UCL claim against Twitter survives where advertiser allegedly was charged for bot activity

Posted on August 18, 2020 by rtushnet

DotStrategy Co. v. Twitter Inc., 2020 WL 4465966, No.
19-cv-06176-CRB (N.D. Cal. Aug. 3, 2020)

Twitter “promises advertisers on its platform that they will
only be charged when “people” interact with the accounts or Tweets they are
paying to promote.” DotStrategy alleged that it was charged for interactions
with automated accounts and that Twitter failed to refund it for those
interactions even after it learned that the truth. The court partially granted
and partially denied denied Twitter’s motion to dismiss—granted to the extent
that DotStrategy complained about “fake” accounts that were nonetheless
controlled by people, denied to the exent that the complaint concerned bots.

As an example of its representations, in 2013, Twitter
represented to advertisers that they would “only be charged when people follow
your Promoted Account or retweet, reply, favorite or click on your Promoted
Tweets.” DotStrategy is a marketing company; between October 2013 and December
2016, it placed thirty-four ads on Twitter for which it paid a total of
$2,220.76.

Twitter’s Advertising Terms state that Twitter “[t]o the
fullest extent permitted by law … disclaim[s] all guarantees regarding …
quality … of … any User Actions….” and state that “[c]harges are solely based
on [Twitter’s] measurements for the Program.” 

“A large number of accounts on Twitter are primarily
controlled by bots rather than human beings.” Around the time that Twitter
deleted 70 million accounts “it had deemed spammy, inactive, or which were
displaying ‘erratic’ behavior that indicated they were likely bots,” 480 of
dotStrategy’s Twitter followers were deleted. After a Twitter account has been
deleted, it is allegedly “as if the account never existed,” making it difficult
or impossible to find information about the account. DotStrategy sued for
violation of the UCL.

Twitter argued that the complaint failed to satisfy Rule
9(b) because dotStrategy alleges that Twitter wrongfully charges for “fake,”
“false,” or “spam” accounts without adequately defining those terms. The court agreed
to the extent that the complaint alleged that a broader category of
human-controlled Twitter accounts are fake, without identifying the outer
boundaries of this group. DotStrategy argued that the terms “fake,” “false,”
and “spam” cannot be insufficiently precise, because Twitter itself has used
those words to describe activity forbidden on its platform. “But the fact that
Twitter knows what it means when it uses these terms does not excuse
dotStrategy’s obligation to identify the categories of interactions it was
wrongfully charged for.”

Also, any theory of liability premised on interactions with
human-controlled accounts failed because Twitter never promised not to charge
advertisers for interactions with “fake” accounts that were controlled by
people. “A reasonable advertiser would understand that achieving its goals
might require some interaction with Twitter users who use the platform to
disseminate spam, violate Twitter’s terms of service, or otherwise qualify as ‘fake’
despite being human. This is especially true because according to dotStrategy’s
own allegations, Twitter is rife with such users.” Likewise, no reasonable
advertiser “would understand the word ‘people’ to mean people who abide by
Twitter’s rules.”

“However, dotStrategy adequately alleges that Twitter
falsely represented that advertisers would not be charged for interactions with
bots.” And the complaint adequately alleged that such charges were imposed. The
allegations that dotStrategy lost 480 (roughly 17%) of its followers in the
twenty-eight days preceding July 20, 2018, during Twitter’s bot purge, and the
allegations that a large number of automated accounts are active on Twitter, plausibly
alleged that at least some of the 480 deleted accounts must have been bots,
that dotStrategy most likely paid for interactions with some of those bots, and
that Twitter failed to reimburse the money paid for those interactions despite
knowing they involved automated accounts.

Though dotStrategy didn’t identify what interactions with
the 480 deleted accounts it was charged for or which deleted accounts were bots,
that was “matter[ ] within the opposing party’s knowledge.” Only Twitter—not
dotStrategy—has access to information about deleted accounts.

DotStrategy also adequately alleged reliance, even though it
agreed to the Advertising Terms in October 2013. The complaint adequately alleged
that Twitter misrepresented in 2013 that advertisers would not be charged for
interactions with botsso even if statements made after that point were
irrelevant, dotStrategy would still adequately allege reliance. And dotStrategy
allegedly continued to place ads, thereby incurring additional charges, after that
time; it could have relied on the misrepresentations when deciding to place
additional ads at additional cost, distinguishing this situation from one in
which misrepresentations were only made after the plaintiff’s purchase was complete.
And dotStrategy’s reliance was reasonable. A reasonable consumer would
understand statements such as “You’ll only be charged when people follow your
Promoted Account or retweet, reply, favorite or click on your Promoted Tweets”
to mean that Twitter would refund charges for those interactions if it later
learned they involved a bot.

Twitter’s contractual disclaimers weren’t sufficient. First,
a UCL fraud claim can be based on misleading representations in a solicitation
even when the plaintiff later signed a contract with provisions contradicting
the earlier falsehoods. “The question, then, is not whether Twitter’s
contractual terms corrected the false statements in its advertising, but
whether dotStrategy’s reliance on the false advertising was reasonable even in
light of the contractual disclaimers.” And it was. The contractual provisions
weren’t irreconcilable with dotStrategy’s understanding. “Disclaiming the ‘quality’
of ‘User Actions’ is not a clear warning that those users might not be people,”
but could just be about whether they’d be nice or naughty. “That understanding
would be particularly reasonable given Twitter’s other representations
guaranteeing that advertisers would not pay for interactions with automated
accounts. … An advertiser could reasonably believe that Twitter would determine
the amount of advertising charges in a manner consistent with its other
representations.”

DotStrategy also sufficiently alleged injury by alleging that
it “paid for ads for which it would not have agreed to pay anything at all had
it known the truth about Twitter’s misconduct.” Twitter argued that dotStrategy
received the benefit of its bargain because it gained more Twitter followers,
but “a public[ly] visible increase in … follower count” isn’t the only goal
an advertiser might have in promoting its products on Twitter. “Presumably
human followers are more valuable to advertisers than automated ones, because
humans, unlike bots, sometimes purchase goods and services. If anything, that
difference seems more meaningful than, for example, a product’s domestic
origin.” [Well, that surely depends on one’s goals; there’s no need to
disparage the materiality of a claim in one purchasing context in another
totally different context.]

 

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continued claim, including failure to edit existing YouTube video, leads to contempt finding

Posted on August 17, 2020 by rtushnet

De Simone v. VSL Pharmaceuticals, Inc., 2020 WL 4368103, No.
TDC-15-1356 (D. Md. Jul. 30, 2020)

Disclosure: I filed an amicus brief in support of De Simone
on one legal issue (the proper standard for a Lanham Act literal falsity
finding) in the appeal that is pending in this case. Of broader relevance: failing to edit previously published YouTube videos and captions is treated as contumacious. And I continue to worry about the injunction here to the extent that it prohibits truthful statements about the ingredients in VSL’s products (as studied in what is now the De Simone product).

As the court explains, this was a dispute between former
business partners about a proprietary formulation (“the De Simone Formulation”)
used in a probiotic previously known by the tradename VSL#3 and now known by
the tradename Visbiome. In November 2018, a jury returned a verdict in favor of
the De Simone parties, including for false advertising of VSL#3 in violation of
the Lanham Act. The court permanently enjoined the VSL parties from making
certain representations about VSL#3; De Simone moved to hold them in contempt. The
court granted it in part and denied it in part.

The injunction, issued in June 2019, barred the VSL parties
from

(1) stating or suggesting in VSL#3
promotional materials directed at or readily accessible to United States
consumers that that the present version of VSL#3 produced in Italy (“Italian
VSL#3”) continues to contain the same formulation found in versions of VSL#3
produced before January 31, 2016 (“the De Simone Formulation”), including but
not limited to making statements that VSL#3 contains the “original proprietary
blend” or the “same mix in the same proportions” as earlier versions of VSL#3;
and

 (2) citing to or referring to any clinical
studies performed on the De Simone Formulation or earlier versions of VSL#3 as
relevant or applicable to Italian VSL#3. [Side note: the difference in First
Amendment treatment of the FDA versus private plaintiffs seeking government’s
aid, in the form of a court, to suppress speech is quite stark here.]

After the jury verdict, the VSL parties posted on the VSL#3
website a letter to healthcare providers that recounted the verdict but
asserted that the trial evidence “confirmed that … Italian-made VSL#3
contains the same 8 strains of bacteria” as the De Simone Formulation and that
“Italian-made VSL#3 is equivalent to” the De Simone Formulation. The letter also
stated that prior clinical studies of the De Simone Formulation could “be
relied on to show the efficacy and safety” of Italian VSL#3. After the
permanent injunction issued, the VSL parties took some steps to remove the letter,
but it remained accessible until September 10, 2019.

In the same time frame, the VSL#3 Facebook page and the
written summaries accompanying numerous YouTube videos contained the statement
that VSL#3 is “clinically proven in the dietary management of IBS, ulcerative
colitis and ileal pouch.” The videos were posted several years prior to the
permanent injunction, but remained accessible at least through November 4, 2019.
At least one posting connected to a YouTube video stated that VSL#3 has “more
than a decade of patient support and use” and that it “is one of the most
studied” probiotics of its kind.

During September 2019, VSL#3 representatives responding to
consumer questions about the composition of VSL#3 on the VSL#3 Facebook page
repeatedly offered the assertions that “VSL#3 was not recalled or discontinued,
there are no safety or efficacy concerns and the formulation has not changed,”
and that “In January 2016 manufacturing of VSL#3 was moved back to its original
site in Italy and the lactose was removed from the product. No changes to the
current formula have been made.”

In a September 9, 2019 press release touting a victory for
the VSL parties in Italian litigation about VSL#3, Luca Guarna, the Chief
Executive Officer of VSL, affirmed VSL’s commitment to “making the VSL#3
probiotic available to our dedicated customers and healthcare providers notwithstanding
De Simone and ExeGi’s aggressive efforts to sell their competing, generic
probiotic product.” The press release appeared on numerous websites.

On July 26, 2019, the VSL parties sent a letter to
wholesalers and distributors of VSL#3 relaying the terms of the permanent injunction,
asserting that it was not retroactive, and stating that no recall of, or
corrective advertising about, previously packaged VSL#3 was required. They
advised that Alfasigma was removing product information sheets from remaining
VSL#3 packages still within its facilities, that future VSL#3 product
information sheets would be revised to remove any comparison of Italian VSL#3
to the De Simone Formulation, and that the sheet would be posted on the VSL#3
website. On August 20, 2019, Alfasigma advised VSL#3 wholesalers and
distributors that they should either remove the old product information sheets
from all VSL#3 packages remaining in their inventory before sale, or return the
unsold product to Alfasigma for credit.

The key questions were whether the VSL parties violated the
injunction and whether the De Simone parties suffered harm as a result. For
civil contempt, there’s no requirement of willfulness. But the order allegedly
violated must be one that sets forth in “specific detail an unequivocal
command.” This specificity requirement is not unlimited; “[i]t is enough
protection for defendants if close questions of interpretation are resolved in
the defendant’s favor in order to prevent unfair surprise.”

Statements that clearly violated the injunction: (1) the
January 31, 2019 letter on the VSL#3 website stating that, despite the jury
verdict, Italian VSL#3 was equivalent to the De Simone Formulation; (2)
statements on Facebook by VSL#3 representatives, in response to consumer
questions, that the formulation for VSL#3 has not changed; and (3) statements
on Facebook and YouTube that VSL#3 is “clinically proven.” Even if the
consumers in (2) were “plants,” it iddn’t matter, because the repeated use of
the same language “reveals that the VSL Parties clearly had a script from which
they were working,” which script violated the permanent injunction. As for (3),
there was no evidence that Italian VSL#3 was the subject of clinical studies,
so the reference could only fairly be construed as referring to the clinical
studies performed on the De Simone Formulation and thus suggesting that those
prior studies are “relevant or applicable to Italian VSL#3,” especially given
related statements about the product’s history. Although there was no evidence
that Italian VSL#3 was “clinically ineffective,” that was “a far cry” from a
claim that it is “clinically proven.”

Press release describing Visbiome as the “generic” version
of VSL#3: This also violated the Permanent Injunction. it clearly suggested an
equivalence between the products’ formulation “and did so a way that signaled
that Visbiome was the later copy while Italian VSL#3 was the original version.”
This constituted “passing off Italian VSL#3 as the authentic De Simone
Formulation,” which “squarely violates the Permanent Injunction’s bar on ‘stating
or suggesting’ that Italian VSL#3 ‘continues to contain’ the DeSimone
Formulation.” The use of “generic” didn’t have its patent-specific meaning “in
a press release widely circulated to diverse media outlets.” When the VSL
parties began to manufacture their own version in Italy using a different
formulation, “it was no longer accurate to describe Visbiome as a generic
version of VSL#3.”

Product information sheets: failure to take steps to ensure
the removal of old product information sheets inserted into packages before the
permanent injunction didn’t amount to civil contempt. The court didn’t
specifically order retroactive action, and the De Simone parties didn’t show
evidence of harm.  The VSL parties’
actions to direct the removal of package inserts still in the possession of
wholesalers and distributors adequately addressed the issue.

Content of the revised VSL#3 product information sheets: The
De Simone parties argued that  representations that VSL#3 has been
manufactured with ingredients that have been deemed “Generally Recognized as
Safe,” (“GRAS”), and that it is “a probiotic medical food intended for the
dietary management of Irritable Bowel Syndrome (IBS), Ulcerative Colitis (UC)
or an ileal pouch,” violated the injunction’s requirement that the VSL Parties
not cite to or refer to clinical studies as relevant or applicable to Italian
VSL#3. The court disagreed. None of these statements on their face suggested or
implied any continuity between products or cited clinical studies of the De
Simone Formulation.

The De Simone parties argued that the GRAS designation
implied equivalence because it was granted after an analysis that included
consideration of the De Simone Formulation’s history of clinical studies. [This
argument sounds like it has FDA preemption/preclusion problems.] But the GRAS
report was based on a review of Italian VSL#3, not of the De Simone Formulation.
It didn’t conclude that the formulation was the same, but focused on the safety
of the ingredients, which substantially overlap with those of the De Simone
Formulation, and apparently relied on De Simone Formulation studies to conclude
that those ingredients are safe. The chain of reasoning was “too attenuated” to
support a violation of the injunction.

So too with the characterization of Italian VSL#3 as a
“medical food.” The De Simone parties argued that “medical food” is a
statutorily defined term that may be applied only when there is significant
scientific agreement that it is clinically effective. Since Italian VSL#3 has
never been tested clinically to determine its effectiveness, the use of the
term allegedly implied that prior clinical studies on the De Simone Formulation
may be appropriately considered as applicable to Italian VSL#3. Again, this was
too indirect.

And here my questions about the First Amendment and FDA
preclusion limits on the injunction really spiked:

To be sure, in using these terms,
the VSL Parties run the risk that they may not be able to adequately respond to
any consumer inquiries into the GRAS or medical food designations without
violating the Permanent Injunction. For example, if asked to provide support
for these designations, they would be unable to provide or even refer to either
the earlier clinical studies or the GRAS report, which references those studies
in a way that would make them “relevant” to Italian VSL#3.

But the sheet alone didn’t violate the injunction.

The violations that did occur, “which were designed to
create a false continuity between Italian VSL#3 and the De Simone Formulation
so that VSL#3 could keep its prior customers and potentially poach new ones,”
caused harm to the De Simone parties. There was evidence customer confusion
over whether VSL#3 still contains the De Simone Formulation caused ExeGi to
lose business.

The De Simone parties asked for some or all of the profits
derived from the sale of VSL#3 during the relevant time period, but there
wasn’t “evidence of quantifiable damages of such a magnitude as would warrant
such a remedy.” And the letter and some of the statements that VSL#3 is
“clinically proven” predated the injunction and might have been left in place
inadvertently; the press release was limited to a single occasion “not focused
on establishing an equivalence between VSL#3 and the De Simone Formulation.”

Thus, the court instead ordered VSL and Alfasigma to (1)
remove the remaining contumacious statements from the relevant media, review
all promotional materials and online postings, including the audio content of
any YouTube videos referenced, for the same or similar statements and to remove
them, and instruct all relevant personnel to refrain from using the same or
similar language going forward; and (2) pay the De Simone Parties’ reasonable
attorney’s fees expended in advancing the Motion. This was justified because “certain
violations, such as the September 2019 Facebook statements, were blatant violations
of the Permanent Injunction, and other violations, such as the claims that
VSL#3 is ‘clinically proven,’ persisted over an extended period of time.
Moreover, the number of different violations demonstrates that the VSL Parties’
efforts to avoid violations of the Permanent Injunction were notably deficient.”
The court found that there was no requirement of a showing of willful
disobedience or obstinacy for a fee award upon a finding of civil contempt.

And the court cautioned that the VSL parties were “on notice
of the identified violations and of potential violations that could arise from
the use of the clinical studies in support of the GRAS and medical food claims,”
so “any such violations occurring in the future will likely result in more
severe sanctions.”

I see risks here, especially if the De Simone parties
really do have “plants” asking Facebook questions about what the VSL parties are hiding, as alleged by the VSL
parties. Ultimately, the injunction should be modified to allow the VSL parties
to truthfully explain that GRAS and similar determinations can be made based on
ingredient assessments, including studies on other products that don’t have the
exact same ingredient list. It’s hard to see how that could be deceptive and
easy to see the anticompetitive risks imposed by the court’s current bar on any
kind of reference to clinical studies.

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patent publication privilege mostly protects licensee against licensor’s false advertising claims

Posted on August 17, 2020 by rtushnet

 AU New Haven, LLC v. YKK Corp., No. 15-cv-3411-GHW, 2020 WL
4366394 (S.D.N.Y. Jul. 30, 2020)

Summarizing only a few key issues: YKK entered into an exclusive
licensing agreement (the ELA) with the owners of a recently issued patent. The
ELA provided YKK an exclusive (but limited) field of use license: “an
exclusive, worldwide right to manufacture, use, sell, offer for sale and
otherwise use and practice the invention… except for zippers placed in
finished goods in the high end outerwear, marine, military and luggage
(excluding sports and cosmetic bags) markets.” Plaintiffs sued YKK because,
among other things, they believe that, for years, YKK has been selling
laminated zippers into the unlicensed, high-end outerwear market.

Issues in the current motions: whether the patent
publication privilege barred plaintiffs’ Lanham Act false advertising claim;
whether plaintiffs could use Connecticut’s CUTPA to sue YKK for selling to
customers all around the world; and whether the remaining contract claim
presented triable issues, given YKK’s offer of judgment for the amount sought
(about which I will say no more).

False advertising: plaintiffs alleged that YKK falsely
advertised its field of use license by advertising that it was “licensed,” “the
exclusive licensee,” or similar statements. Precedent establishes that, to
avoid conflict with patent law, false statements about patent rights “are
actionable under the Lanham Act false advertising provision only if they are
made in bad faith.” But are statements about licensee status similarly covered?
The court said yes: Such statements “fall squarely within the scope of the
patent publication privilege: They inform the marketplace of the existence of
the ’214 patent and YKK’s rights under that patent.”

Plaintiffs argued that, since there was no need to look at
patent law to determine whether the statements were false—as there would be if
the alleged falsity went to patent validity or what infringes—the patent
privilege didn’t apply. The court disagreed: The “privileged right of a
patentee to notify the public of its patent rights is statutorily rooted in the
patent laws at 35 U.S.C. § 287, which authorizes patentholders to ‘give notice
to the public’ of a patent by marking [their] patented articles and makes
marking or specific notice to the accused infringer a prerequisite to the
recovery of damages.” Even if most of the time this means that a court has to
apply patent law to determine whether the challenged statement was true or
false, the privilege isn’t necessarily limited to that context.

Plaintiffs then made a clever argument about the inherent
nature of patent rights that the court had no interest in at all:

[B]ecause the core right conveyed
by a patent is the right to exclude others from using the claimed invention,
that fundamental right must necessarily define the scope of the patentee’s
privilege to notify the public of its patent rights. Thus, according to Plaintiffs,
because a licensee does not obtain the right to exclude by virtue of its
license—it merely obtains a covenant from the patentee not to sue for
infringement—a licensee’s statements about its own license rights cannot fall
within the scope of the publication privilege.

But the caselaw doesn’t support this; one key Federal
Circuit case explicitly treated exclusive licensees and patentholders
identically for the purposes of analyzing the privilege’s applicability. Also,
the statute from which the publication privilege is derived, 35 U.S.C. § 287,
specifically permits not just patentees, but “persons making, offering for
sale, or selling within the United States any patent article for or under them
or importing any patented article into the United States” to “give notice to
the public” that an article is patented. And finally, YKK’s exclusive license
in fact gave it a right to sue infringers.

More simply, plaintiffs argued that the publication
privilege applied only to statements claiming potential infringement. That too
was wrong. The patent laws permit marking to give notice to the world in
general. “That marking is not a statement that infringement has already
occurred; it is a warning to potential infringers.”

I’m more sympathetic to the plaintiffs’ argument, though I’m
not convinced the court is wrong—the question is about balancing the interests
served by the two bodies of law. If one were convinced that the specific aim of
protecting consumers against deception often overrides ancillary patent law aims,
then it could make sense to limit the privilege where a marketing statement
isn’t so much a warning to potential infringers as a promise of the
advertiser’s own ability to deliver. After all, the problem here is allegedly
that YKK told customers it could supply them with zippers it had no right to
supply, possibly converting the customers into patent infringers as
well/deterring them from contracting with the actual owner of the patent rights
for the relevant segment.

Regardless, given the result, plaintiffs had to show that
YKK made its statements in bad faith. They mostly couldn’t do so. The first
requirement of bad faith was that the statements were “objectively baseless,”
which usually means that “the infringement allegations [are] such that no reasonable
litigant could reasonably expect success on the merits.” Of course, the
statements here aren’t infringement allegations, but the Federal Circuit has held
that “the ‘objectively baseless’ standard applies to publicizing a patent in
the marketplace as well as to pre-litigation communications.”

The court found that three of the four challenged statements
was “objectively true on its face, and accordingly does not lack a reasonable,
objective basis.” Not objectively baseless: (1) “YKK is the Exclusive Licensee
of the [relevant tech]”; (2) “YKK Corporation is licensed to manufacture and
sell across the world, products protected by these patents”; and (3) “YKK
Corporation is a licensee to manufacture and sell products protected by [the
’214 and related foreign patents]”. But the same could not be said for: (4) “YKK
is the exclusive licensee of the water repellant slide fastener technology
embodied in U.S. Patent No. 6,105,214 and its corresponding foreign patent. YKK
has the exclusive right to manufacture, use, sell and import zippers
incorporating this water repellant technology.”

How to distinguish (1) and (4)? “The mere fact that the
exclusive license was not an unlimited exclusive license does not render these
statements objectively baseless,” but a reasonable jury could conclude that the
second sentence in (4) was objectively baseless, because YKK actually shared
that right with the licensor’s company.

Causation: Was there enough evidence for a reasonable jury
to find that YKK’s fourth category of statements caused plaintiffs’ alleged
injury? Yes. The court excluded proposed expert testimony from “a clothier,
creative director, and brand manager “who was set to testify “that companies
would not have purchased the accused zippers from YKK if they had known that
YKK was infringing upon Uretek’s patents.” The opinion was excluded for being
rooted in hypothetical speculation, “abstract belief[s],” and attorney
argument.

Still, plaintiffs had a theory: “Customers in excluded
markets, having decided that they wanted to purchase a patented water-resistant
zipper, believed they had only one choice after reading YKK’s false
advertisement—YKK-laminated zippers. Had YKK’s advertisements made clear that
only Uretek could sell in the excluded market, YKK’s customers would have had
to buy from them instead. Thus, every sale of a YKK zipper in the excluded
market was a sale stolen from Uretek.” In a footnote, the court noted that it
had looked for record evidence that customers in the excluded market were
“sensitive to the intellectual property rights of their component suppliers”
and would not have purchased infringing products. There wasn’t much, but it was
enough. Three emails suggested, with varying degrees of firmness, that desire to
respect patent rights would affect purchases. E.g., a reference to one customer
who wouldn’t buy non-YKK “because of the patent issue,” and another who “is not
interested in buying non-YKK or violating our patent.” Also: “YKK needs to
educate and inform Brand Holders (LandsEnd) that YKK is an exclusive licensee
and Uretek is a patent owner of this products. They know what this means and
what they need to do and you know that.” Drawing all inferences in favor of plaintiffs,
this evidence was sufficient to support plaintiffs’ causation theory. The court
cautioned, however, that the emails might not be admissible at trial; they were
arguably hearsay.

“Tricky as this link might be to prove at trial, the
evidence presented here is sufficient to survive summary judgment. It presents
a cogent reason why YKK’s profits on sales in the excluded market might have
been at Uretek’s expense: every sale of a YKK zipper was a diverted sale.”

CUTPA (Connecticut Unfair Trade Practices Act): This goes,
because there was no evidence that YKK engaged in any unfair or deceptive
practices “in the conduct of any trade or commerce” in Connecticut, as required
by the statute. Even if YKK’s “underlying business is associated with
Connecticut,” CUTPA “covers only unfair or deceptive practices that occur in
the course of trade or commerce in Connecticut.” Plaintiffs never alleged that
YKK made any sales into the excluded markets in Connecticut, and the court was
dubious that the act of negotiating the terms of a contract to secure the
exclusive license—“an act at least two steps removed from any eventual sale of
a zipper (first: acquire the license, next: manufacture zippers, finally: sell
them to customers)”—qualified as “trade or commerce” within the meaning of
CUTPA.

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9th Cir. revives suit against allegedly deceptive “prescription pet food” marketing

Posted on August 17, 2020 by rtushnet

Moore v. Mars Petcare US, Inc., No. 18-15026, — F.3d —-,
2020 WL 4331765 (9th Cir. Jul. 28, 2020)

Over a dissent, the court of appeals reversed the dismissal
of plaintiffs’ claims based on allegedly deceptive marketing of “so-called
prescription pet food” under California’s consumer protection laws, though it
affirmed the dismissal of antitrust claims. “Plaintiffs allege that the
prescription requirement and advertising lead reasonable consumers falsely to
believe that such food has been subject to government inspection and oversight,
and has medicinal and drug properties, causing consumers to pay more or
purchase the product when they otherwise would not have.”

As alleged: Defendants are pet food manufacturers,
veterinary clinic chains, and a pet goods retailer. Defendant Hill’s sells
“Prescription Diet.” Purina sells “Pro Plan Veterinary Diets.” Mars sold
prescription pet food under the “Iams” label and then switched to “Royal Canin
Veterinary Diet.” I’m skipping details about the market concentration, but the
defendant manufacturers have over a 90% share of the U.S. prescription pet food
market.

All defendants require a vet prescription as a condition for
the purchase of prescription pet food. In 2012, the FDA published a Draft
Compliance Policy Guide for comment, noting the increase in pet food products
labeled as intended for use in the diagnosis, cure, mitigation, treatment or
prevention of disease, as well as a shift in marketing toward pet owners
directly. FDA expressed concerns that these products “affect physiological
processes to extents that may not be tolerated by all animals and/or may not
achieve effective treatment.” It was, however, “less concerned when such dog
and cat food products are marketed only through and used under the direction of
a licensed veterinarian because the agency presume[d] the veterinarian will
provide direction to the pet owner.” The FDA then proposed nine factors it
would consider in determining whether to initiate enforcement action against
pet food products.

Again as alleged: At that time, defendant manufacturers’
products violated three of those factors: (1) their prescription pet food
included indications of disease claims on the labels; (2) the distribution of
promotional materials with disease claims were not limited to veterinary
professionals; (3) they electronically disseminated promotional materials with
disease claims to consumers on the internet. The 2016 Final CPG was
substantially the same, but added two more conditions that could lead to
enforcement action. Defendant manufacturers didn’t change their behavior, but
the FDA hasn’t taken any actions.

Plaintiffs were six California residents who purchased
prescription pet food for their sick pets after consulting with their vets. For
example, one plaintiff bought prescription urinary care dog food that costs
$3.44 per pound while urinary care non-prescription dog foods from other
manufacturers cost $2.73 and $2.45 per pound. The non-prescription dog food was
also allegedly marketed to “[p]romote[ ] balanced urinary pH” and “a healthier
immune system [and] urinary tract,” and had “a number of overlapping
ingredients in common” with Hill’s prescription dog food, while the
“non-overlapping ingredients are not drugs and are not sufficient to justify
one product being sold by prescription for a significantly higher
price.”Plaintiffs allegedly assumed from the prescription requirement that this
pet food was “(a) a substance medically necessary to health; (b) a drug,
medicine, or other controlled ingredient; (c) a substance that has been
evaluated by the … [FDA] as a drug; (d) a substance to which the
manufacturers’ representations regarding intended uses and effects have been
evaluated by the FDA; and (e) a substance legally required to be sold by
prescription.” As a result, they alleged that they paid more for the
prescription pet food than they would have in the absence of the prescription
requirement, had they purchased it at all. They alleged the usual California
claims.

The district court dismissed those claims, reasoning that the
sale of the prescription pet food exclusively through vets or with veterinarian
approval was not itself a deceptive or otherwise misleading practice; that
plaintiffs failed to plead enough facts to show that prescription pet food and
other pet food are not materially different; and that they failed adequately to
allege that the use of the word “prescription” or “Rx” symbol to have caused
any of their claimed loss. The court of appeals reversed on all three grounds.

Some themes: First, “[l]iteral truth can sometimes protect a
product manufacturer from a misleading claim, but it is no guarantee,” whereas
“there is no protection for literal falseness.” Second, qualifiers in packaging,
usually on the back of a label or in ingredient lists, “can ameliorate any
tendency of the label to mislead.” If, however, “a back label ingredients list
… conflict[s] with, rather than confirm[s], a front label claim,” the
plaintiff’s claim is not defeated. Third, “brand names by themselves can be
misleading in the context of the product being marketed.” Descriptive brand
names require of the consumer “little thought,” which can make consumers
susceptible to purchasing because “they won’t have the time or interest to read
about [the product] on [the] website or the back of the box.”

Following these rules, the labeling of “prescription pet
food” appeared deceptive and misleading. “Common sense dictates that a product
that requires a prescription may be considered a medicine that involves a drug
or controlled substance. This conforms to general understandings of
prescription drugs for humans and pets.” The brand name of “prescription pet
food” “itself could be misleading.” The role of vets in the referral process
wasn’t enough to avoid deception. Plaintiffs alleged that the food was marketed
to consumers, not just to vets. The 2016 CPG “doesn’t signal [the FDA’s]
authorization” and “doesn’t specifically authorize the [defendant]’s
prescription requirement, prescription label, and related marketing
representations.” Vanzant v. Hill’s Pet Nutrition, Inc., 934 F.3d 730, 739 (7th
Cir. 2019).

Indeed, the FDA warned in the CPG that the labeling on such
pet food “may lack sufficient information, particularly for pet owners.” And
plaintiffs alleged violation of three of the conditions listed in the CPG.
Anyway, an advertising practice can be deceptive without directly violating FDA
regulations.

Rule 9(b): The consumer protection claims were based in part
on a theory of fraud: that prescription pet food is not materially different
from non-prescription pet food and therefore does not justify the higher cost. In
a footnote, the court commented that “Rule 9(b) requirements may not even be
necessary, given that a defendant can violate the UCL, FAL, and CLRA by acting
with mere negligence.” But plaintiffs didn’t make this argument in their
briefing, so the court didn’t reach it. Regardless, the complaint satisfied
Rule 9(b) by alleging “what is false or misleading about a statement, and why
it is false.” Specifically, they identified six kinds of prescription pet food
and alleged how they overlap with a substantial portion of ingredients in
non-prescription pet foods that were marketed to treat similar health issues. “More
importantly, Plaintiffs allege that all non-overlapping ingredients are not
drugs and are not sufficient to justify one product being sold by prescription
for a significantly higher price.” This was enough to put defendants on notice.

Reliance/standing: the district court thought there wasn’t
enough detail on how each plaintiff relied on the “prescription” label or
requirement to buy the food. But a consumer “who relies on a product label and
challenges a misrepresentation contained therein can satisfy the standing
requirement of [the UCL] by alleging … that he or she would not have bought
the product but for the misrepresentation.” Plaintiffs collectively alleged that
“[a]s a result of the false and fraudulent prescription requirement, each
Plaintiff paid more for Prescription Pet Food than each Plaintiff would have
paid in the absence of the requirement, or would never have purchased
Prescription Pet Food.” That was sufficient. “The fact that vets had prescribed
each Plaintiff the pet food—rather than each discovering the pet food on their
own—does not negate the allegation of actual reliance because the prescription
requirement and advertising need not be the sole or even the decisive cause of
the purchase.”

Also, at the motion to dismiss stage, “actual reliance …
is inferred from the misrepresentation of a material fact.”

[I]t certainly seems plausible that
a reasonable consumer would at least partially rely on the prescription
labeling to pay more money for a certain type of pet food over others … particularly
for a pet owner who is dealing with possibly a sick or unhealthy pet. … Pets
can, after all, be as cherished and cared for as family members, and a
reasonable person in Plaintiffs’ shoes would rationally gravitate toward a
“prescription” product if that family member’s health is at risk.

Agreed. You’re paying for what you hope is a greater chance
of a better outcome. (Disclosure: We buy prescription pet food for our cats, for that very reason.)

The court of appeals also rejected challenges to injunctive
relief. “There is sufficient cognizable injury where Plaintiffs allege that
they cannot rely on Defendants’ labeling of a product when deciding whether to
purchase it in the future.” Also, the argument that plaintiffs couldn’t eek
equitable relief under the UCL or FAL, given an adequate legal remedy under the
CLRA, was “foreclosed by statute. The UCL, FAL and CLRA explicitly provide that
remedies under each act are cumulative to each other.” Finally, defendants
argued that plaintiffs lacked standing because they hadn’t bought every single
type of prescription pet food available form them.  No: the challenge was “to the common scheme of
the prescription requirement and prescription-based advertising,” giving class
representatives standing.

Judge Rawlinson, in dissent, agreed with the district court.
The FDA hasn’t initiated any enforcement action, so the CPG violations are just
theoretical, and the CPG is non-binding anyway. Relying on the alleged
“violations” of the recommendations about disease claims & dissemination to
consumers wasn’t enough [FWIW, my reading of the majority is that those
violations are not that central to the holding except insofar as they reinforce the plausibility that consumers are deceived, which seems like the right call post-Pom Wonderful].

Plaintiffs’ basic argument was that an individual seeing the
word “prescription” in connection with pet food “would reasonably assume that
the pet food has been vetted and approved by the FDA.” But plaintiffs didn’t
explain why that would be reasonable, given that the FDA hadn’t historically
done such approvals and that pet foods had been marketed to cure/treat pet
diseases for more than fifty years. [If the FDA weren’t involved in any disease
claims, I’d see the dissent’s point. Given the role the FDA plays in regulating
human disease claims, though, it would be reasonable for most people not to
know this distinction and to assume that an arthritis claim for dogs & one
for people are treated similarly.]

The dissent also thought that plaintiffs couldn’t show
reliance on the labels because they didn’t read the labels prior to purchase,
but relied on vets’ advice.

And the dissent would have found the CLRA claims preempted “because
the FDA has exclusive enforcement authority over the claims made by Plaintiffs
predicated on alleged misrepresentations through use of the term ‘prescription
pet food,’ and the healing properties of that food.” [I think that would be a
pretty major departure from existing understandings of California law &
preemption, especially given the dissent’s point that the FDA hasn’t made binding regulations here.] Analogizing to a pre-Pom Wonderful case finding that fraud
by omission claims against the off-label use of a medical device were
preempted, the dissent would have found that this issue as well was within the
FDA’s exclusive authority. As in that case, the FDA has been made aware of the allegations that
defendants were providing mislabeled products, but hasn’t taken action. 

The
dissent also pointed to Mylan Laboratories, Inc. v. Matkari, 7 F.3d 1130 (4th
Cir. 1993), which rejected a theory that merely placing prescription drugs on
the market impliedly represents FDA approval.  [I suspect that Mylan could survive Pom, but only because of the very specific context of Congress deciding to allow certain grandfathered drugs to stay on the market without modern efficacy testing; that’s a much greater conflict than that posited here.]

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Covid cure “church” can’t avoid false advertising investigation

Posted on August 17, 2020 by rtushnet

 Morningside Church, Inc. v. Rutledge, 2020 WL 4333539, —
F.Supp.3d —-, No. 3:20-cv-05050-MDH (W.D. Mo. Jul. 7, 2020)

“Plaintiffs are a not-for-profit corporation, which
describes itself as a church, a for-profit corporation, wholly owned by the
church, and an individual employed as a ‘minister’ by both.” They sought a TRO
against the Attorney General for the State of Arkansas (Rutledge); the District
Attorney for the County of Merced, California; the District Attorney for the
County of San Joaquin, California; and the City Attorney for the City of Los
Angeles, California, restraining them from taking any action against them for
their refusal to comply with Civil Investigative Demands or for alleged
violations of the Arkansas Deceptive Trade Practices Act, California False
Advertising Law, or California Unfair Competition Law, “resulting from the
content of their sermons, efforts to inculcate, or solicitation of
contributions” in conjunction with the offering of “Silver Solution,” or other
products. They alleged that touting Silver Solution etc. was part of their
religious practice and exercise and thus sought relief under 42 U.S.C. § 1983,
claiming First Amendment and related due process rights.

No.

Plaintiffs argued that the CIDs infringed on their religious
freedom and other rights by requiring disclosure of the names of their church
partners. “Defendants argue they have made it clear they are not requesting a
list of any church members, even given Plaintiffs’ broad definition of that
term (Plaintiffs refer to these individuals as ‘partners’), and that their
inquiries are limited to representations made in relation to, and furtherance
of, the sale of a product consumed in their respective jurisdictions.” Their
requests were limited to any products related to Silver Solution offered by plaintiffs
and any representations made by plaintiffs related to whether the products are
effective in the treatment or eradication of COVID-19.

Plaintiffs claimed
that anyone who ever interacted with them was a “member” of their church,
including anyone who ever ordered from the Silver Solution product line.  “They contend their church partnership does
not require any request for or consent on the part of the partner. … They
acknowledge they provide the product upon request only to those willing to make
a certain minimum level church contribution,” but denied that this was a sale. They
denied that they ever represented Silver Solution to be an effective cure or
treatment for COVID-19.

The AG of Missouri has a pending case against them; and
plaintiffs argued that interest from the FDA and FTC led to their decision to
stop offering Silver Solution in March 2020.

The court found no irreparable harm. Even with chilling
effect concerns, defendants agreed to drop requests for the names of individual
recipients of Silver Solution (though, I note, this could complicate consumer
redress), and plaintiffs have stopped offering Silver Solution products. And,
given their factual denials, they couldn’t be irreparably harmed by being
deterred “from doing something they say they have never done and do not intend
to do.”

Separately, jurisdictional issues alone raised doubts about
likely success on the merits, given the law enforcement authority of these representatives
of other states.

“The Court also has serious concerns regarding the breadth
of religious freedom Plaintiffs claim.” They argued that, if they sincerely
held a religious belief that the product was good, the government had no right
whatsoever to test the validity of their representations. “[S]uch a broad
interpretation opens the door to the criminally inclined to fraudulently market
products to the harm and detriment of the consumer public under the protection
and subterfuge of religious freedom.” Or, in other words, Employment Div. v.
Smith had a good point about generally applicable laws.

But—perhaps unwilling to say that—the court instead said: “While
caution and deference should define the government’s approach in these
situations, at least some governmental inquiry into representations concerning
product offerings by ‘religious organizations,’ including an inquiry into the
basis and sincerity of the representations being made, and the safety of the
product for use by the public, seems appropriate.” Of course, the Supreme Court
is wary of inquiries into religious sincerity, and it’s completely unnecessary here,
because sincerity is irrelevant to the consumer protection question. That is
not about belief but about substantiation—and safety is far from the only
relevant issue. The court would have been better off focusing on facts and
substantiation of factual representations.

Anyway, the court thought that the CIDs were “within the
bounds of reasonable inquiry and focused on the protection of constituents of
the governmental entities conducting the investigation.”

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White Kit Kats not misleading, court rules, despite consumer perception

Posted on August 14, 2020 by rtushnet

Rivas v. Hershey Co.,  2020 WL 4287272, 19-CV-3379(KAM)(SJB) (E.D.N.Y.
Jul. 27, 2020)

Another not-white chocolate case. The Kit Kat White is
coated “in a white confection coating.” Plaintiff alleged that Hershey marketed
it as an “alternative[ ]” to the dark and milk chocolate versions of the Kit
Kat, and in that context, “the reasonable consumer expects the white variety to
contain white chocolate,” which is “derived from cacao fat.” The package
describes the product as “[c]risp [w]afers [i]n [c]rème.” Retail websites such
as those of Target, Dollar General, and Amazon, which use “white chocolate” in
the description of Kit Kat White bars, and Hershey’s own marketing allegedly suggested
that by advertising/displaying it next to milk chocolate and dark chocolate
versions. Kit Kat White allegedly used to contain white chocolate, but it no
longer does with no change in the package, which allegedly further misleads
consumers.

It turns out that in 1989, Hershey asked the FDA to
establish a standard to identify white chocolate:

In many cases, the use of fanciful
names obscures the true nature of the product. Consumers who might expect to be
purchasing a “chocolate” or “white chocolate” product may, in fact, be
purchasing a coating-type product manufactured with cheaper ingredients made
from other oils and/or fats and which contain little or no cacao ingredients.

Also, Hershey conducted a marketing survey “to determine the
most common name used by adult candy consumers when shown a variety of
confection products, including a generic white confection bar.” The results
showed that “the majority of candy consumers tend[ed] to identify white
confection as either ‘white chocolate’ specifically or as some variety of
chocolate.”

I am disappointed, but not surprised, that the GBL §§ 349
and 350 claims failed, though the court primarily ruled that it lacked subject
matter jurisdiction because the amount in controversy was too low. Still,
amendment was futile because (despite the evidence of what consumers actually think)
the court held that a reasonable consumer acting reasonably could not have been
misled because Hershey never itself describes the product as containing white
chocolate. If “diet” on soda can’t be misleading to reasonable consumers about
whether it would help with weight loss, then “white” can’t be misleading to
reasonable consumers about whether candy contains white chocolate. (Not
impressed with the logic. While no soda can ensure or necessarily even increase
the chances that you lose weight, plenty of candy does contain white chocolate.
Relatedly, the cost-benefit analysis might be very different: if “diet” is an
efficient way of communicating “zero calorie” (itself probably something that
courts shouldn’t assume on a motion to dismiss, but whatever) then suppressing
it has costs to consumers, but if they have trouble distinguishing “white” and “white
chocolate” then the costs of deception could be much higher here.)

Anyway, the dictionary says that white means a color, and
the Kit Kat White is white (ish). Thus, there’s no falsity, even when the Kit Kat is
put in context with other, chocolate-containing Kit Kats. “Even if Plaintiff’s
allegation may have been plausible if the packaging only included the words ‘Kit
Kat White,’  the product is also clearly
described as ‘[c]risp wafers [i]n [c] rème.’ … A reasonable consumer would not
be misled into believing that the wafers are dipped in white chocolate when the
packaging does not mention chocolate, and states that the wafers are dipped in
crème, which is not the same as white chocolate.” But why not? The court has disregarded the context, but context is how implication works.

 

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“all IP” puts C&D recipient on notice of TM (R), and a bit on the meaning of blue check marks

Posted on August 14, 2020 by rtushnet

Commodores Entertainment Corp. v. McClary, Nos. 19-10791,
19-12819, — Fed.Appx. —-, 2020 WL 4218236 (11th Cir. Jul. 23, 2020)

As quickly summarized by the court:

The prolonged dispute concerns the
ownership of the mark “The Commodores,” the name of a famous Grammy
Award-winning rhythm and blues, funk and soul music band. McClary was an
original member of The Commodores but left the band in 1984. He later formed a musical
group that performed as “The 2014 Commodores” and “The Commodores featuring
Thomas McClary.” In 2014, [plaintiff] CEC filed this lawsuit against McClary,
claiming trademark infringement, trademark dilution, passing off, false
advertising, and unfair competition….

At the outset of the case, the
district court granted CEC’s motion for a preliminary injunction. After the
injunction was entered, CEC learned that McClary and his band were marketing
upcoming performances in Europe. Upon CEC’s motion for clarification, the
district court held that the injunction had extraterritorial application
because use of the marks overseas would have a substantial and negative impact
on CEC, an American corporation.…

The district court then determined that CEC owned trademark
rights, and ultimately found that McClary infringed. A jury found that McClary
had actual notice of CEC’s trademark registrations as of June 2009 and that CEC
was entitled to damages from McClary’s profits resulting from musical
performances at West Hampton Beach Performing Arts Center (WHBPAC) and six
non-US locations.  The jury also found
that CEC had not shown it had suffered damages under the FDUTPA. McClary moved
to modify the permanent injunction, arguing that he had acquired licenses to
use the trademark “The Commodores” in Mexico, New Zealand, and Switzerland. The
district court denied the motion as untimely/insufficiently justified. The
court of appeals affirmed everything. 

The most notable thing to me here was the court of appeals’
reasoning that McClary had actual notice of the trademark registration (which
affects eligibility for profits/damages under 15 U.S.C. § 1111) because of a
letter that claimed only “all intellectual property rights” and didn’t mention
registrations. The court of appeals reasoned that the jury reasonably could
have concluded that “all intellectual property rights” included registered
trademarks. “The statement that CEC would treat ‘any future unauthorized use of
the Commodores trade name or logo’ as misconduct further put McClary on actual
notice of CEC’s trademark registrations.” This seems quite misguided to me,
given the existence of non-registered trademark rights, but there you have it. 

As for the motion to modify the permanent injunction, it was
filed “more than five years after the court entered the preliminary injunction,
three years after it issued the clarification order confirming its
extraterritorial reach, two-and-a-half years after it entered the permanent
injunction, and over a year after our Court affirmed the scope of the permanent
injunction.” And McClary obtained the licenses he sought to effectuate from
April 2017-August 2018. “He did not move for two years after his first
acquisition, and about nine months after his last. The district court was well
within its discretion to find this time frame unreasonable, especially in light
of the extensive litigation over the injunction and McClary’s failure to
explain the delay.”

As for McClary’s counterclaim for commercial
misappropriation of his likeness and identity under Fla. Stat. § 540.08, it was
based on screenshots of a Facebook page run by “The Commodores,” which had a
blue checkmark next to the name “The Commodores,” and used his picture on the
page. CEC introduced an unsworn declaration from William King, current member of
The Commodores and CEC’s president, averring that CEC does not maintain a
Facebook page. McClary failed to present any rebuttal evidence, including any authority
about the blue checkmark’s meaning or how Facebook confirms the identity of a
verified account. Without that, he couldn’t avoid summary judgment.

McClary’s defamation/business disparagement counterclaims:
They were based on allegedly false e-mail communications CEC’s former manager made
to non-parties, representing that McClary was enjoined from any use of CEC’s
marks. But the district court had already ruled that McClary’s use of CEC’s
marks, including “The Commodores featuring Thomas McClary,” created a
likelihood of confusion and actual confusion, the emails were true when McClary
continued to market himself as “The Commodores featuring Thomas McClary” in the
EU, and the former manager eliminated any ambiguity by attaching the
preliminary injunction to his e-mail.

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safe harbors under consumer protection law are mostly limited to very specific approvals

Posted on August 14, 2020 by rtushnet

Patane v. Nestlé Waters North America, Inc., No.
3:17-cv-01381 (JAM), 2020 WL 4677636, — F. Supp. 3d – (D. Conn. Aug. 12, 2020) 

This case offers a nice overview of the safe harbor provisions
in several consumer protection laws. Short version: defendants want them to work
like field preemption, but they are usually (not always) better described as working like
conflict preemption. Here, where it was not clear that Nestlé’s state licenses
to bottle water authorized it to label that water as “spring” water, the safe
harbors mostly did not preempt claims under consumer protection law that the water was
in fact groundwater and thus misleadingly labeled. 

Nestlé moved for summary judgment on all of plaintiffs’
claims arising under the laws of Connecticut, Maine, Massachusetts, New
Hampshire, New Jersey, New York, Pennsylvania, and Rhode Island. The court
denied the motion except as to plaintiffs’ statutory claims under Rhode Island
law. 

Nestlé argued that there was no private right of action for
the violation of state “spring water” standard laws and, alternatively, that
any right of action was foreclosed by safe harbor exemptions under state law
and by doctrines that limit collateral attacks on state-issued permits or
licenses. Going state by state, the court concluded that the lack of a specific
right of action for the violation of a state law spring water standard didn’t “foreclose
the underlying conduct from being actionable under separate state statutes that
prohibit unfair and deceptive trade practices or from being actionable to the
extent that they amount to fraud and breach of contract.” Note that this is not
the broader California rule making violations of other statutes violate the UCL
as “unlawful”; rather, the court simply holds that conduct that misleads
consumers is generally actionable under state consumer protection law, even if
another statute that doesn’t provide a private cause of action also prohibits
such conduct. Also, with the exception of Rhode Island, there was at least a
genuine issue of fact about whether Nestlé was entitled to the benefit of regulatory
safe harbor exemptions/whether plaintiffs’ claims were an impermissible
collateral attack on state-issued licenses or permits. 

Generally speaking, Nestlé had licenses that allowed it to
bottle water, but it did not appear that the relevant regulatory agencies had
specifically evaluated whether its water was “spring water” according to state
standards (which generally adopt the federal standard). 

In Connecticut, for example, “a plaintiff may predicate a
CUTPA claim on violations of statutes or regulations that themselves do not
allow for private enforcement.” But a safe harbor expressly exempts from
liability “[t]ransactions or actions otherwise permitted under law as
administered by any regulatory board or officer acting under statutory
authority of the state or of the United States,” and it places “[t]he burden of
proving exemption … upon the person claiming the exemption.” The court must determine
whether the conduct at issue—here, the sale of bottled water as “spring
water”—is “expressly authorized and pervasively regulated.” But the licenses it
submitted “reflect permission for bottled water in general and without any
further reference or approval specific to spring water.” Although
correspondence to the Connecticut Department of Consumer Protection stated
Nestlé’s intent to sell its water as “spring water,” the relationship of those
communications to the approval and issuance of licenses was “unclear.” 

In Maine, similarly, the court found that the safe harbor
applied only if Nestlé’s conduct was either required or specifically authorized
by law. Although “similar exemption provisions have been interpreted
differently by other states, such that entire industries are exempt if
regulated under a separate statutory scheme” (citing a Georgia case), the court
found such interpretations “in the minority and textually unpersuasive,”
because the Maine safe harbor exemption from the unfair/deceptive trade
practice law required that conduct be “in compliance with,” not simply
“regulated by,” certain other laws. Maine’s statutes didn’t make the grant of a
license contingent on approval of how the bottled water was to be labeled or
otherwise marketed. Nestlé’s submitted licenses didn’t even refer to “spring
water,” just “water.” As for a “hodgepodge of letters it received at various
times over the course of two decades from various compliance officers and
geologists at the Drinking Water Program of the Maine Department of Health and
Human Services,” many appeared to be non-binding “advisory rulings,” rather
than binding orders, licenses, permits, or other approval necessary for the
safe harbor. The remaining letters did state that certain boreholes “[a]re
approved by the DWP as public water supply sources” and that they “[m]eet the
U.S. FDA definition of ‘spring water,’” but assuming they qualified Nestlé for
the safe harbor, Nestlé didn’t show that the approvals covered all sources of
water and the entire time period at issue in this action, and its own declaration
was equivocal about that. 

And so on with the other states (detailed discussion that will be useful to other courts omitted). In New Hampshire, the safe
harbor exempts only “[t]rade or commerce that is subject to the jurisdiction of
the bank commissioner, the director of securities regulation, the insurance
commissioner, the public utilities commission, the financial institutions and
insurance regulators of other states, or federal banking or securities
regulators who possess the authority to regulate unfair or deceptive trade
practices.” Bottled water is regulated by the New Hampshire Department of
Health and Human Services, not by any of these, so the safe harbor didn’t apply
at all. And Pennsylvania’s UTPCPL doesn’t even have a safe harbor exemption. 

Nestlé had more success with the Rhode Island claims. RIDTPA
“quite broadly” exempts “actions or transactions permitted under laws
administered by the department of business regulation or other regulatory body
or officer acting under statutory authority of this state or the United
States.” Critically, the Supreme Court of Rhode Island held that “the
exemption applie[s] to all activities subject to monitoring by governmental
agencies, not simply activities permitted under state or federal law.” Nestlé
successfully showed that its general activities of labeling bottled water were “subject
to monitoring or regulation” by a government agency. The burden shifted to
plaintiffs to show that the “specific acts at issue” were “not covered by the
exemption.” But Rhode Island had specific standards of identity for spring
water and its labeling. Nestlé could lose its license for violating the
standards. Thus, Nestlé qualified for the Rhode Island safe harbor under RIDTPA. 

As for common law fraud and breach of contract claims, Nestlé
didn’t explain how its arguments should apply to the common law differently
than to the statutory claims. For the seven states as to which the court denied
summary judgment as to the statutory unfair trade practice claims, it seemed
reasonable that if a legislature wanted consumers to be able to sue under the
statute, it would also want the common law to remain available. “Even for Rhode
Island . . . , it is a stretch to conclude that the legislature’s enactment of
a statute-specific exemption should be extrapolated to bar any common law cause
of action for conduct that is subject to government regulation.” Thus, the
court denied Nestlé’s motion for summary judgment on the common law claims.

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fake not-really-third-party reviews can be commercial advertising or promotion

Posted on August 14, 2020 by rtushnet

Sanho Corp. v. KaiJet Tech. Int’l Ltd., No.
1:18-cv-05385-SDG, 2020 WL 4346881 (N.D. Ga. Jul. 29, 2020)

Sanho owns rights in a design patent that claims the
ornamental design for a multi-function docking station colloquially known as
the “HYPERDRIVE,” and a design patent “directed at the technology underlying
Sanho’s HYPERDRIVE product.” [???] It sued KaiJet for misappropriation and
infringement.

KaiJet US counterclaimed for, among other things, false
advertising under the Lanham Act. It alleged that Sanho paid third parties— “falsely
disguised as independent reviewers, not paid-for advertisement—to submit positive
reviews of Sanho’s HYPERDRIVE product on various online platforms,” and “to
remove negative reviews of Sanho’s product.” Sanho argued that this wasn’t “commercial
advertising or promotion,” but the court disagreed, rightly without needing
much analysis. That the reviews purported to come from a third party did not
take them outside the scope of the Lanham Act if they did in fact come from
Sanho (which of course remains to be seen).

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statements to 3 of 15 market participants weren’t “commercial advertising or promotion”

Posted on August 13, 2020 by rtushnet

Globe Cotyarn Pvt. Ltd. v. Next Creations Holdings LLC, No. 18
Civ. 04208 (ER), 2020 WL 4586892 (S.D.N.Y. Aug. 10, 2020) 

Globe, a fabric manufacturer, sued a fabric patent holder,
AAVN, and its subsidiary, Next Creations, for allegedly falsely telling certain
of Globe’s potential customers that Globe sold infringing products. Globe
alleges Lanham Act false advertising and tortious interference and unfair
competition under New York law. The court dismissed the amended complaint. 

Background: AAVN previously filed an ITC complaint against certain
imported textiles. An (unrelated) respondent defended on the basis that its
allegedly infringing product had been on sale before AAVN even received the
relevant patent. The parties settled, but Globe alleged that in filing the ITC
complaint AAVN had determined that the prior art product practiced claims of one
patent, and also was within certain claims of other patents. Another company
petitioned the PTO for review of three AAVN patents as invalidated by prior
art; as to two of them, the PTAB found that “more likely than not that [the
challenger] will prevail in showing that at least one of the challenged claims
in each of the patents is unpatentable” (it didn’t rule on the third, which was
challenged separately). The parties settled. 

Globe argued that defendants contacted a number of Globe’s
customers and falsely accused Globe of selling infringing materials. Globe
identified three importers, but contends on “information and belief” that defendants
also spoke to the buyers of certain retailers who, in turn, relayed the message
to other importers. For example, Next Creations’ CFO wrote to one importer: “I
am reaching out to you today in regard to product your company sells to
retailers throughout the United States that infringe upon AAVN’s CVC Patent.
Your company is not authorized to sell this CVC product.” He wrote a similar letter
to another, and the named inventor/alleged owner/officer of defendants, told
another importer that it should not purchase CVC bed sheets from Globe because
the sale of those products in the U.S. would infringe AAVN’s patent. Globe
alleged that he also told buyers for five retailers the same thing.

Globe alleged that these five retailers, along with another,
sell the “vast majority of CVC bed sheets” in the United States, and that the
buyers informed importers of CVC bed sheets what defendants told them. According
to Globe,“[o]ver half of the 15 to 25 companies who import CVC bed sheets into
the United States for sale” sell or have sold CVC bed sheets to the five stores
the buyers represent.

Lanham Act claims: Commercial advertising or promotion was a
barrier. Globe still didn’t show that the messages were sufficiently
disseminated to the relevant purchasing public. As the Second Circuit has held,
a business “harmed by isolated disparaging statements do[es] not have redress
under the Lanham Act” and should instead “seek redress under state-law causes
of action.” Prior cases have held that, for example, “[d]issemination of a
statement to one customer out of 36 simply does not meet [the necessary]
standard,” and that “six statements, most directed at a single individual,”
were not sufficiently disseminated to qualify as commercial advertising or promotion,
“[e]ven if the relevant market, jewelry retailers, is in fact … smaller than
that for [previous Second Circuit precedent].” 

Though the allegations here were broader than that, they
insufficiently alleged that defendants’ actions “were part of an organized
campaign to penetrate the market.” Globe alleged specific communications to
three importers, but the court declined to consider other allegations “on
information and belief” withouth a further “statement of the facts upon which
the belief is founded.” Statements relating to communications to buyers didn’t appear
to be based on more than “conjecture and speculation.” With only communications
to three of the “15 to 25” importers, “apparently made in private over a
10-month period,” the facts didn’t reasonably suggest “the contested
representations [were] part of an organized campaign to penetrate the relevant
market.” Instead, they appeared to be “isolated events, for which Globe should
seek redress under state law, rather than the Lanham Act.” Out-of-circuit
precedent was not to the contrary; compared to other cases, the three targeted
importers didn’t allegedly “represent an outsized share of the relevant market.” 

Bad faith: both Lanham Act and state law claims required a
showing of bad faith to avoid patent law preemption. “Bad faith is determined
on a ‘case by case basis,’ but the Federal Circuit has held that if a
patentholder knows that its ‘patent is invalid, unenforceable, or not
infringed, yet represents to the marketplace that a competitor is infringing
the patent, a clear case of bad faith representations is made out.’” Bad faith
has both objective and subjective elements: that “no reasonable litigant could
realistically expect to prevail in a dispute over infringement of the patent” and
that the “lack of objective foundation for the claim was either known or so
obvious that it should have been known.” 

Globe failed to allege objective baselessness.  It suggested that, having done analysis to
show that the product at issue in the ITC proceedings practiced its patents and
been through part of a PTAB proceeding, defendants now knew that these patents
were invalidated by prior art. But the complaint didn’t sufficiently allege
that all claims of the AAVN patents were invalidated by prior art, which
matters because “statements that Globe products infringed its patents could not
have been made in bad faith if only some portion of its patents were invalid.”
[I’m not sure this is always true but it might require additional facts about
the claimed infringement.] 

Tortious interference: without sufficient evidence of bad
faith/falsity or misleadingness, this also failed.

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