Rebecca Tushnet

false advertising as a workaround when municipal codes are copied?

Posted on August 11, 2021 by rtushnet

International Code Council, Inc. v. UpCodes, Inc., 2021 WL
1236106, Nos. 17 Civ. 6261 (VM) & 20 Civ. 4316 (VM) (S.D.N.Y. Mar. 1, 2021) (presently on appeal)

ICC, a nonprofit that develops model codes for
design/construction that are often adopted by government entities, sued for
false advertising and unfair competition by UpCodes, alleging that they falsely
claim to provide updated and accurate building codes on their website, when in
fact the posted codes contain numerous errors. The court granted UpCodes’
motion for summary judgment.

ICC develops the codes through a
consensus process and revises the codes regularly to reflect changes in the
industry. ICC publishes revised I-Codes every three years, and it also
publishes custom codes that reflect versions of the codes as adopted by states
and local governments (the “Custom Codes”).

That’s costly. It sells I-Codes and Custom Codes through its
online store, along with access to additional features through its
premiumACCESS tool. “[I]ts primary funding source is the sale and licensing of
publications containing its copyrighted works.”

Meanwhile, UpCodes is a for-profit that provides access to
materials and tools of particular importance to building professionals, such as
the state and local building codes that govern their projects. It allegedly
sold or gave away unauthorized copies of the I-Codes and Custom Codes to both
customers and prospective customers. In addition, while UpCodes claims its
codes are up-to-date and contain integrated amendments, UpCodes’s codes allegedly
actually contain numerous errors.

The complaint alleged that UpCode falsely asserted that the
posted codes are “always up to date”; the UpCodes website said customers would
“never work from outdated code,” “Your code library in one place, always up to
date,” “Codes are organized by state and jurisdiction to provide a full
understanding of the applicable codes for your project,” and “Understand all
the requirements for your jurisdiction in one place”; on Twitter they claimed that
their codes are “kept up-to-date with all the amendments integrated natively
into the code”; it claimed that it provides the building industry with “ ‘a
complete understanding of relevant material’ for their projects” and helps
customers “surface the most critical code sections.” ICC alleged reliance, including a customer
review saying he was “much more comfortable knowing that my team is working off
the most up-to-date codes.”

Likewise, ICC alleged that UpCodes falsely claimed: “Integrated
Amendments: … Never miss important requirements in your jurisdiction”;
“UpCodes has the adopted codes as enacted by the state or local jurisdiction”;
and “While some states provide integrated codes … Where these are not
provided, UpCodes has integrated the local amendments ….” Etc. On Twitter,
UpCodes claimed that their copies of building codes are “kept up-to-date with
all the amendments integrated natively into the code,” and separately that they
had integrated “all 973 amendments” to the New Jersey 2018 codes.

However, ICC alleged errors in UpCodes’s Wyoming, Virginia,
Oregon, and New Jersey codes. The errors include: posting the entire text of a
model code as the state code when it wasn’t incorporated in its entirety (this
meant, among other things, posting appendices for Wyoming that included Tsunami-Generated
Flood Hazards); failing to incorporate certain amendments the states made to
the codes; and failing to include appendices that were adopted.

Finally, UpCodes allegedly falsely claimed to be the “only
source” of state amendments integrated into the model code, when in fact ICC
also offers custom codes on its website.

Once upon a time, this was a copyright dispute. When the
court ruled mostly in favor of UpCodes, though reserved for trial whether
UpCodes infringed by copying “model codes as model codes or indiscriminately
mingl[ing] the enacted portions of the model codes with portions not so enacted”
as a factual matter, ICC filed this new suit, which the court consolidated.

Falsity as to amendment integration: UpCodes argued that its
claims weren’t adequately alleged to be false, because “two dozen” errors among
“tens of thousands” of Integrated Amendments wasn’t plausibly false or
misleading. ICC responded that the errors it identified were merely
representative, not an exhaustive list, and that two dozen errors among
thousands was sufficient for falsity. The court declined to rely on “vague and
conclusory” allegations about “additional, unidentified errors” under Twiqbal.
But even if the complaint plausibly alleged more errors, the statements about
amendment integration were neither literally nor impliedly false. ICC acknowledge
that UpCodes does have “some” integrated amendments, so its claim to offer
integrated amendments was not rendered false by (1) not having all the possible
integrated amendments or (2) having errors in the integration; those things
went to accuracy and completeness, as discussed below.

Falsity as to accuracy/completeness: UpCodes argued that its
claims of accuracy and completeness were nonactionable puffery, not material,
and not plausibly the source of injury because ICC has more errors than
UpCodes’s website.

Even a statement that could in theory be proven true or
false, and isn’t a vague statement of opinion, can be puffery if it is “an
exaggerated, blustering, and boasting statement upon which no reasonable buyer
would be justified in relying.” That was the case here. Claims to provide “a
complete understanding of relevant material,” a code library that was “always
up to date,” and that ensured that customers “never work from outdated code”
were exactly the type of “exaggerated” and “boasting” statements “upon which no
reasonable buyer would be justified in relying.” The court noted that numerous
courts have treated the terms “accurate” and “complete” as puffing language,
and putting them in the context of legal requirements didn’t change matters.
Accuracy is important in building, but “codes are not static, nor are the laws
that rely on them. As changes in law occur, some delay between the adoption of
those changes, their dissemination to the public, and their publication on the
UpCodes website is not only understandable, but expected.” Thus, no reasonable
consumer would believe that “the codes are instantaneously updated and at all
times error-free.” And the complaint didn’t plausibly allege “rampant” errors
by plausibly alleging errors in the codes of four states.

This was further supported by a disclaimer on the UpCodes
website (cited in the complaint, but that might not be necessary since the
website is integral to the complaint), which expressly disclaims liability for
“any errors or omissions in the information or content” on its website and
expressly disclaims warranting that the services provided will be “error-free.”
Although in the copyright decision, the court made reference to “rather
surprising oversights,” UpCodes corrected issues when notified by ICC.

Falsity as to unique services: ICC’s own screenshot shows
that UpCodes claims to be the only source of integrated codes only for
“jurisdictions [that] do not provide integrated code books.” ICC didn’t allege
that the statement as qualified was false.

The state-law claims thus failed too.

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CA’s Prop 65 warning unconstitutional for acrylamide warnings for being scientifically overcertain

Posted on August 10, 2021 by rtushnet

California Chamber of Commerce v. Becerra, 2021 WL 1193829, No.
2:19-cv-02019-KJM-EFB (E.D. Cal. Mar. 30, 2021)

California allegedly compelled businesses to display
misleading warnings about the dangers of acrylamide, a carcinogen. The Council
for Education and Research on Toxics (CERT) intervened because it often files
lawsuits against businesses that do not display warnings about acrylamide.

The court granted an injunction against the law because genuine
scientific dispute over the harms to humans of acrylamide meant that the
disclosure was not “purely factual and uncontroversial,” so not ok under Zauderer,
and the state didn’t meet its burden under any higher standard.

Acrylamide is a toxic chemical first
detected in food in 2002, but not newly there. It often forms as a result of a
reaction between sugars and the amino acid asparagine, which naturally occur in
many foods. Roasting, baking, frying, or otherwise cooking food at a high
temperature appears to cause acrylamide to form, whether at home or at
industrial scale. According to the U.S. Food & Drug Administration (FDA),
the foods that contribute the most acrylamide to the American diet are baked
and fried starchy foods like french fries, chips, crackers, donuts, pancakes,
and toast. Coffee also contains acrylamide, as do almonds, olives, and asparagus.

It’s well established that acrylamide increases cancer in
animals; more acrylamide means more cancer. The studies do use very high doses,
not real-world doses. “[M]any public health authorities have concluded that
exposure to acrylamide probably increases the risk of cancer in people.” Some
researchers—some with ties to the food/beverage industries—think that rats and
mice react differently to acrylamide. And for obvious ethical reasons, there
aren’t clinical human studies, though in vitro human cell studies suggest that
acrylamide causes DNA changes that are known to cause breaks and mutations in
chromosomes, which can in turn cause cancer; in the International Agency for
Research on Cancer (IARC) database of 1,600 human tumor genomes, about one
third of the tumor genomes could be connected to acrylamide. “This may mean
that a large portion of human cancer is connected to acrylamide exposure.”
However, dozens of epidemiological studies have failed to find a connection. This
may simply be because food diary studies are unreliable, especially given the ubiquity
and uniformity of acrylamide exposure—plus, the effects may not surface for decades,
so a short-term study won’t be helpful.

It is thus unsurprising that, despite their conclusions
about “probable” or “likely” links to cancer, government authorities haven’t
urged people to avoid acrylamide-containing foods, though the FDA has offered
guidance to reduce consumption. “At the end of the day, however, because
acrylamide is found in so many foods, it is probably impossible to avoid it
completely. The FDA advises Americans not to attempt removing fried, roasted,
and baked foods from their diets.” California public health authorities specifically
decided not to warn against acrylamide exposure in coffee; the State found
“inverse associations—decreasing risk with increasing coffee consumption—for
[some] human cancers.”

But non-coffee sources remain subject to the warning
requirements of California’s Safe Drinking Water and Toxic Enforcement Act of
1986, more commonly known as “Proposition 65.” Businesses must not knowingly or
intentionally expose people to chemicals “known to the state to cause cancer or
reproductive toxicity” without a “prior clear and reasonable warning.” A chemical “must be listed even if it is
known to be carcinogenic or a reproductive toxin only in animals.”

Regulations require warnings to name the chemical and to be
displayed “prominently,” “with such conspicuousness” that they are “likely to
be seen, read, and understood by an ordinary individual.” A warning may include
more information than this, but only if the addition “identifies the source of
the exposure or provides information on how to avoid or reduce exposure.” There
is a safe harbor warning: “Consuming this product can expose you to [name of
one or more chemicals], which is [are] known to the State of California to
cause cancer. For more information go to http://www.P65warnings.ca.gov/food.”

California has settled cases by allowing more nuanced
warnings: in potato chip litigation, it allowed the warning to say the chips
“contain acrylamide, a substance identified as causing cancer under
California’s Proposition 65.” The warning further explained that foods other
than chips contain acrylamide and that acrylamide is not added to these foods,
but rather is “created when these and certain other foods are browned,” and
that the “FDA has not advised people to stop eating potato crisps and/or potato
chips…or any foods containing acrylamide as a result of cooking.”

Proposition 65 allows for exceptions, as with coffee; under
the regulations, 0.2 micrograms/day poses no significant risk and needs no warning,
and higher levels of exposure are permitted when “chemicals in food are
produced by cooking necessary to render the food palatable or to avoid
microbial contamination”; and the law grants businesses an affirmative defense
if they can prove the alleged exposure “poses no significant risk assuming
lifetime exposure at the level in question,” but the court concluded that these
paths were too risky to be a defense to the First Amendment claim.

Here, the only safe path—the safe-harbor warning—would be:
“Consuming this product can expose you to acrylamide, which is …known to the
State of California to cause cancer. For more information go to
http://www.P65warnings.ca.gov/food.” First, by “asserting vaguely” that consumption
could expose the consumer to acrylamide, a chemical most people have likely
never heard of, “the warning implies incorrectly that acrylamide is an additive
or ingredient.” And the warning required consumers to make several leaps—that
it meant that animals get cancer more often when they consume doses hundreds of
times larger than the amounts in the food, that scientists presume (absent
other evidence) this means cancer in people, and that therefore the chemical is
“known” to cause cancer in humans. (Necessary implication!) “People who
read the safe harbor warning will probably believe that eating the food
increases their personal risk of cancer.” There was indeed some evidence for
that, but the epidemiological studies didn’t find it, and “California has also
decided that coffee, one of the most common sources of acrylamide, actually
reduces the risk of some cancers.”

Thus: “the safe harbor warning is controversial because it
elevates one side of a legitimately unresolved scientific debate about whether
eating foods and drinks containing acrylamide increases the risk of cancer.”

The state couldn’t adopt private definitions of what it
means for California to “know” that acrylamide causes cancer, “or by showing
the warning contains no affirmative falsehoods. Statements are not necessarily
factual and uncontroversial just because they are technically true.”

The court commented that these problems could have been
avoided by allowing businesses to explain that acrylamide forms naturally when
some foods are prepared; that California has listed acrylamide as a chemical
that “probably” causes cancer or is a “likely” carcinogen or that the chemical
causes cancer in laboratory animals; and that acrylamide is commonly found in
many foods and that neither the federal government nor California has advised
people to cut acrylamide from their diets. Although this was okayed in the
potato chip litigation, it wasn’t obviously available to others without
litigation, based on the statute and the regulations. On the current record,
the court agreed that “only the safe harbor warning is actually useable in
practice,” and the state couldn’t “ ‘put the burden on commercial speakers to
draft a warning that both protects their right not to speak and complies with
Proposition 65.’ If the seas beyond the safe harbor are so perilous that no one
risks a voyage, then the State has either compelled speech that is not purely
factual, or its regulations impose an undue burden.”

This case was distinguishable from the earlier CTIA cellphone
radiation warning case in three ways: First, the CTIA warning only “hinted”
at potential dangers, for example by referring vaguely to “safety,” but “its
text was a purely factual summary of federal regulation about radio frequency
radiation.” This wasn’t even argued to be “controversial as a result of
disagreement about whether radio-frequency radiation can be dangerous to cell
phone users.” But the truth of whether acrylamide is “known to cause cancer” is
“the subject of controversy,” even if it wasn’t a political or moral
controversy.

Second, CTIA involved an unchallenged federal mandatory
disclosure of the same information; the ordinance at issue just required more
prominence. Here, “[n]o regulatory or public health authority has advised
against consuming foods with acrylamide.” [… That’s not what this disclosure
says either.]

Third, the ordinance in CTIA allowed businesses to
add information, whereas “Proposition 65 does not permit businesses to add
information to the required warning at their discretion, and thus prevents them
from explaining their views on the true dangers of acrylamide in food.”

Since Zauderer didn’t apply, it also flunked Central
Hudson and any higher standard of scrutiny. “There is no question that
protecting the health and safety of consumers is a substantial government
interest.” But at this stage of the
litigation, the required warning likely does not “directly advance” that
interest and is “more extensive than necessary” because it misleadingly implied
that the science about the risks of food-borne acrylamide was settled. The
state could also fund scientific research and pursue public awareness campaigns
to further its interest. “Regulators could also modify safe harbor warnings to
eliminate inaccuracies and controversial statements.”

The court cautioned that it was not invalidating “existing
consent decrees, settlements, or other agreements. For example, this order does
not permit businesses that have already agreed to display a certain warning do
take those warnings down, and businesses that have agreed to reformulate their
products to reduce acrylamide content are not permitted by this order to breach
those agreements.” And the court noted the risk of misinterpretation or misuse
of this injunction to attack warnings about other carcinogens and reproductive
toxins. “California has a substantial and likely compelling interest in
protecting people from exposure to dangerous chemicals, including chemicals
that have been shown to cause cancer or reproductive harm in experimental
animals, even if epidemiological evidence is inconclusive.” But at this stage,
the court granted the preliminary injunction.

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trolling over gnomes–no, really–on Amazon

Posted on August 10, 2021 by rtushnet

Shenzhen Tange Li’an E-Commerce Co. v. Drone Whirl LLC, 2021
WL 3474007, No. 1:20-CV-00738-RP (W.D. Tex. Aug. 6, 2021) (R&R)

Shenzhen sought a declaratory judgment that a design patent
for a toy gnome figurine was unenforceable and invalid, given that defendant/counter-plaintiff
Tatiana Mironova allegedly purchased its stuffed gnome toys, then switched
manufacturers and obtained a patent for an identical ornamental design without
authorization. Mironova then allegedly filed intellectual property complaints
against its storefront on Amazon.com fraudulently claiming infringement of her
patent rights and copyrights. Amazon delisted Shenzhen’s products. Shenzen also
brought claims under Texas law for unfair competition, tortious interference
with existing business relationships, fraud, and business disparagement. (The
parties agreed to judgment on the pleadings holding a key patent invalid.
Nonetheless this is now a patent case.)

The defendants (collectively Drone Whirl) counterclaimed
that Shenzhen retaliated after Drone Whirl stopped buying gnome dolls from
Shenzhen by interfering with Drone Whirl’s business on Amazon.com. Shenzhen allegedly
placed orders without paying for them to “lock up” Drone Whirl’s gnome
inventory; bribed Shenzhen’s customers to submit bad reviews of Drone Whirl’s
products; and distributed pamphlets to its customers containing false or
misleading statements about Drone Whirl’s products. It counterclaimed for
unfair competition under the Lanham Act, as well as Texas common-law claims of
fraud, breach of contract, business disparagement, and tortious interference
with existing and prospective business relations.

In relevant part, the Shenzen pamphlet began:

We are aware that there are a number of companies who are
committing design infringements on our products. Producing versions of our
products and selling them on the internet, particularly AMAZON. Using our
products description, our pictures that we have taken of our own products even
our brand to falsely exploit our reputation, in order to make quick sales.
Then, they are manufacturing cheap imitations with the intent of selling them.
There are only 3 shops (shop name: ITOMTE, ITOMTE INC., Hi Gnome) that are
currently authorized to sell our products on AMAZON ….

Not discussed in the opinion, but relevant—the pamphlet
offers various incentives for reviews of competitors. Is this legitimate, either
under general advertising law, or Amazon policy?

Without discussion of the broader caselaw about legal claims, the
magistrate concluded that stating that a company engaged “design infringements”
to manufacture products that are “cheap imitations” of Shenzhen’s “authorized”
products were all “statements of fact that are capable of being proved false or
misleading.” Alleging that these statements disparaged Drone Whirl (not named,
but implicated) and that they were likely to confuse consumers was sufficient
for falsity/misleadingness, and alleging that the statements were in emails and
a pamphlet sent to customers was sufficient to allege commercial advertising/promotion.

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NYIPLA student writing competition

Posted on August 10, 2021 by rtushnet

The New York Intellectual Property Law Association (NYIPLA) is currently accepting submissions for the Hon. William C. Conner Intellectual Property Law Writing Competition. Further information can be found on: https://www.nyipla.org/nyipla/ConnerWritingAwards.asp.

Award Name	Hon. William C. Conner Writing Competition
Award Provided by	New York Intellectual Property Law Association (NYIPLA)
Deadline	Sunday, February 27, 2022
Number of Awards	One (1) first place award in the amount of $1,500 and one (1) runner-up award in the amount of $1,000.
Provider Website URL	www.nyipla.org
About NYIPLA	The New York Intellectual Property Law Association serves as a vehicle to promote the development and administration of intellectual property interests. NYIPLA strives to educate the public and members of the bar in this particular field and continually works with foreign associations to harmonize the substance and interpretation of international conventions for the protection of intellectual property. Today, the NYIPLA exceeds 1,500 intellectual property attorneys practicing throughout the United States and abroad. The Association has a combined total of twenty-four active Committees and Delegates, whose scope covers all aspects of intellectual property law and practice and related topics, including alternative dispute resolution, legislative oversight and amicus briefs, meetings and forums, and continuing legal education.
About the Award	The Hon. William C. Conner Writing Competition was established to recognize exceptionally written papers that are submitted by law students and is presented each year at the Annual Meeting and Awards Dinner. The competition is open to students enrolled in a J.D. or LL.M. program (day or evening). The subject matter must be directed to one of the traditional subject areas of intellectual property, i.e., patents, trademarks, copyrights, trade secrets, unfair trade practices, antitrust, and data security/privacy issues. Entries must be submitted electronically by Sunday, February 27, 2022, to Richard Brown, rbrown@daypitney.com.
For Eligibility and Submission Requirements Visit	https://www.nyipla.org/nyipla/ConnerWritingAwards.asp
Contact	Lea Tejada
E-mail Address	admin@nyipla.org
Contact Phone Number	(201) 461-6603
Fax Number	(201) 461-6635
Mailing Address	2125 Center Avenue, Suite 616, Fort Lee, New Jersey 07024

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false advertising & bankruptcy law: $18 million for deceptive campaign in violation of automatic stay

Posted on August 9, 2021 by rtushnet

In re Windstream Holdings, Inc., 627 B.R. 32 (S.D.N.Y. 2021)

Plaintiffs/Debtors argued, and the court held in relevant
part, that defendants (Charter) breached the automatic stay by a literally
false and intentionally misleading advertising campaign to induce the Debtors’
customers to terminate their agreements with the Debtors by telling them that
bankruptcy risked impairment of their service. (Charter, notably, had
previously been the victim of a similar campaign by DirecTV when Charter filed
for bankruptcy ten years prior, and obtained a TRO against DirecTV, which the
court doesn’t mention here but might bear on the concept of willfulness.)

As alleged in the initial complaint, Charter mailed
solicitations whose envelopes “used Windstream’s trademark and copied the same
distinct color pattern from Windstream’s current advertising campaign.”

“Important Information Enclosed for Windstream Customers.”

Text: Windstream Customers,

Don’t Risk Losing Your Internet and TV Services.

Windstream has filed for Chapter 11 bankruptcy, which means
uncertainty. Will they be able to provide the Internet and TV services you
rely on in the future? To ensure you are not left without vital Internet and TV
services, switch to Spectrum.

With a network built for the future, Spectrum is here for
the long haul . . . .

Windstream’s future is unknown, but Spectrum is here to
stay—delivering internet and TV services you can count on. . . .

Example consumer call alleged in the complaint: “…. I got a
letter in the mail saying that ya’ll were going bankrupt and for me to go with
Spectrum so I have gone to Spectrum and I have just called to have the services
of Windstream disconnected.”

On social media:

“Were U planning on telling UR customers” [to switch before they lose service]?

This opinion considered whether Charter was liable in civil
contempt and the amount of harm caused by its conduct to the relevant creditors.
The court found that yes, Charter was in contempt of the automatic stay, and should
be sanctioned $19,179,329.45 for the losses caused by intentionally and
wrongfully interfering with the Debtors’ customer contracts and good will.

Along with knowledge of an order and failure to comply with
it, civil contempt generally requires “that (1) the order the contemnor failed
to comply with is clear and unambiguous, (2) the proof of noncompliance is
clear and convincing, and (3) the contemnor has not diligently attempted to
comply in a reasonable manner.” If there’s “a fair ground of doubt as to the
wrongfulness of the defendant’s conduct,” civil contempt isn’t appropriate. But
an additional bad faith/willfulness finding isn’t required. The touchstone is
not an intent to violate, but an intentional act in violation of the order; an
objectively unreasonable belief that one is complying with the order does not avoid
a contempt finding.

Courts have sometimes been more aggressive when treating
violations of the automatic stay, which “aims to prevent damaging disruptions
to the administration of a bankruptcy case in the short run.” Given the
importance of the automatic stay to multiparty bankruptcy cases and the
continuing judicial supervision of a bankruptcy case, “it is logical to require
those in doubt whether the stay applies to seek clarification from the court or
be sanctioned for shooting first and aiming later.” Certainly no more than an
objective standard for a clear violation is required.

This made the nonadvertising part of the case easy: Charter
breached the automatic stay when it terminated services to some of debtors’
customers based on debtors’ default on prepetition obligations.

Of possible interest to cyberlaw folks, Charter argued that
it was unable to comply, because its termination of service was wholly
mechanical, arising from “automatic nonpayment protocols” programmed into its
computerized billing system. The court disagreed: “[I]t is not really a defense
for a large and sophisticated entity like Charter that provides services to
many customers, some of whom inevitably will file for relief under the
Bankruptcy Code, to argue that its systems do not have an effective fail-safe
to prevent it from violating the automatic stay.” Charter didn’t argue that it
couldn’t create systems to override automated collection activity. “Turning a
blind eye to the automatic stay by choosing systems that are incapable of
complying with it is not tantamount to an inability to comply nor with making
diligent efforts to comply in a reasonable manner.”

For advertising folks: Charter was also held in contempt for
interfering with debtors’ customer contracts and goodwill “through Charter’s
literally false and intentionally misleading advertising campaign intended to
create the impression, using mailings designed to seem as if they were coming
from the Debtors, that the Debtors were going out of business.” There was clear
knowledge of the automatic stay, given that “Charter premised the campaign on
false assertions regarding the Debtors’ bankruptcy cases.”

The Bankruptcy Code automatically stays “any act to obtain
possession of property of the estate or of property from the estate or to
exercise control over property of the estate.” It’s not confined to acts to
collect or enforce a claim or judgment against the debtor, but was designed to
ensure that a trustee or debtor in possession maintains control of the estate’s
property and to protect against its “dismemberment” in furtherance of an
eventual equitable distribution to creditors. It covers executory contracts,
which are property of the debtor’s estate, and protects them both against termination
and “other interference that would have the effect of removing or hindering the
debtor’s rights” in violation of the statute. Goodwill is also well recognized
property of the estate.

Comment: This is an interesting question given that
TM/advertising people tend to define goodwill differently than general business
valuation people, especially in the TM/false advertising context. Is a
counterfeiter of products of a bankrupt entity in violation of the automatic
stay if it knows about the bankruptcy? Or say an unrelated competitor to a
bankrupt pharmaco starts falsely advertising comparatively about its
painkillers without reference to the bankruptcy. Does its awareness of the stay
mean that its false advertising violates the automatic stay? A few of the cited
cases seem to say yes, but even the closest analogous case seems to have been
premised on prior contractual dealings: Alert Hldgs., Inc. v. Interstate
Protective Services, Inc. (In re Alert Hldgs., Inc.), 148 B.R. 194 (Bankr.
S.D.N.Y. 1992) (court summary: “intentionally deceptive advertising that
interfered with debtor’s customer contracts and harmed goodwill automatically
stayed”; contempt defendants had previously sold the relevant accounts to the
debtor); see also Phillips v. Diecast Marketing Innovations, LLC (In re
Collecting Concepts), 2000 Bankr. LEXIS 615 (court summary: “preliminary
injunction granted against interference with debtor’s goodwill and executory
contracts by competitor in violation of section 362(a)(3)”; competitor was in
negotiations to buy the business line before bankruptcy and had dealings with
relevant party with prepetition debtor’s knowledge).

The court noted that many such decisions didn’t require “acts
for which the violator would be liable under applicable non-bankruptcy law” as
long as there was simply interference with the debtor’s contract rights. Where
the acts were clearly lawful under applicable non-bankruptcy law, courts use a
balancing test, but that didn’t matter here because the literally false and
intentionally misleading advertising campaign was not “ordinary course
commercial conduct,” but rather unlawful under nonbankruptcy law.

Defendants unhelpfully argued that they subjectively didn’t
believe they were violating the stay, which didn’t matter. Nor could they cast
off blame onto their ad agency or their consultant. Defendants authorized the
campaign “to be modeled on a prior campaign relating to a competitor that was ‘shutting
down service’ to create doubt whether the Debtors would remain in business,”
and anyway acts of their agents in violation of the stay would be imputed to
them.

Defendants also argued that applying the automatic stay to
their advertising would violate the First Amendment, and (implicitly) that the
First Amendment provided them with a fair ground for doubt that the automatic
stay applied. But First Amendment rights can be restricted when they are an
integral part of conduct that violates a valid statute, such as that providing
for the automatic stay. (This seems to treat the false advertising as speech
rather than conduct; that creates problems when it comes to, say, truthful
comparative advertising that also implicates the estate, but apparently that is
not unique to this case. Cited: Collier v. Hill (In re Collier), 410 B.R. 464 (Bankr.
E.D. Tex. 2009), “in which the posting of a sign that said, ‘Brad Collier owes
me $943.23. Will you please come and pay me!’ was not protected by the First
Amendment because it was debt collection activity prohibited by 11 U.S.C. §
362(a)(6), and In re Andrus, 189 B.R. 413 (N.D. Ill 1995), “which held that
conduct including the posting of signs stating that the debtor ‘Went Bankrupt!
He Didn’t Pay His Bills! He Is A Deadbeat! This Is a Public Service
Announcement’ and ‘Gene Andrus, Where’s My Money?’ was not protected speech,
but, rather, properly prohibited.” Also—and perhaps even more sound—false/misleading
commercial speech isn’t protected by the First Amendment. The automatic stay “protects
a strong governmental interest threatened by the Defendants’ conduct.” By contrast,
defendants’ primary case, In re National Service Corp., 742 F.2d 859 (5th Cir.
1984), involved a defendant who “accurately reported a debtor’s bankruptcy
status on a billboard commissioned from it by the debtor which otherwise would
have inaccurately implied that the debtor was affiliated with a financially
healthy company and therefore could pay its bills.” There, the addition “was
found to be primarily informational; there was no act to harm and thus no
violation of section 362(a) of the Bankruptcy Code.” Seems like a lot of work
is being done by “harm” there, which is pretty manipulable when it comes to
intangibles. Another case cited by the court, In re Golden Distribs., Ltd., 122
B.R. 15 (Bankr. S.D.N.Y. 1990), found that “the debtor’s former salespeople did
not harm the debtor’s goodwill or contracts because they had not appropriated
any customer lists or similarly protected information and the former customers
who changed their allegiance did not have contracts with the debtor.” But of
course that doesn’t mean they didn’t harm the debtor’s goodwill—it means that
outside of bankruptcy, they didn’t commit a tort.

But did these defendants nonetheless have a fair ground for
doubt about whether their advertising campaign violated the stay” The provision
has sometimes been found to be ambiguous with respect to the meaning of “any
act … to exercise control over property of the estate,” but only in irrelevant
contexts (e.g., when the alleged violator of the stay has a strong
countervailing interest that would be affected, such as when federal law
precluded a nonbankruptcy injunction against a union’s actions in contacting prospective
customers). This last one, coming out of a Trump bankruptcy, strikes me as a
solid precedent to protect truthful comparative advertising that damages the
estate—but that’s not relevant here. The court considered the Trump case
relevant when it’s tricky to determine “the nature and extent of the estate’s
interest in the property.” But there was no ambiguity here—the debtor had uncontroverted
evidence that debtors’ customer contracts’ average duration at the time of the
stay violation was 50 months—and anyway the caselaw clearly points to the rule
that if a party isn’t sure, it should seek relief from the automatic stay.

Future guidance: “Although every corporation expects
legitimate advertising by competitors, and thus such advertising does not ‘exercise
control’ over its property, improper advertising such as the Defendants’
clearly and objectively interfered with the Debtors’ customer contracts and
goodwill and thus clearly was precluded by section 362(a)(3)’s plain terms and
the caselaw applying them.” Again, this is a manipulation of what counts as “control”
to insert “wrongful” in front. And the automatic stay isn’t overbroad simply
because it “could conceivably be applied more broadly to advertising in general”;
“the foregoing caselaw sufficiently cabins that application for there to be no
fair ground of doubt that Charter fell on the wrong side of the statute when it
undertook to mislead the Debtors’ customers to end their contracts and impaired
the Debtors’ goodwill.”

For the advertising violations, the court basically accepted
debtors’ evidence of (1) lost profits from customers who switched to Charter as
a result; (2) corrective advertising costs; (3) “the cost of a promotional
campaign to recover market share, or new customer momentum lost because of the
breach,” and (4) related attorneys’ and expert witness fees and expenses. While
Lanham Act courts are sometimes hesitant about damages from categories (2) and
(3), the court here was satisfied that “corrective advertising is a
well-recognized component of damages for harm caused by wrongful advertising,”
and defendants didn’t fight very hard on whether the corrective advertising costs
were reasonable and causally related to their ad campaign. Though they did
object to (3), the court was satisfied that the $4 million campaign was “incurred
because of and in response to Defendants’ ad campaign,” based on testimony that
it was “the most aggressive campaign that [Plaintiffs] have run,” “was
absolutely uncommon for [Plaintiffs],” and was aimed to address the Charter
campaign’s “profound impact on [Plaintiffs’] business, and we didn’t see it in
the non-Charter [Exchanges],” where the false advertising campaign didn’t
occur.

Nor did (3) unfairly duplicate lost profits because it was
trying to win back lost customers. It surely stood to reason that some of the
promotional campaign reached former customers, but still, “damages for wrongful
advertising can include both lost profits and the cost of damage control
programs, including corrective advertising, at the same time.” Plaintiffs’
witness testified credibly that before the false ad campaign, they were on a
growth trajectory, but after, they were “behind plan” by about 5000 customers.
The promo program was primarily designed to recover suppressed demand. That met
plaintiffs’ burden of showing that (3) was a category of damages separate from
lost profits—or, in the alternative, that established that (3) approximated the
value of plaintiffs’ lost goodwill. And here’s an interesting statement
relevant to my point about goodwill above: “Defendants’ contention that this
should be precluded because the Debtors’ monthly operating reports filed during
their bankruptcy cases showed no erosion in goodwill clearly misses the mark;
GAAP goodwill for purposes of the Debtors’ monthly operating reports is not
business goodwill for purposes of calculating damages.”

Plaintiffs also received a chunk of their attorneys’ fees;
if willfulness was required for that, they showed it. “While the ratio of
Plaintiffs’ fees and expenses to Plaintiffs’ damages is high ($9,183179.45 /$9,996,200),
a large portion of the legal fees and expenses were incurred in response to
several questionable litigation choices by Defendants” as well as the costs of
obtaining the cessation of the false advertising.

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3 things that all mean the same thing: a slogan isn’t a TM for ad injury insurance purposes

Posted on August 9, 2021 by rtushnet

Travelers Indemnity Co. v. Luna Gourmet Coffee & Tea Co.,
2021 WL 1293314, No. 19-cv-02039-RM-NYW (D. Colo. Apr. 7, 2021)

The underlying litigation involves class actions against
coffee distributors, wholesalers, and retailers arising out of the allegedly
misleading use of the name “Kona.” There was a Kona coffee farmer plaintiff class
and a consumer plaintiff class. They alleged that the underlying defendants
wrongly profited from the goodwill of Kona, which injured Kona farmers by
having excessive supply which drives prices down and by causing consumers to
conclude that Kona coffee is “nothing special.” As to defendant Boyer (the relevant
defendant), the class actions alleged that it falsely designated the geographic origin of its coffee with the
intent to deceive, when the products actually contained little to no Kona
coffee.

Travelers insured Boyer, which sought coverage. The personal and advertising injury policy at
issue bars coverage for knowing violation of rights; material published with
knowledge of falsity; failure of goods to conform to quality/performance
statements; infringement of ©/patent/TM/trade name/trade dress/trade secret/ “other
IP rights or laws,” with the standard exception to the last for advertising
injury “arising out of any actual or alleged infringement or violation of
another’s copyright, ‘title’ or ‘slogan’ in your ‘advertisement.’”

There’s also an exclusion for material published prior to
the policy period, which Travelers alleged applied, but Colorado law directs
courts to look at the complaint itself, which doesn’t make that clear. Its
evidence was from websites, and it didn’t request judicial notice.

The policies covered disparagement of people or products in
ads, defined in the Policies as “a notice that is broadcast or published to the
general public or specific market segments about your goods, products or
services for the purpose of attracting customers or supporters.” Travelers
argued that the underlying actions concerned product labels/packages, which
aren’t ads. That seems wrong given the definition, but the court rejected this
argument on the narrower ground that there were underlying allegations that Boyer’s
also used marketing and advertising to tell consumers the packages contain
coffee from Kona.

But did Boyer’s use of “Kona” disparage Kona farmers just
because it allegedly harmed their goodwill? No. Implied disparagement was
insufficient; the theory was “too remote to constitute disparagement within the
meaning of the Policies or the element of the claim under Colorado or
Washington law.” And it definitely didn’t disparage Kona consumers.

What about infringement of “slogan”? “Slogan” is defined in
the Policies as “a phrase that others use for the purpose of attracting
attention in their advertising” that “[d]oes not include a phrase used as, or
in, the name of: (1) Any person or organization, other than you; or (2) Any
business, or any of the premises, goods, products, services or work, of any
person or organization, other than you.”

First, Travelers argued that a slogan can’t be a single
word. “Priceless,” Boyer responded—and also pointed out that it was actually
accused of using “Café Kona” and “Kona Blend.” The court agreed with the former
argument, but not the latter, since those weren’t the accused matter, “Kona”
was.

Second, Travelers argued that “Kona” was used in the name of
the Kona coffee products and, by definition, a slogan does not cover phrases
used in another company’s products. But there were Kona farmers who do not use
“Kona” in their product names, such as “Rancho Aloha.”

Finally, Travelers argued that “slogans are catchy
stand-alone phrases or mottos, not brand names or product descriptions, relying
on Laney Chiropractic & Sports Therapy, P.A. v. Nationwide Mut. Ins. Co.,
866 F.3d 254 (5th Cir. 2017).” Relatedly, it claimed that neither “Kona” nor
“Kona Coffee” or “Kona Café” are “used to attract attention” in advertising. Although
the court here didn’t rely on Laney, it still agreed with Travelers,
which is… a bit puzzling from a TM theory perspective.

The underlying complaint showed that the Kona farmers used “Kona,”
“Kona Coffee,” and “Café Kona,” to describe the products or brand names used by
Boyer’s, not as “a phrase that others use [here, Kona farmers] for the purpose
of attracting attention to their advertisement.” Instead of use of Kona as a “slogan”
or “advertising tagline,” they were seeking to protect Kona as a “source
identifier.”

CJ Cregg is right

So, no coverage. Comment: A slogan can be a trademark, which is to say a source identifier–and a source identifier is definitely something used for purposes of attracting attention. But the insurance policies distinguish slogans from trademarks. It’s something they certainly can do, but the language of trademark can’t explain it. And in fact this interpretation seems to render coverage a null set: If a slogan is something used to get attention, but that doesn’t work as a source identifier for the plaintiff, then the plaintiff will not be able to assert cognizable rights that could be infringed (setting aside copyright, separately listed in the exclusion to the exclusion). It would be more natural, from a TM perspective, to define a slogan as words distinct from the product name that are prominently used to sell the product. A slogan answers neither “who am I?” nor “what am I?” but provides an indication of “who.”

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aiding and abetting liability in false advertising cases

Posted on August 9, 2021 by rtushnet

Bonus: Civil RICO claims survive!

Sihler v. Fulfillment Lab, Inc., 2021 WL 1293839, No. 3:20-cv-01528-H-MSB
(S.D. Cal. Apr. 7, 2021)

Defendants allegedly used fake celebrity endorsements and
reviews and misrepresentations about price and limited availability to induce
consumers to buy weight-loss pills, then charged consumers more than they
originally agreed to pay, made it difficult or impossible to return the
products or receive a refund, and operated “false front” websites to mislead
banks and credit card companies investigating chargebacks.

For example, plaintiff Sihler saw an internet ad for “InstaKeto,”
claiming that it was featured on Shark Tank. She chose “Buy 3 bottles, Get 2
free” promotion with the expectation that she would be billed for three bottles
of the product at $39.74 each, but her debit card was charged for $198.70, the
price of all five bottles. When she called, the representative told her she
would have to ship the bottles back at her own expense to obtain a partial
refund; she didn’t receive any money back.

Defendants’ ads allegedly are deleted after a few weeks or
months to avoid detection; the terms and conditions of purchases, including the
refund and return policy, are hidden or buried on the landing page, and consumers
do not need to read or acknowledge the terms in order to complete their
purchase. When consumers dispute charges with banks or credit card companies,
defendants allegedly used a “false front” website that was similar to the
original landing page, but the terms and conditions were clearly stated, the
false advertisements are removed, and the actual purchase prices of the
different options were listed, thus deceiving the investigators. Defendants also
allegedly used multiple shell companies, each of whom signs up for a unique
merchant account, which are rotated so that they won’t flagged for fraud due to
high levels of chargebacks.

Plaintiffs’ amended complaint, like their first one, stated
claims for violations of the CLRA, FAL, and the unfair, fraudulent, and
unlawful prongs of the UCL. They identified multiple problems with the ads and
alleged how they’d be false or misleading to a reasonable consumer: the
pictured and quoted celebrities have not in fact endorsed the Keto Products in
question, there is not actually a limited supply of Keto Products remaining,
and they will not “Buy 3 Get 2 Free.” And using a “false front” website for financial
institutions would also be misleading and deceptive to a reasonable consumer.

The remaining issue was whether specific defendants were
plausibly alleged to be directly or indirectly liable.

Plaintiffs alleged that defendant Beyond Global created the ads
containing the false statements; created and operated the landing pages viewed
by consumers and the “false fronts”; opened hundreds of merchant accounts; and
charged one plaintiff’s credit card. That was enough for direct liability.

Plaintiffs also alleged that defendants TFL and Nelson aided
and abetted Beyond Global’s violations and conspired with it to violate the
CLRA, FAL, and UCL. These allegations were also sufficient: aiding and abetting
requires facts making it plausible “that defendants either ‘(a) [knew] the
other’s conduct constitute[d] a breach of duty and [gave] substantial
assistance or encouragement to the other to so act or (b) [gave] substantial
assistance to the other in accomplishing a tortious result and the person’s own
conduct, separately considered, constitute[d] a breach of duty to the third
person.’ ”

The court focused on (a); a plaintiff must “plead sufficient
facts to permit a ‘reasonable inference’ that [the defendant] knew of the
‘specific wrongful act[s]’ of fraud by the [principal(s)] at the relevant
time.” Although states of mind can be alleged generally, the pleader still has
the burden of alleging “the nature of the knowledge a defendant purportedly
possessed,” here actual knowledge of the pirmary violation. A defendant’s “decision to ignore suspicious
activity or red flags is sufficient to demonstrate actual knowledge” for aiding
and abetting liability. Allegations about a defendant’s knowledge and
familiarity with the structure and operation of an alleged fraudulent scheme are
also relevant. Similarly, “ordinary business transactions” can satisfy the
substantial assistance element of an aiding and abetting claim “if the
[defendant] actually knew those transactions were assisting the [principal] in
committing a specific tort. Knowledge is the crucial element.” Defendants didn’t
contest the substantial assistance element.

Here, plaintiffs alleged that TFL and Nelson had actual
knowledge: they knew how the fraudulent scheme worked, that they were shipping
products sold using deceptive and unfair advertising, that the ads and websites
were false and misleading, and the nature of the tortious conduct being
committed by Beyond Global and Doe defendants. They allegedly “directly run” ad
campaigns for their clients, including Beyond Global. TFL’s website allegedly provides
a variety “Affiliate Marketing Resources,” and its marketing director’s
LinkedIn profile states that his duties include “Run[ning] and monitor[ing]
marketing campaigns.” TFL and Nelson also allegedly integrated TFL’s custom
software into the landing pages, which would have necessitated knowledge of the
deceptive and misleading content on those websites. In addition, they allegedly
ignored “a significant number of red flags,” receiving and processing customer
returns and complaints. They also received complaints on TFL’s BBB page, one of
which specifically mentioned viewing a false Shark Tank advertisement; TFL/Nelson
“responded to several of these comments, demonstrating that they read them and
were aware of their contents” and supporting a reasonable inference that they
were aware of comments to which they did not directly respond in the same
period.

The court also rejected the argument that providing order
fulfillment software didn’t mean they would have been aware of the website
content. “It is plausible that an entity responsible for integrating order
fulfillment software with a client’s website would have knowledge of the
content, representations, and general nature of the website. And it is very
plausible that providing assistance with advertising campaigns for clients
would necessitate knowledge of the content of the advertisements and the nature
of the campaign.” Of course this could be revisited on summary judgment.

Shockingly, civil RICO claims also survived, despite being civil
RICO claims.

Tan v. Quick Box, LLC, 2021 WL 1293862, No.
3:20-cv-01082-H-DEB (S.D. Cal. Apr. 7, 2021)

A similar case. Noted because the court found that the
following allegations sufficiently pled aiding and abetting liability: The
relevant defendants had prior experience helping other clients run free trial
scams, knew the elements and hallmark characteristics of such schemes, and knew
the main defendants were operating such a scheme. The design, implementation,
and utilization of the relevant defendants’ load balancing software
necessitated the their knowledge of the entire scheme: it was designed and used
for rotating merchant accounts to avoid detection of a scheme to defraud
consumers. The relevant defendants provided coaching services on how to apply
for, manage, and rotate merchant accounts, as well as designing and
implementing advertisements, and participated in a months-long onboarding
process with the main defendants.

Defendants argued that they merely licensed legitimate,
commercial software for lawful use only. But under Twiqbal, plaintiff
alleged more: They specifically advertised their ability to help companies who
had been “shut down” by helping them “get real merchant accounts” and providing
“chargeback mitigation.” The aiding/abetting defendants’ website and press
materials make several references to “load balancers” and merchant account
managing. Load balancing, defined as “distribution of Transactions between or
among Merchant ID numbers in order to avoid minimum thresholds,” is expressly
prohibited by VISA and Mastercard. Plaintiff alleged that there is no
legitimate reason to be rotating hundreds of merchant accounts and employing
chargeback caps and pointed out that the aiding/abettind defendants didn’t
offer a potential lawful purpose for their load balancing software. They could
try at summary judgment.

Civil RICO claims also survived here.

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prescription and OTC products can directly compete; many non-FDCA-based claims survive

Posted on August 9, 2021 by rtushnet

Scilex Pharmaceuticals Inc. v. Sanofi-Aventis U.S. LLC, 2021
WL 3417590, — F.Supp.3d —-, 2021 WL 3417590, No. 21-cv-01280-JST (N.D. Cal.
Aug. 5, 2021)

Scilex sells an FDA-approved, prescription-strength topical
analgesic self-adhesive patch, ZTlido (lidocaine), which is allegedly often prescribed
off-label, including for general neuropathic pain (e.g., back and spinal pain).
It brought Lanham Act and California FAL/UCL claims over defendants’ allegedly
false advertising of their respective OTC lidocaine patches.

Article III standing: Defendants argued that Scilex’s
allegations of harm to its goodwill and lost profits were conclusory and that
the parties don’t compete for the same customers. But defendants were plausibly
direct competitors because they all “sell lidocaine patches that treat pain
through the skin.”

“A party may prove its injury (1) by using lost sales data,
that is ‘actual market experience and probable market behavior,’ or (2) ‘by
creating a chain of inferences showing how defendant’s false advertising could
harm plaintiff’s business.’ ” And direct competition plus materiality can create
such a chain of inferences, as here. For competition, plaintiff alleged that “ZTlido
is regularly prescribed for the off-label use of treating general neuropathic
pain – the same purpose for which OTC lidocaine patches are marketed and used,”
and the court noted that “the competition between prescription and OTC
lidocaine patches is reflected in [defendant] Hisamitsu’s advertising itself,
which draws direct comparisons between OTC and prescription patches.” In two blog
posts, Hisamitsu asserts that the “4% of lidocaine” found in its patches “is
close to the 5% lidocaine patch you would get with a prescription” and that the
Hisamitsu patches “followed the same principles used for the Rx (5% Lidocaine)
version …. The only change they made was to improve the price.” “[T]he extra
steps necessary to acquire a prescription patch – including getting the
prescription from a doctor – do not change the fact that Scilex and Defendants
are competing for the same consumers.”

Likewise, Scilex adequately alleged that its injury was fairly
traceable to its ads, despite defendants’ argument that there were other
explanations for Scilex’s failure to gain market share and that there are other prescription lidocaine patch producers. Footnote: Even
though ZTlido has only been approved by the FDA for relief of pain associated
with post-herpetic neuralgia, a complication of shingles, off-label use is
allegedly permissible, so its lost sales for off-label uses may be legitimately
compensable. Scilex isn’t required to show that the ads were the only reason
for reduced sales, so arguments about the crowded market weren’t helpful at
this stage. The fact that defendants’ ads preceded ZTlido’s entry into the
market doesn’t “foreclose the possibility” that the ads caused consumers to
choose defendants’ OTC products when they had a choice.

Redressability: Defendants argued that there was no “substantial
likelihood” that Scilex would gain the sales it claims to have lost if the challenged
ads were enjoined, because Scilex “would still be legally precluded from
advertising the ZTlido patch for any use other than the narrow indication
allowed by [the] FDA.” But that’s not relevant to the lost profits argument,
which is part of causation.

Statutory standing under the Lanham Act: You can guess how this
will go; I don’t think putting this as an Article III standing challenge was
helpful.

Must the plaintiff allege its own reliance to prevail
on its UCL/FAL claims? Scilex was seeking only injunctive relief under the
UCL/FAL. Although this judge had previously required such allegations, the
court was now convinced that recent cases to the contrary were more persuasive:
a non-consumer plaintiff has standing as long as the plaintiff alleges a
sufficient causal connection between the falsity and its losses. In re
Tobacco II did say “that ‘[t]here are doubtless many types of unfair
business practices in which the concept of reliance … has no application,’ ” and so injury “as a result of” the defendant’s conduct can be proved without showing
that the plaintiff relied on the misrepresentation; Proposition 64’s aim
of requiring actual injury isn’t served by barring competitor plaintiffs as a
class.

Since FAL/UCL relief is equitable, plaintiffs also have to
show that they lack adequate remedies at law, but this can mean injunctive relief
when damages wouldn’t protect against future harm, so that’s ok too (at this
stage at least).

On the merits: Defendants argued that the claim of implied
FDA approval wasn’t cognizable because Scilex didn’t allege any affirmative
representation of FDA approval or sponsorship, and there’s no private cause of
action under the FDCA. This worked better: Mylan Laboratories, Inc. v. Matkari,
7 F.3d 1130 (4th Cir. 1993), held that implied misrepresentation-of-approval
claims must fail because the act of placing a drug on the market with standard
package inserts doesn’t falsely imply FDA approval. By contrast, JHP
Pharmaceuticals, LLC v. Hospira, Inc., 52 F. Supp. 3d 992 (C.D. Cal. 2014),
accepted allegations that defendants had put products on “industry ‘Price
Lists,’ and that ‘buyers believe that all prescribed drugs identified on the
Price Lists are … FDA-approved.’ ” That was more than merely putting a
product on the market. But Scilex didn’t allege similar actions, only that
defendants claimed that their products “desensitize aggravated nerves” and targeted
neck and back pain. It didn’t point “any reason that consumers would believe
these statements imply FDA approval,” especially since the statements “seem to
merely describe the effect of their products. … More is required to imply FDA
approval.”

Likewise, allegations about a “commercial containing [an]
individual in [a] white lab coat, referred to as ‘Dr. Bob’ in a doctor’s office
and labeled as ‘Bob Arnot, MD, Former Chief Medical Correspondent,’
recommending [Hisamitsu’s] product to apparent patient who asks what he should
use for back pain” weren’t sufficient. Scilex didn’t explain why such an ad
would lead consumers to believe that the product is FDA-approved or
prescription-only. Scilex can’t use the Lanham Act to make defendants say on
labels or in ads the specific uses the FDA has approved OTC lidocaine patches
be used for.

Hisamitsu also argued that Scilex didn’t sufficiently allege
how or why Hisamitsu’s statements – including “ ‘Maximum Strength,’ ‘Apply for
8 Hours,’ ‘Numbing Relief,’ ‘Blocks Pain Receptors,’ ‘Desensitizes Aggravated
Nerves,’ ‘for temporary relief of pain … back, neck, shoulders’ ” etc. – were
false or misleading. Scilex alleged
that these statements falsely “impl[y] that Defendants’ products completely block
pain receptors, eliminate responses to painful stimuli, and provide a numbing
sensation,” “impl[y] that Defendants’ products provide pain relief by
desensitizing nerves and/or pain receptors,” and “impl[y] that Defendants’
products contain ingredients that target nerves.” Since Scilex alleged that
lidocaine “is used to treat pain by depressing sensory receptors in the nerve
endings in the skin, which prevents pain signals from reaching the brain,” it
wasn’t clear why statements about the effects of lidocaine patches were
misleading. It wasn’t enough that the FDA’s Tentative Final Monography for
External Analgesic Drug Products for Over-the-Counter Human Use “declined to
grant approval for external analgesic products to be permitted to state on product
labels that these products ‘numb[ ]’ pain or ‘completely block[ ] pain
receptors.’ ” If defendants were violating the FDCA/FDA regulations, that was a
matter that couldn’t be resolved in a Lanham Act case.

Scilex successfully alleged that “MAXIMUM STRENGTH” “[f]alsely
states that [the] product[ ] contain[s] and deliver[s] to the area of pain the
maximum amount of lidocaine available in patch form” and “[m]isleadingly
implies that [the] product[ ] [is] superior, or at least equivalent, in
efficacy and results to prescription-strength lidocaine patch products.” Hisamitsu
argued that, in the context of the entire package, there was a disclaimer that
the tagline referred to products available without a prescription. The disclaimer
was in small font on a separate panel; that certainly wasn’t enough to grant a
motion to dismiss.

Scilex also successfully alleged that “apply for 8 hours’ …
[m]isleadingly implies that [Hisamitsu’s] product[ ] continuously adhere[s] to
the body and continuously relieve[s] pain for the specified amount of time.” Hiramitsu
argued that it didn’t make claims about how long the product adheres to the
skin or if the strength of the product remains effective for all eight hours,
and anyway Scilex didn’t allege materiality. Nope. Scilex plausibly alleged that
“apply for 8 hours” misleads consumers to believe that the product will adhere
to their skin and be effective for eight hours. It further alleged that
consumers “have experienced considerable problems with patch adhesion and patch
detachment prior to the 8 … hours for which [Hisamitsu] claim[s] [its]
patches adhere” and that if patches are “even partially detached, there may be
uncertainty about … the rate and extent of drug absorption.”

However, the court dismissed claims that a TV ad misleadingly
implied that the parties’ products were equivalent in efficacy and that the
parties’ products were interchangeable; there was no allegation that the TV ad made a
comparison to prescription patches. Hisamitsu argued that its blog posts (that the
product was “close to the 5% lidocaine patch you would get with a prescription”
and that the product “followed the same principles used for the Rx (5%
Lidocaine) version…. The only change they made was to improve the price so as
to make the product more accessible to the general public”) weren’t misleading
because they highlighted that there was less lidocaine and directed patients to
consult a doctor before switching. “The Court first rejects Hisamitsu’s
position that a consumer is not misled so long as they are directed to consult
with a physician. Such a rule would allow any manner of misleading
advertisement.” And the statements at issue clearly made
superiority/equivalence claims. It was plausible that consumers would be misled
to believe that Hisamitsu’s patch was interchangeable with or as effective as a
prescription lidocaine patch.

Defendants argued that the claims were barred by laches, but
the causes of action weren’t available before ZTlido entered the market in February
2018. Scilex sued less than three years later, within any applicable (borrowable)
statute of limitations, so there was a strong presumption against laches.

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IPSC Panel 12 – Identity, Data, and Privacy

Posted on August 5, 2021 by rtushnet

Dustin Marlan, The Dystopian Right of Publicity

Privacy problems (surveillance) are often analogized to the dystopia
of 1984; ROP problems stemming from infinite transferablility can be analogized
to Brave New World (1932). A state of unfreedom that is apparently chosen and
pleasurable (though enforced by drugs and conditioning). This is relevant to
the extent that everyone has a ROP. ROP is also criticized when applied to use
of celebrity personae in expressive works. Is that a preference for amusement
over discourse? There are only about 18 celebrity personality cases/year. That’s
not nothing and litigated cases aren’t everything, but wants to focus on publicity
interests of average citizens: the pleasurable servitude problem. Risk of
identity loss means that “everyone belongs to everyone else,” as the slogan
used in Huxley’s book goes. Class action ROP lawsuits against social media:
result was broader consents in TOS. Voluntary relinquishment of identity
control in return for the benefits of social media. Commodification of identity
as a prerequisite for social media access. Social, political problem; social
networks get monopolies over human capital.

Proposal: clickthrough policies designed to educate the
public, maybe choices. 1A shouldn’t be a barrier to regulation b/c the use for
endorsement is commercial speech.

Rothman: Does not agree that ROP is the coined opposite of
the right of privacy, nor that it should have a purely economic and commercial
focus. See her book. Also in her count there are 100s of ROP cases/year—order of
magnitude more.

RT: Suggestion: Read Ashley Mears, Very Important People, on
pleasurable exploitation and its relation to commodification and anti-commodification
norms. Doesn’t have policy discussion itself, but has implications for
solutions where individual relations seem pleasurable. Discussion seems
indifferent to hidden data use; endorsement is almost literally the tip of the
iceberg of individual data use. Proposal seems pretty weak tea; disclosure won’t
work if they can still condition access on agreement.

A: On disclosure: Wants to be realistic about what could
happen.

Wu: seems more unwitting [without thinking about it one way
or another] and unavoidable transfer than pleasurable transfer. But in context
of social media, the pleasure is inextricable from the agreement [and it’s not
surprising that the agreement would then be experienced as, at least, not a
problem].

Bita Amani, Authoring Identity: Copyright, Privacy, and
Commodity Dissonance in the Digital Age

Emerging threats to capacity for self-authorship seem
greater than in the past—here, algorithmic errors may generate disruptions in
identity construction. Personal experience with multiple Bita Amanis with related
interests. This has led to problems both with health care (corrected),
misattribution of credit (interviews), and database connections as if they were
all the same author.

Why should we care? Misappropriation; interference w/connection
b/t author and text. Moral rights as a solution? Not clear. Peter Doig,
well-known artist: denied
creating a particular work; the owner claimed it was Doig’s work, and had
to defend his identity to assert it wasn’t his work. The plaintiff pointed to
style indicia of it being his. (Doig
won; it was another guy named Peter Doige.) Privacy may have untapped
potential for dealing with these misattributions, especially false light. Even
true facts can be actionable; defamation is not required for intrusion on
privacy/public disclosure of embarrassing facts. (Comes out of case involving nasty
divorce where one party posted videos involving the kids on YT.)

Victoria Schwartz, Joint Privacy

[picking up kid; interesting project using ideas of joint authorship
as a lens on issues of privacy that arise when people create information (or
even just have information, as w/DNA) together and so sharing one’s own information
or life story necessarily implicates others.]

Uri Y. Hacohen, User-Generated Data Network Effects

Network effects are key to current tech companies, whether
via reviews, userbase, or otherwise. AI increases the power of network effects—making
Google’s predictive results better. Many problems, including price discrimination,
manipulation. Possible changes: changing liability regime so that they are more
liable depending on what they know (e.g. that the user is a child); simple
payment requirements to pay for harm [Pigouvian tax, I think]; management
rights for users. Does not want to break up (at least as first solution) b/c that
just means more entities with the data creating privacy and security problems,
but we may not have a choice.

Felix Wu: Amazon, Google, and FB actually had different core
businesses and if they’re all gulping this data then we have oligopoly, not
monopolies. Even in a world of perfect competition, wouldn’t they be competing
for who can manipulate best?

A: for FB, more data = more problems; right now they aren’t
sharing as much as they might.

Wu: Some would say that innovation from the scale isn’t
worth it; give up the marginal benefits and limit the size.

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IPSC Panel 9 – Crosscutting IP

Posted on August 5, 2021 by rtushnet

Derek E. Bambauer, Everything You Want: The Paradox of
Tailored IP Regimes

Customized IP has benefits (avoids lowest common denominator
[or highest] problem), but also costs: manipulation to shift from one regime to
another; colleciton of information by decisionmakers.

Standard debate assumes semi omniscience of designer
neutrally concerned with social welfare. What if rules are largely written by
the regulated parties? Bespoke systems are often underutilized by their own
designers and outmoded. The paradox of getting your way and finding it
unsatisfying.
Examples: Vessel Hull Design Protection Act. Industry pushed very hard against
cheap copying, and yet as of 2019 there were only 538 registrations in 20 years
versus hundreds of thousands of utility patents. Was more heavily used 1999-2003.
It seems that boat designers/manufacturers used C&Ds under this regime, but
there were 1100 utility patents on boat hulls and 20 design patents since 2013,
which was the last boat hull registration. Sharp shift to regular regime. Fed.
Cir. found in one key case that boat hulls didn’t infringe if the decks were
different. Registration is fast—takes a month—versus patent, but term of
protection is only 10 years.

Computer chips: Semiconductor mask works, 1984. Through 2012,
only about 1000 registered. Technical reason: as chips have grown in size and
specialization, reverse engineering is more expensive than designing them from
scratch.

Audio Home recording Act: Excluded general purpose
computers, so whoops. Diamond Rio case: excluded MP3 players. Customers didn’t
like paying more for DAT; CDs won.

It’s hard to write and get passed exactly what you want—industry
insiders may compete. Also, as a tailored regime begins to flow closer to a
generalized regime, it falls down the gravity well of the general field and is
overtaken. Maybe small changes are easier to pass.

Industries design for current needs and not for what it may
evolve to because innovation is difficult to predict (like the future),
especially if generated by upstart or edge firms or driven by wider tech
changes. Even if we assumed incumbents have better info, their own internal
pressures exist to align legal rules w/existing business models. Give and take
of legislative process may be better when it harnesses information from more
stakeholders than those who are generating the IP. Tailored regimes may also be
tightly coupled and fragile—subject to disruption/irrelevance from one unfavorable
judicial ruling, like boat hulls.

Generalized regimes are more adaptable, adjustable by more
institutional stakeholders (judges, admin agencies, the bar). Overton window:
you get your specialized regime; it’s difficult to revisit that after something
changes because the legislature thinks it’s done. Copyright Term Extension Act:
blatant rent extraction generates or increases opposition. When Big 3 automakers
requested their own tailored design regime to exclude repair parts, Congress didn’t
want that.

Bespoke regimes may divert innovation—music industry was
successful in delaying and killing off DAT, but that allowed the rise of the
CD, and MP3s, and then Napster and P2P.

IP industries have historically been terrible at
prognostication, as w/the VCR. Maybe we should be less worried about attempts
at incumbent protection/rent extraction via IP.

Even if my thesis is right, it will still be an irresistable
lure/strong optimism bias, which will cause incumbents to concentrate on
legislative activity instead of innovation under the standard IP system.

Jake Linford: are there overlaps with patents and boat hulls
suggesting two bites at apple.

Bruce Boyden: another reason is that crafting a bespoke
system takes years, making narrow legislation more likely to be out of date.

Mark McKenna: Another explanation was maybe these bespoke regimes
weren’t addressing actual problems; overrepresentation of people w/specific litigation
interests.

Betsy Rosenblatt: If they solve problems, general systems
might be much better at solving specific problems and not advantaging opportunists—a
narrow protection might be harder to manipulate.

RT: Before coming to a conclusion about comparative
advantage, consider what creates trolls in more general system: different kinds
of exploitability of larger systems. Consider compulsory licensing as a midway
point here as well. Also, the history of DMCA was that 512 was the price (which
the © industries thought was small) for 1201; 1201 turned out not to be worth
it, which supports your argument, but also indicates that matters can be more complex
if there is horsetrading across regimes.

Mala Chatterjee, Understanding Intellectual Property:
Expression, Function, and Individuation

© and patent differ in breadth and type of rights (copying
requirement v. independent invention). Treated as distinct and scholars warn
against overlapping rights. But what are the subject matters and how are they
to be distinguished?

Argues that defining difference b/t creative works and
inventions is the way in which they are individuated. Creative works are
author-individuated while inventive works are structure-individuated. Two acts
of authorship can’t result in the same creative work, only structurally identical
works, while two acts of inventorship can result in the same invention.

An author who has made something has said something. Sets
aside what counts as expressive work, but the defining feature of the category
is speech. Expression is the kind of thing for which where it comes from makes
a difference to what it is. Author’s work is uniquely hers even if others might
also be connected to it and might make things that look alike. Pierre Menard;
appropriation art where the point is that it is structurally identical to
something else—Warhol’s Brillo Boxes and Pettibone’s Brillo Boxes, and this
matters to their aesthetic properties.

Inventions are importantly different from creative works in
being tools: instrumentally valuable for some specified end. This isn’t to say
that it doesn’t matter at all who invents: it could be historically relevant
that both Liebnitz and Newton invented calculus, but that doesn’t make calculus
different.

Vindicates core features of the structure—originality as ©
requirement—must come from author, not must be novel. Independent creation is
likewise justified. For patent, this makes sense of utility, novelty, and lack
of independent creation defense. Ownership is of linguistic description of
structural properties of invention.

For ©, standards of proof are wrong if they allow inference
of copying from structural similarity alone; theory also refutes rejections of
transformativeness where clear meaning to audiences is different even w/o
structural change. Also relevant to some patent doctrines (sorry).

Jeremy Sheff: Paul Goldstein has told this story several
times—quotes a colleague saying if Shakespeare had died as a child, we would never
have had Hamlet, but if Newton had died as a child, we would still have
calculus. He sees this as something about teleology of patent and ©: what they
are and what ends they’re for. Do you care about ends?

A: don’t know what it means for design of legal systems unless
paired with theory about aims of legal systems.

Linford: is this reputational? Richard Prince is understood
to have a different meaning/authorship of his works because of his reputation.
That might have implications for what counts as authorship in cases like
Garcia. Is this bringing in concepts from TM/ROP about branding? Could a patent
turn on the personality of the creator?

A: recognizing that creative works are more tied to authors
generally than invention is. Need to look for authorial intent, but part of
what tells us is whether that results in successful communication is context
surrounding the actor. But not saying that authorial intent wholly constrains
the work.

Mark McKenna: sounds like Abraham Drassinower’s theory—he says
he’s explicating a view inherent in © as a system not a metaphysical view that
there are things that are inventions out there in nature. Are you making an
argument that these are not just legal constructs but things that are true
about the world?

A: aligned with Drassinower but one important difference is
that she is starting not just with legal system but with works and practices
surrounding them and arguing that they are plausibly real things in the world.

Betsy Rosenblatt: pace Amy Adler, doesn’t your approach kill
all of © if it’s about individuated expression? © is at odds with that at least
for the sorts of works that are personally expressive. We don’t care about authenticity
of an air conditioner manual, but it’s still in ©. Also urge you to include
recipient/dialogical creation of meaning, which helps you—an invention is
structurally the same to every recipient and expression isn’t.

Dilip Sharma, Arbitrability of Intellectual Property
Disputes

Indian cases have long pendencies, making arbitration more
attractive. WIPO offers mediation and arbitration services. Number is rising,
and expected to rise in India. Court: Booz Allen v. Hamilton—only disputes
involving rights in personam are arbitrable and IP isn’t. Delhi High Court also
held that © infringement can only be dealt with by courts because the statutory
remedies are all there is. But Eros v. Telemax allowed arbitration: law said
that every © suit or civil proceeding should be instituted in a district court;
but interpreting that to bar arbitration would be too broad where the IP
dispute arises out of a commercial contract. Another case: patent disputes
about infringement were not about in personam rights and were arbitrable.

Other nations: much more pro arbitration. Countries may
require registration of arbitral award before it’s enforceable. India needs
legislative support.

RT: Does India recognize UDRP results? It’s mandatory for registrants
to agree. Possible model?

A: to the extent required by international rules, yes, but
not much support.

Ana Alba: consider enforceability of international arbitrations—that
is also required in some cases.

Mauritz Kop, Quantum Technology: Waiving or Pledging IP?

General principles of quantum mechanics: physics of very
small + engineering. Superposition, entanglement, tunneling: defies laws of
physics on the macro level. Applications: computing, communication, sensing, simulation,
basic research, and AI. Not yet many use cases beyond cybersecurity, finance,
and defense; consequences remain mostly unknown. Dual military/civilian uses
are possible necessitating export controls and shared tech transfer policies.
Foresees heavy regulation and chilled innovation given the very high risks. Key
principle: equal access to benefits. Similar motivation to open COVID pledge,
but key quantum tech is now controlled by a handful of multinationals, universities,
and gov’ts. Could we temporarily override rights in quantum tech to repair
market power problems?

Should build on adjacent fields like CRISPR, nanotech, which
also require huge initial investment. Looking for mechanisms beyond social solidarity.
Right now waiving IP would have no effect without sharing knowhow, since
patents don’t disclose that right now; there is no skilled workforce available;
clean rooms are very expensive. Pledging IP looks promising given the current
limited number of stakeholders. Lack of consensus about whether a special
regime is needed.

Sheff: questions about resource limits being more important
than IP

Rosenblatt: given those resource requirements, maybe history
of nuclear regulation is more important than history of AI regulation

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Rebecca Tushnet

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IPSC Panel 12 – Identity, Data, and Privacy

IPSC Panel 9 – Crosscutting IP

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