context would incentivize any upstart
competitor in a market to claim, without proof, that a dominant player’s
long-time marketing statements are causing injury.”

NY state claims failed for the same reason.

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a rare freestanding UCL unfairness claim re: service termination that rendered cameras nonfunctional

Posted on September 15, 2020 by rtushnet

Soo v. Lorex Corp., 2020 WL 5408117, No. 20-cv-01437-JSC
(N.D Cal. Sept. 9, 2020)

Plaintiffs brought California and New York consumer
protection claims based on what happened to their home security Flir cameras;
defendants moved to compel arbitration, which was denied because defendants
failed to prove by a preponderance of the evidence that plaintiffs agreed to
arbitrate. Defendants’ motion to dismiss was partly granted and partly denied.

Lorex made Flir cameras, which had the ability to upload
security footage into cloud storage and a “Rapid Recap” feature, with which
users could see a condensed, time-stamped video of activity observed by the
camera. Cloud storage and Rapid Recap were made possible by applications
managed by Lorex. After selling Flir cameras since 2015, in mid-2019 Lorex
announced it was changing technology providers for the apps, rendering the
cameras unable to connect to the apps and thus nonfunctional. Lorex then
offered consumers a “Lorex Active Deterrence Wi-Fi replacement camera” or a
Lorex.com store discount of US $120.00, which plaintiffs alleged were
inadequate substitutes.

Defendants contended that the Warranty inside the box that plaintiffs’
cameras came in contained a binding arbitration provision. For purposes of this
motion, it was undisputed that Lorex provides a hard copy of the Warranty in
the box of every Flir camera it sells. The Warranty in the box advised plaintiffs
that if they kept the cameras they were agreeing to the Warranty as well as to
binding arbitration.

This was a “shrinkwrap” license [I can hear Eric Goldman
sighing from 3000 miles away]. But Lorex’s warranty, unlike that in previous
cases, didn’t give consumers any amount of time to examine the product and
return it instead of accepting the arbitration agreement, and the included
written materials did give the consumer the right to return the camera. “At a
minimum, without evidence that Mr. Lauinger had the right to return the camera
and thus reject the arbitration provision there can be no agreement to
arbitrate formed by ‘keeping the [camera.]’”

Another plaintiff, Soo, “activated” his warranty online. Was
that enough? Under California law, “silence or inaction cannot constitute
acceptance of an offer,” unless an exception applies, such as “when the offeree
has a duty to respond to an offer and fails to act in the face of this duty.” However,
even then, a contract offeree’s silence cannot constitute consent to a contract
“when the offeree reasonably did not know that an offer had been made.” California
courts have held that “even if a customer may be bound by an in-the-box
contract under certain circumstances, such a contract is ineffective where the
customer does not receive adequate notice of its existence.” Previous case shad
held that titles like “Product Safety & Warranty Information” aren’t enough
to provide notice of “a freestanding obligation outside the scope of the warranty.”
So too here. His online activation doesn’t support a finding that had to or
should have been aware of the arbitration agreement. He “could have registered
for warranty protection without ever seeing the in-the-box Warranty that
contained the arbitration provision in the section entitled ‘State/Provincial
Law.’”

Unfairness under the UCL: Courts are divided on how to
assess unfairness, but plaintiffs invoked the balancing test: it asks whether
the alleged business practice “is immoral, unethical, oppressive, unscrupulous
or substantially injurious to consumers and requires the court to weigh the
utility of the defendant’s conduct against the gravity of the harm to the
alleged victim.”

Defendants argued that it wasn’t right to impute an
underlying P2P service provider’s cessation of service to them. But plaintiffs alleged
that “Defendants changed technology providers knowing that such a decision
would cause the Flir Cameras to cease functioning.” And, after changing
providers, defendants “have not created their own P2P software to replace
OzVision that would continue to provide support for Flir Cameras, or otherwise
partnered with another third-party vendor.” The harm could plausibly outweigh
the utility of the conduct to defendants.  The cost-benefit analysis of unfairness was
“not properly suited for resolution at the pleading stage.”

Fraudulent omission under the UCL: This was predicated on defendants’
failure to disclose that app support for the Flir cameras was contingent on
Defendants’ contract with OzVision, and that there was no guarantee OzVision
would continue to provide service. Plaintiffs alleged that had defendants
disclosed such a fact, they would not have purchased their Flir cameras at all
or on the same terms. However, the complaint didn’t plausibly support an
inference that, at the time they sold the cameras, defendants knew that the
functionality issue existed. This also disposed of the NY consumer protection
claims.

California unjust enrichment: It was plausible that the
failure of defendants’ replacement program to properly compensate Plaintiffs
for the lost value of their cameras with adequate replacement cameras or a
comparable store credit may sustain a claim for unjust enrichment at the motion
to dismiss stage.

Trespass to chattels: perhaps surprisingly, also survives.  Defendants argued that OzVision, not they, rendered
the cameras nonfunctional. But plaintiffs sufficiently pled that it was
defendants’ acts that “substantially harmed the functioning” of their devices,
which “significantly impaired the devices’ condition, quality, and value.”

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Expedia’s unavailability claims sometimes literally false, maybe misleading; materiality is contested for trial

Posted on September 15, 2020 by rtushnet

Buckeye Tree Lodge v. Expedia, Inc., 2020 WL 5372246, No. 16-cv-04721-VC
(N.D. Cal. Sept. 9, 2020)

The court denies cross motions for summary judgment on whether
Expedia violated the Lanham Act by suggesting that plaintiffs’ hotels could in
theory be booked on Expedia’s site but lacked available rooms (except as to
allegedly misleading phone numbers) and whether the plaintiffs are entitled to
a permanent injunction. Expedia also failed to decertify the plaintiff class,
but did get a clarification in the class definition.

There were genuine disputes of fact over whether (1) Expedia’s
unavailability messages and Google ads were misleading; and (2) any deception
was material to consumers’ purchasing decisions. “[A] small number of Expedia’s
unavailability messages—most noticeably, ‘We are sold out’—are literally false
when used to describe availability at hotels for which Expedia never had any
beds to sell.” Also literally false: “Sorry, the [Hotel name] is not available
for your travel dates. You may choose alternatives dates OR select from the
properties below.”; and “Fully booked! We’re sold out for your travel dates on
our site.”

Most of the other unavailability messages weren’t literally
false but nonetheless could be misleading, e.g., “Your dates are popular! Rooms
are unavailable for your trip dates on Expedia. Try new dates to check
availability.” “This message seems intuitively to imply that rooms are
unavailable because of the particular dates selected, rather than because
Expedia is entirely incapable of booking rooms at that hotel.” “Many of the
other messages are similar, e.g.: ‘This property has no availability for your
travel dates on [Expedia, Travelocity, or Orbitz]’; ‘[Hotel name] has no
availability for your travel dates on Hotels.com.’” Indeed, I think it would
have been reasonable to at least the first false by necessary implication;
similarly, the attribution of “no availability” to the hotel, instead of
to the website, in some of these other statements is pretty significant. The court thought other messages
might be less likely to mislead, such as 
“Wait a minute. There is no availability for this hotel on Hotels.com.
Please amend your search.” The court found some “quite unlikely to have been
misleading, e.g. ‘Sorry, we aren’t taking reservations for this property on our
site.’” [Once again, there’s a huge gap between what courts find plausible in
trademark cases and what they find plausible in false advertising cases.] Overall,
Expedia “raises fair concerns about the reliability and probative value of the
plaintiffs’ survey evidence, and the question of whether these phrases were
misleading cannot be answered at summary judgment.” [Seems like plaintiffs
would be entitled to an instruction about falsity for the literally false
statements, but it looks like this will be a bench trial.]

There was also a genuine dispute over materiality: Expedia
presented evidence “suggesting that the messages were not material in the
actual context of how consumers make travel decisions,” conflicting with
plaintiffs’ evidence.

Expedia did win summary judgment for claims related to “Expedia’s
allegedly misleading display of telephone numbers,” because plaintiffs offered
“no actual evidence that the phone number displays were false, misleading, or
material to consumers’ purchasing decisions.” That seems like a shame, because
it sounds like evidence could have been developed: proximate to the hotel name,
Expedia apparently put up a phone number that went instead to Expedia and
offered reservations to other hotels. An internal Expedia document “acknowledging
that the placement of phone numbers on the sites often confuses consumers” was
in the class certification record, but plaintiffs didn’t introduce it on
summary judgment or even cite it, and anyway that showed misleadingness rather
than materiality. [If properly used, the bait and switch character would itself
be the materiality: if consumers dialed the number because they thought they’d
reach the hotel in the listing, that belief affected their decision to act;
having been diverted to the Expedia line, many consumers might not search
further. That’s the classic reason bait and switch is actionable.]

Mootness: “The named plaintiffs have standing to seek
injunctive relief because the alleged Lanham Act violations were ongoing at the
time the complaint was filed (or at the time the additional plaintiffs
intervened).” And “voluntary cessation of allegedly unlawful conduct ordinarily
does not suffice to moot a case” and Expedia “bears the formidable burden of
showing that it is absolutely clear the allegedly wrongful behavior could not
reasonably be expected to recur.”

This it did not do, despite arguing that it had “resolved
any errors” causing class member hotels to appear on its websites and has
implemented “proactive measures” to prevent these “errors” from reoccurring. References
to “investigations” conducted by its “Health and Safety team” and to
contractual obligations it imposes on the bed banks it works with were “too
vague and conclusory to meet the high burden of showing mootness.” It portrayed
other measures, such as preventing Expedia from bidding on Google ads for
hotels that do not have availability for a certain period of time, as business
decisions, “while failing to show that there is anything to keep it from reversing
these decisions if business considerations change. Indeed, Expedia’s repeated
assertions about the dynamic and complicated nature of the online travel
industry suggest that business considerations in fact frequently do change, and
undercut its arguments that the changes are permanent or will prevent any
future misrepresentations from occurring.”

There was a genuine question whether class members were
likely to be harmed in the future absent an injunction “that either bars
Expedia from making misleading statements about hotels it is incapable of
booking or requires Expedia to institute reforms designed to minimize the
chances of such statements inadvertently appearing,” and whether these harms
were irreparable.

Clarification: The class consisting of “hotels that do not
have booking agreements with Expedia and are not capable of being booked
through Expedia, but appear on Expedia’s websites” includes “hotels that
appeared on Expedia’s websites when they were not capable of being booked
through Expedia at some point during the class period, regardless of whether
they previously had booking agreements with Expedia or later entered into
agreements with Expedia that gave Expedia booking capabilities.” Also, it
includes “hotels about whom Expedia will make similar statements in the future
despite being incapable of booking rooms at those hotels.”

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escalated materiality requirement precludes class certification

Posted on September 15, 2020 by rtushnet

Oddo v. Arocaire Air Conditioning & Heating, 2020 WL
5267917, Nos. 15-cv-01985-CAS Ex, 18-cv-07030-CAS(Ex) (C.D. Cal. May 18, 2020)

These are consolidated putative class actions alleging that
defendants’ HVAC systems have faulty thermal expansion valves (TXVs). A TXV is
“a precision valve that controls the expansion of refrigerant central to the
cooling process[.]” Because it’s a bottleneck in the system, “[a]ny
contaminants or impurities that may be flowing through the system are likely to
collect around the TXV pin,” which can harm its function. “Ryconox,” a chemical
rust inhibitor, allegedly “reacts with the refrigerant and/or oil and causes a
tar or sludge to form when the systems are put into service.” As such, “within
just weeks or months of installation of a brand-new HVAC system, the tar can
cause the TXV to become stuck, rendering the system inoperable.” Also, “even a
partial clog can impact system performance and efficiency, … such that the
defective HVAC systems are not capable of performing to the efficiency
standards advertised ….”

Defendant Carrier allegedly took various unsuccessful steps
to remediate the problem.

Previously, the court dismissed warranty-based claims and
claims based on affirmative misrepresentations. Not previously dismissed: California
unjust enrichment, negligent misrepresentation, fraudulent concealment, UCL,
CLRA, and FAL claims; Missouri fraudulent concealment, negligent
misrepresentation, and Missouri Merchandising Practices Act (MMPA) claims to
proceed; and Massachusetts unjust enrichment and Massachusetts Consumer Protection
Act (MCPA) claims. The court also previously denied a motion for class
certification without prejudice. Because the gravamen of the fraudulent
omission claims is failure to disclose, those plaintiffs failed to show that
people who bought a home with a Carrier HVAC suffered the same injury as people
who just bought a Carrier HVAC. Homebuyers “may have never been exposed to any
Carrier materials during the homebuying process, much less attached the same
level of importance, if any, to a disclosure of the alleged defect as would a
purchaser of an HVAC unit.” The court rejected plaintiffs’ contention “that
virtually any class can be certified in an omissions-based case as long as the
defendant could have, in theory, ensured that a disclosure would reach its
consumers.”

Carrier moved to exclude the opinions of plaintiffs’ survey
expert, Dr. Maronick. Previously, the court had reasoned that “[p]laintiffs do
not explain how homebuyers could have suffered an injury in the form of paying
a premium price for their HVAC units when they purchased a home that already
had the Carrier HVAC system installed” and “it appears that homebuyers, if they
suffered any injury at all, suffered an injury of a different nature than
purchasers of new HVAC units.” Based on his consumer survey, Dr. Maronick
opines that: (1) “most consumers who purchased a new air conditioner saw the
air conditioner itself prior to payment … regardless of whether the air
conditioner was acquired in connection with [buying a home or just a unit]”; (2)
“the vast majority of consumers who purchased a new air conditioner obtained
information about the air condition from the seller prior to purchase …
regardless [etc.]”; (3) “aside from the brand name, the efficiency rating of
their air condition was the most common piece of information purchasers learned
from their seller or homebuilder prior to purchase”; (4) “most consumers would
have considered a disclosure about the alleged defect in this case to be an
important, if not decisive, factor in their purchasing decision, regardless of
whether they were purchasing an air conditioner alone or a new home”; and (5)
“if the alleged defect had been disclosed prior to sale, the vast majority of
consumers would have demanded a unit that did not contain the rust inhibitor,
or a price discount equal to the cost of removing the rust inhibitor.”

This was relevant to the issues of classwide exposure,
materiality, and injury, and addressed deficiencies that the court previously
identified. Carrier challenged the survey because it: (1) failed to survey “the
relevant target universe”; (2) asked the wrong questions “because the survey
did not ask whether purchasers reviewed any labels on the product itself prior
to deciding the unit”; (3) failed to approximate market conditions and asked
ambiguous, leading questions; and (4) “failed to provide a control to isolate
the effect of the disclosure of the alleged defect.” These criticisms didn’t
require exclusion; they all went to weight rather than admissibility. Maronick used
a nationwide universe of sample individuals who had purchased a central air
conditioning system for their residence in the previous three years (including
respondents who bought a new construction home with a new AC). Questions about “the
relevant target universe” generally go to weight, not admissibility, as do
attacks on the framing of questions and the absence of a control.  Even though the court had its doubts, it
denied the motion to exclude. (So too with plaintiffs’ damages expert.)

Carrier offered its own expert testimony, based on a
consumer survey, which Carrier believes “confirms that individual inquiry would
be necessary to determine both whether consumers would have reviewed
information from Carrier prior to purchase and the materiality of that information.”
Dr. Dhar’s contrary opinions that “exposure to and consideration of product
information from an HVAC manufacturer is highly variable across consumers,” were
relevant, proper rebuttal and plaintiffs’ criticism of his survey went to
weight, not admissibility.  (So too with
the other experts.)

On to certification: “Resolution of plaintiffs’ fraudulent
concealment claims and plaintiffs’ related consumer protection claims … turn,
in part, on factual questions such as, inter alia: (1) whether the presence of
Ryconox in Carrier’s HVAC systems caused a defect; (2) whether Carrier knew of
the defect; (3) and whether Carrier concealed the defect.” Thus, commonality
was satisfied.

Typicality: the California and Missouri named plaintiffs had
bought new HVAC units, not new houses with HVACs installed, and their claims
were thus only typical of the former subset. The Massachusetts named plaintiff
bought a new house, but testified during deposition that he “was not exposed to
any of Carrier’s materials until after he had already negotiated and agreed to
the purchase price of his new home” and that “he would have not tried to
renegotiate the price of his home based on anything he learned during the
course of this inspection.” Even if that was just a snippet of his
testimony—and he also testified that if there’d been a defect disclosed,
everything would have changed—his vulnerability to a unique defense made him
nontypical.

Predominance: all the theories require that Carrier had a
duty to disclose the alleged defect. Plaintiffs had three arguments for such a
duty: (1) Carrier had exclusive knowledge of material facts not known or
reasonably accessible to them; (2) Carrier actively concealed material facts;
and (3) Carrier made partial representations (i.e., the energy efficiency
labels) that were misleading because other material facts had not been
disclosed.

California: “Even assuming arguendo that California law
recognizes a duty to disclose where an alleged defect does not present a safety
hazard but instead relates to a product’s central function, plaintiffs fail to
establish the existence of such a duty to disclose in this case is capable of
class-wide proof.” [That seems weird. The central function of an HVAC unit
seems invariant across purchasers; why wouldn’t its centrality be capable of
classwide proof? The court cites Ahern v. Apple Inc., 411 F. Supp. 3d 541 (N.D.
Cal. 2019), in which Apple’s failure to install “fans and vents” in its
computers allegedly allowed the fans to “suck in dirt and debris” which
resulted in the dirt and debris “getting stuck behind the screen, causing
permanent dark smudging to appear in the comers of the screens.” But smudging
at the corners (and another case about security flaws in microprocessors) is
pretty different from “the HVAC system may choke and die.”] Since plaintiffs’
expert did not opine that all, or virtually all, of the affected HVAC units
would suffer acute failure as a result of the problem, or be rendered incapable
of use, the alleged defect didn’t go to their central function. The expert also
opined that “the evidence shows that consumers have experienced performance
loss and do not know it.” If many victims didn’t know that they were suffering,
then the units hadn’t been rendered “incapable of use” such as to trigger a
duty to disclose under California law.

And again with redactions on facts that determine the
outcome! Carrier’s internal documents disclosed a redacted failure rate on
certain smaller units. Assuming that was a rate sufficient to impose a duty to
disclose [sure would be nice to know what that was!], plaintiffs’ expert also
argued that the evidence showed problems with larger units, though he
acknowledged that [redacted]. Given that the failure rate may differ among the
range of units making up the proposed classes, there might be a duty to
disclose as to some, but not all, of the proposed class members’ HVAC systems. Plaintiffs
offered no method to determine which class members’ HVAC systems will suffer
acute failure. Thus, individualized inquiries would be necessary.

The court then doesn’t discuss plaintiffs’ theory (3), which
I think is a misreading of the governing law. If you make an affirmative
representation that is misleading because of failure to disclose important
related information, the statement as a whole is misleading and there’s no
“central function” requirement for that basis for a duty to disclose,
predicated as it is on the specific affirmative statements that were made and thus on the message that affirmatively reached consumers.

In Missouri, a “duty to disclose arises from a classical fiduciary
relationship, from a partial disclosure of information, or from particular
circumstances such as where one party to a contract has superior knowledge and
is relied upon to disclose this knowledge.” “Unlike California law, then,
Missouri law does not appear to necessarily limit a manufacturer’s duty to
disclose to circumstances where a defect presents a safety hazard or where the
defect fatally compromises a product’s central functionality.” [Again, this
appears to be an overly constrained reading of California law, which has never
been known for its plaintiff-unfriendliness.] The court assumed without
deciding that whether a duty to disclose existed, given evidence that Carrier
was aware of the problem, was susceptible to common proof.

Reliance/materiality: In California, “[a]n essential element
for a fraudulent omission claim is actual reliance.” “A plaintiff need not
prove that the omission was the only cause or even the predominant cause, only
that it was a substantial factor in his decision,” and this can be inferred if
the omission is material. “Missouri law follows a similar approach with respect
to MMPA claims,” since it too uses the reasonable consumer standard. “If a
statute uses a reasonable person standard, it is more likely to be subject to
common proof because the inquiry into materiality is objective.”

Thus, the relevant claims allowed for class-wide inferences
of reliance and causation. What about the specific omissions here? The court
previously rejected as insufficient (1) Carrier’s surveys showing that,
generally, ‘reliability’ and ‘quality’ are the two most important factors
considered by purchasers” and (2) Carrier’s own purported belief that the
defect was material. Plaintiffs added the Maronick survey, which asked, inter
alia, how consumers would have reacted to learning about a defect that would  “cause the air condition to fail in some cases
within either a few weeks or a few years, and, even if the unit doesn’t fail,
the chemical can cause loss of performance and efficiency of the system” and
which cost $1000 to fix at the time of installation. Results: “It would have
been a decisive factor in my decision to purchase or not purchase that central
air conditioner”: 72.2%. “It would have been important information to know but
not a decisive factor …”: 13.9%.  “It
would not have been an important factor …”: 8.3%. “Don’t know/Not sure …”: 5.6%.

Similarly, in response to a question regarding what, if any,
respondents likely would have done had they learned about the defect prior to
completing a purchase, “41.0% of the respondents would have ‘demanded a
replacement that didn’t have the chemical in it,” and 22.2% would have
‘demanded the chemical be removed before accepting the unit.’ Another 12.5%
would have demanded a price reduction of $1,000, which is described as ‘the
cost of removing the chemical.’ ”

Carrier argued that the survey didn’t actually test
materiality or causation, criticizing the questions and format, especially how
it focused on and described the alleged defect. The court agreed: the survey
didn’t “question respondents about which, if any, of these attributes [about
which respondents received or sought information] respondents found important
when making a purchasing decision.” To the extent that the questions above don’t address that (which they seem to do), I think the court conflates materiality and
deceptiveness—materiality is about the kinds of claims or omissions that matter. The
court found the survey insufficient to establish, on a class-wide basis,
“how the challenged statements, together or alone, were a factor in any
consumer’s purchasing decisions.”

Because the survey didn’t indicate how consumers “valued”
Carrier’s alleged omissions “compared to other attributes of the product and
the relevant market generally,” “the Court is not convinced that the question
of materiality”—whether reasonable consumers would view Carrier’s failure to
disclose the alleged defect in this case as material to the consumers’
purchasing decision—“is susceptible of classwide proof.”

Thus, no certification.

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Selling two products together doesn’t plausibly cause confusion as to their source

Posted on September 15, 2020 by rtushnet

General Motors LLC v. KAR Auto Gp., Inc., No.
20-CV-2039-CJW-KEM, 2020 WL 5371717 (N.D. Iowa Sept. 8, 2020)

When a court can’t give a doctrinal reason for its decision,
that can signal a deep indeterminacy in the doctrine that can only be resolved
by fiat. Here, the indeterminacy is that confusion theory has very few
doctrinal brakes even when any harm of confusion seems minimal and the
anticompetitive consequences of plausible threats of suit seem great.

KAR (which made me hear the Knight Rider theme, child
of the 80s that I am) is an auto dealer in Iowa. The parties entered into
dealer agreements allowing KAR to sell Chevrolet and Cadillac vehicles at its GM
dealership. KAR formerly operated a separate automobile dealership adjacent to
its GM dealership which sold Chrysler, Dodge, Jeep, and Ram made by Fiat
Chrysler. KAR merged its operations in June 2020.  “The practice of selling vehicles from two
different manufacturers at a single dealership is called ‘dualing’ in the car
dealership industry.”

GM sued for breach of contract claims and trademark
infringement, alleging that, as a result of the unauthorized dualing, consumers
will be confused, make mistakes, or be deceived as to the “source, affiliation,
or sponsorship” of its marks.

The court granted the motion to dismiss and denied leave to
amend.

Even under the very broad notion of infringement that allows
infringement when “a legitimate mark [is used] in a confusing manner,” GM
failed to state a claim. GM argued that KAR’s dualing “will cause less
knowledgeable consumers to confuse which vehicle brands are manufactured by plaintiff
and Fiat Chrysler respectively.” It didn’t plead any infringing advertising,
promotion, or marketing, only that GM marks would be present at the dualed
facility.

Although likely confusion “is a factual inquiry that is
seldom resolved at the motion to dismiss stage,” this was the “rare” case of
inadequate allegations.

As to the factors (which of course are a bad fit here), the
GM marks are strong; there was no “infringing mark or infringing product”
because the marks were undisputedly being used to identify GM products. There
were no allegations of intent to confuse the public about who made which
vehicles. “lthough it can reasonably be expected that consumers will do their
homework on a given vehicle before purchasing it, many consumers may not know
or care which particular manufacturer made any given vehicle.” [Materiality as
spackle! Courts tend to mention materiality when they are explaining why
trademark confusion theories shouldn’t expand even further.] There was no
actual confusion alleged, though “extensive discovery” had yet to be conducted.

At the end, though, all GM alleged was that KAR sold and
serviced both GM and Fiat Chrysler vehicles at the same location. “The
existence of two competing products in the same building does not reasonably
signal that they are connected or related in any way. The mere fact that some
consumers may not know which entity manufactures which vehicle model is of
little consequence.” There was no authority for the idea that offering
competing goods side by side is infringing just because some consumers may not
know the difference [in source].

[Given that knowledge of the specific source is not required
for trademark validity, per Congress’s intervention to overrule the
Anti-Monopoly case, it would seem that sauce for the goose is sauce for the
gander: a consumer’s lack of knowledge, or even potential confusion, about corporate parenthood of two completely dissimilar marks isn’t
infringement. More strongly: a survey that found that consumers thought that
Snickers and Reese’s Peanut Butter cups came from the same manufacturer because
they’re found together in thousands of stores across the country should be
disregarded. One version of the insight here: any confusion about whether
there’s a shared corporate source of Snicker’s and Reese’s comes not from mark
similarity, as required for infringement, but from marketplace structure.
So too with dualing (even dualing in breach of contract). This is only hard to
explain in doctrinal terms because false association theories have metastasized
beyond any conceivable consumer protection interest.]

The court continued: “The Lanham Act does not require
sellers to segregate products by manufacturer to affirmatively reinforce brand
identity to consumers.” In a footnote, the court offered the example ofa
restaurant that served both Coca-Cola and Pepsi products. “Consumers may not
know that Fanta is a Coca-Cola product and Sierra Mist is a Pepsi product. That
the restaurant offers both beverages, however, does nothing to confuse
consumers into mistaking that they are connected in any way or originate from
the same source.” Thus, GM failed to plead a use of a mark “in a false,
misleading, or confusing manner.”

In addition, “[d]ualing itself is not confusing. To the
contrary, it is a well-established practice in the car dealership industry.”
Without more than the mere simultaneous presence of two automakers’ marks, GM didn’t
allege facts that would make consumer confusion likely. Dualing itself could
not be “a misleading representation. Although a representation can be made via
conduct, dualing alone does not assert any fact.”

In its moving papers, GM referred to KAR’s advertising,
marketing, and promotion, though not any specific items thereof; it argued that
“advertising and selling both GM and Fiat Chrysler vehicles from a building branded
with both GM Marks and CDJR trademarks” constituted infrignement, and
speculated that “combined, misleading advertising may occur.” This wasn’t
enough, and any further amendment of the complaint would be futile.

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insurer must defend Expedia because its false advertising exclusion didn’t cover false claims about hotels

Posted on September 14, 2020 by rtushnet

National Union Fire Ins. Co. v. Expedia, Inc., 2020 WL
5369261, No. C19-0896RSL (W.D. Wash. Sept. 8, 2020)

While receiving bad news in the underlying false advertising
claims (watch this space), Expedia did manage to keep its insurer involved in the defense, despite
a false advertising exclusion that turns out not to have been broadly worded
enough.

National Union provided Special Risk insurance to defendant
Expedia which included “Special Professional Liability” and “Media Content”
coverage. In 2016, a class action lawsuit was filed in the Northern District of
California against Expedia by four hotel operators, accusing Expedia of “a bait
and switch marketing scheme whereby it advertises deals at hotels with which it
had no contractual relationship and, when a customer attempts to make a
reservation at one of those hotels, Expedia gives the impression that there are
no rooms available on the requested dates and drives the traffic to its
contracting partners.” When Expedia tendered defense of the lawsuit to National
Union, National Union agreed to defend while reserving its rights, then filed
this action for a declaration of its obligations.

National Union didn’t dispute that the coverages applied; it
had the burden of showing that an exclusion nonetheless bars coverage.

The underlying lawsuit alleges, that when customers search
for their hotels on Google or one of Expedia’s websites, Expedia displays the
hotels as if it the customer were able to make a reservation through its
websites. But, because Expedia has no ability to book rooms at their hotels, it
allegedly switches them to other hotels by falsely implying that the chosen
hotel is sold out or that rooms are unavailable for the selected dates. The
remaining claim is false advertising in violation of the Lanham Act: “Expedia
made false or misleading statements in on-line travel and booking services
which misrepresented the nature, characteristics, and qualities of the hotels’
services and commercial activities” (emphasis added).

“Exclusions from coverage are strictly construed against the
insurer because they are contrary to the protective purpose of insurance.” The
Media Content coverage covers “any act, error or omission, negligent
supervision of employee, misstatement or misleading statement” in any form of
media content which results in, among other things, an infringement of
trademark or trade dress. There is an express exclusion for claims “alleging,
arising out of, based upon or attributable to (1) false advertising or
misrepresentation in advertising of an Insured’s products or services . . . or
(3) any infringement of trademark or trade dress by any goods, products or
services, including any goods or products displayed or contained” in any form
of media content. (The Specialty Professional Liability policy covers “any
negligent act, error or omission, misstatement or misleading statement in an
Insured’s performance of Professional Services for others….” There are
exclusions for claims “alleging, arising out of , based upon or attributable to
any misappropriation of trade secret or infringement of patent, copyright,
trademark, trade dress or any other intellectual property right….” and claims
“alleging, arising out of, based upon or attributable to false advertising or
misrepresentations in advertising.”)

For the Media Content exclusion, the parties disagreed about
whether the phrase “of an Insured’s products or services” mattered. “National
Union argues that anything and everything Expedia says in its advertising is in
furtherance of its own business interests and is therefore uncovered.” Expedia
argued that the exclusion was limited only to misrepresentations about its own
products or services, not those of another, contrasting it with the SPL
exclusion which had no such additional language.

The court agreed with Expedia. As written, the false
advertising must be “of an Insured’s products or services,” and if National
Union truly intended to exclude all false statements Expedia made in
advertising, there would be no need to add the phrase “of an Insured’s products
or services.” Citing a practice guide to insurance litigation, the court noted
that the exclusion “is generally thought to refer to inaccurate and misleading
representations…concerning the insured’s own product, rather than that of
another entity.” “Otherwise, protections expressly granted, such as coverage
for claims arising out of disparaging comments aimed at the another’s product,
would be negated by the exclusion. Such an interpretation would be
unreasonable.”

Nor did the trademark exclusion apply, given that “the hotel
operators’ Lanham Act claim can succeed without having to show that they have a
protectable trademark or that Expedia infringed on their intellectual property
rights.”

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