Friday, July 22, 2016

Settlement class can't stand where settlement notice gave mistaken info

Duran v. Obesity Research Institute, LLC, No. D067917, 2016 WL 3913205 (Cal. Ct. App. Jun. 23, 2016)

Duran sued ORI and Wal-Mart for allegedly falsely advertising the weight loss benefits of Lipozene and MetaboUp. The court approved a claims-made settlement providing that class members submitting a claim without proof of purchase would receive $15, and those submitting receipt(s) would receive one refund of double the unit price paid. (A claims-made settlement isn’t a fixed fund but depends on the number of claims submitted; “[s]uch settlements may promise far more than they deliver because the claiming rate is notoriously low.”) The settlement also provided that ORI would cease making certain advertising claims, and that defendants wouldn’t oppose a motion seeking $100,000 in attorney fees to class counsel.  The class is estimated at between 400,000 and 600,000 consumers.  In total, 895 claims were submitted, in the total amount of $31,800, or 0.179% of the class (assuming 500,000 class members)—about six cents per class member.  Objectors appealed, and the court ruled that the notice, which was emailed to consumers who bought online directly from ORA and also appeared in USA Today, was insufficient.

The notice here depended on the settlement website.  The email, which went to 237,334 class members, didn’t include the terms, but just told recipients to click on a link to the settlement website.  The USA Today notice explained the method of calculating settlement payments and generally described the injunctive relief, but also referred readers to the settlement Web site “[f]or additional information on submitting a claim ....“ The settlement Web site said that submitting a valid claim form was the only way to get a cash payment.  But the downloadable claim form, integral to the settlement, was wrong.  Instead of stating that class members who submitted receipts would get one refund of double the purchase price, it said they’d get a refund of all products bought during the class period, resulting in overvaluing or undervaluing claims.

The online claim form also misstated the product involved—it referred to Hydroxycut products, not involved here—and the scope of the release involved in taking the settlement (the trial court had rejected a release of unknown claims, but the claim form included it).  These issues weren’t raised in the trial court, even by objectors, but class counsel and defendants argued that the settlement was fine and a remand was necessary only to decide the “details and logistics“ of giving corrected class notice.  The court disagreed.  “The judgment must be reversed because the class notice failed in its fundamental purpose—to apprise class members of the terms of the proposed settlement.”

The court found that the problems its independent review of the claim form revealed weren’t waived.  The relevant facts were undisputed and couldn’t have been changed by presenting addditional evidence.  And the trial court couldn’t have cured the error at the final approval hearing because the claims process was over.  Further, “[t]he court’s responsibility to protect absent class members” justified an exception to waiver or forfeiture.

Defendants and class counsel argued that, even though the notice was bad, the finding that the settlement was reasonable, fair, and adequate should be left untouched.  But the adequacy of class notice of settlement was too intertwined with the reasonableness of the settlement to accept that argument, since, among other things, “the amount offered in settlement“ and “the reaction of the class members to the proposed settlement” are relevant to the court’s assessment.

As for notice to class members, “process which is a mere gesture is not due process. The means employed must be such as one desirous of actually informing the absentee might reasonably adopt to accomplish it.”  ORI sent notice by email to its direct website customers.  Objectors argued that purchasers could have been given email notice too, and that the parties should have subpoenaed records from other retailers, such as Amazon, CVS, and Walgreens, to obtain addresses of other class members.  Wal-Mart argued that it couldn’t get addresses for those who purchased from its online store because the entity operating— USA, LLC—wasn’t the entity Duran sued, which was Wal-Mart Stores, Inc.  ORI’s attorney filed a declaration stating he “reached out“ to “several retailers“ to obtain customer contact information, but was told that “obtaining such information is illegal, unavailable or improper.”

“On remand, class counsel and defendants will have to provide a better foundation to support a ruling that direct notice need not be given.”  Among other things, the fact that the brick and mortar store was owned by one entity, and the online store by another, didn’t by itself establish the requested information wasn’t reasonably obtainable.  What’s required is “a notice plan that one would implement if one genuinely wanted to inform someone, all relevant factors considered.”  It wasn’t enough to say, vaguely, that counsel “reached out to several retailers.”  Direct notice might not be required for online purchasers other than those who used ORI’s website, but the court needed more information.

Objectors also submitted a declaration from a media expert asserting the USA Today notice reached only approximately 1.06% of class members. She used “industry-standard research data” about “demographic, lifestyle, product usage and exposure,” using data for audiences targeted with a definition of “Meal/Dietary/Weight Loss Supplements Used For Weight Loss in Last 6 Months.”  There was no evidence disputing her opinion or even evidence that Lipozene was advertised in USA Today.  ORI didn’t explain how a settlement class member who didn’t receive e-mail notice and who didn’t read the notice in USA Today would even know to look for a Lipozene settlement Web site.  The idea of using publications targeting class members needed to be explored.

As for injunctive relief, the settlement required ORI to change its advertising and some other business practices.  Among other things, ORI agreed to add a disclaimer regarding Lipozene’s effectiveness, including links to studies about Glucomannan, an ingredient contained in Lipozene. It would also add, “For best results, use in conjunction with reasonable diet and exercise.“ ORI also agreed to end its pay-per-click Internet advertising, increase its return policy from 30 to 45 days to claim a refund, and use “best efforts“ to “eliminate all testimonials created prior to January 1, 2010.”

Objectors argued that the injunctive relief was illusory; on this record, the court of appeals agreed.  Adding language about how “study participants” had been helped by Lipozene wasn’t helpful in correcting the allegedly false claims.  Nor was changing that  Lipozene has “effectively helped millions of people”  to Lipozene has “effectively helped countless people.”  There was no evidence that the extra 15 days in the return period offered any material benefit to consumers.  As for the diet/exercise statement, ORI was already working under a stipulated judgment with the FTC prohibiting ORI from representing that Lipozene or MetaboUp products “[c]auses rapid or substantial weight loss without the need to reduce caloric intake or increase physical activity.” Requiring ORI to obey an existing judgment didn’t add value.

IP Professors' Amicus in Star Athletica v. Varsity Brands

Filed today: Mark McKenna, Chris Sprigman, Mark Lemley, Tyler Ochoa, Betsy Rosenblatt, Pam Samuelson, Kathy Strandburg, and I submitted a brief in this copyright separability case, arguing that conceptual separability is simply a coda to physical separability, dealing with situations in which physical separation couldn't be accomplished without destroying the useful article--regardless, there must be something other than the design of the article itself that can be identified as a protectable work.  The existence of design patent also sheds important light on the limited role Congress intended copyright to play for useful articles.

Don't send a TM to do a (c)'s job: 7th Circuit rules in Slep-Tone case

Mark McKenna organized an amicus brief in this case, which was not cited by the court but advocated a position similar to that adopted by the panel.

Phoenix Entertainment Partners, LLC v. Rumsey, No. 15-2844 (7th Cir. July 21, 2016)

Slep-Tone and its successor in interest Phoenix argued that defendants, a pub and its owner, infringed Slep-Tone’s trademarks by passing off unauthorized digital copies of Slep-Tone karaoke files as genuine Slep-Tone tracks. The court of appeals concluded that Slep-Tone hadn’t “plausibly alleged that the defendants’ conduct results in consumer confusion as to the source of any tangible good sold in the marketplace.”

Slep-Tone is a serial litigant that distributed karaoke accompaniment tracks under the trademark “Sound Choice.” The audio component of the track is a re-recorded version of a popular song that omits the lead vocals, while the graphic component displays the lyrics to the song as well as a variety of visual cues (including color coding and various icons) that are synchronized with the music. Slep-Tone alleged that it had a distinctive trade dress in the typeface, style, and visual arrangement of Slep-Tone tracks, along with the entry cues for singers (a series of vanishing rectangles) and the Sound Choice mark is typically shown with the song lyrics.  According to Slep-Tone, its trade dress was “sufficiently recognizable to karaoke customers to enable them to distinguish a track produced by Slep-Tone and a track produced by a competitor even if the Sound Choice mark itself were not displayed.”  However, Slep-Tone didn’t own any relevant copyrights.

Slep-Tone sold physical media such as disks to customers, but karaoke customers now prefer to use hard drives with hundreds or thousands of accompaniment tracks to cut down on the time and effort of loading a new disk.  Media-shifting is necessary to accomplish this for Slep-Tone tracks.  In 2009, Slep-Tone adopted a media-shifting policy that permitted customers to copy tracks, under specific conditions including paying for each copy and providing notice to Slep-Tone. “It should come as no surprise that not all operators comply with Slep-Tone’s media-shifting policy,” allegedly depriving it of revenue.  The Basket Case, and its principal Rumsey, allegedly had one or more hard drives containing copies of Sound Choice tracks made in violation of Slep-Tone’s media shifting policy.

Slep-Tone’s theory of confusion was that, when unauthorized copies were played at the pub, pub customers would see Slep-Tone’s Sound Choice mark and trade dress “and believe they are seeing and hearing a legitimate, authentic Slep-Tone track, when in fact they are seeing an unauthorized copy.”  This was fundamentally flawed because Slep-Tone’s allegations didn’t plausibly suggest that confusion was likely among Basket Case customers “as to the source of any tangible good containing the karaoke tracks they are seeing and hearing.” Dastar makes clear that it’s “consumer confusion about the source of a tangible good that a defendant sells in the marketplace” that matters for purposes of trademark infringement.  But defendants don’t sell any relevant tangible good; they just play unauthorized copies:

What pub patrons see and hear is the intangible content of the karaoke tracks. They will see SlepTone’s trademark and trade dress and believe, rightly, that Slep-Tone is the source of that intangible content. But patrons will neither see nor care about the physical medium from which the karaoke tracks are played; consequently, any confusion is not about the source of the tangible good containing the karaoke tracks.

Slep-Tone argued that an unauthorized copy of a Sound Choice track was a new good that would look and sound like a genuine Sound Choice track; in addition, customers might mistakenly believed that Slep-Tone “sponsored or otherwise approved the defendants’ services and commercial activities.”  

The parties don’t compete in the market for karaoke tracks, but Slep-Tone argued that Basket Case’s failure to pay gave it a competitive advantage as against compliant karaoke establishments.  If legitimate operators were discouraged from paying for genuine Slep-Tone tracks, Slep-Tone could lose sales.  Plus, Slep-Tone argued that “unauthorized copying may result in inferior knock-offs that will injure its reputation for quality karaoke tracks.” 

This chain of causation was indirect, but the court accepted it, noting however that it was important that unauthorized copying of the karaoke tracks (not the trademark or trade dress as such) was the core of the injury-producing conduct.  These tracks were copyrightable works, and copying a creative work is ordinarily a matter of copyright law.

There was therefore a mismatch between Slep-Tone’s problem (unauthorized copying) and the legal right it invoked.  The court noted that one oddity of Slep-Tone’s theory is that a legitimate customer would also make a “new good” according to Slep-Tone’s theory when it loaded a Slep-Tone track onto a hard drive, as it was allowed to do.  The only thing distinguishing the legitimate from the illegitimate copy was authorization to make the copy—and that’s really about copyright.  Copyright’s limited term is one reason it’s important to distinguish copyright and trademark; trademark could allow a perpetual monopoly if applied to creative works.

But how to draw the line?  The court noted that, “where, as here, the protected mark (including the trade dress) is embedded in the good’s creative content, such that the mark is invariably displayed along with the content, it can be particularly difficult to decide whether the unauthorized copying of the good presents a claim of trademark infringement or one of copyright infringement.”  However, Dastar made clear that trademark couldn’t be used to assert what’s “really” a copyright claim.  Dastar wasn’t directly controlling, because this case didn’t involve reverse passing off, but it was helpful.  Dastar specifically rejected a broader understanding of the “origin of goods” “for communicative products that consumers will value more for the intellectual and creative content they convey than for their physical form.” Karaoke tracks were such a product. 

Thus, the court’s job was, first, to identify the “tangible product sold in the marketplace” at issue here, and second, to ask whether the confusion alleged would be about who produced the good, or whether it would really be about the source of the creative content in the good.  Only the former would be actionable under the Lanham Act.

The court accepted that a digital file could count as a tangible good for these purposes.  However, defendants didn’t sell these files.  They allegedly played unauthorized copies to patrons, encouraging alcohol and food sales.  “[W]hat the pub patrons see is the performance of the creative work contained on the copies: they hear the musical accompaniment and they see the corresponding lyrics and graphics.”  They didn’t encounter the physical good in question, even if they might be aware that such a file exists; from their perspectives, it wouldn’t matter whether the track came from a disk, a hard drive, or from streaming video.

True, the Sound Choice mark and trade dress would be displayed, and patrons might assume that they were seeing “a genuine, authorized Slep-Tone product when in fact it is a bootleg copy.”  But here’s the relevance of the second part of the inquiry: what (if anything) is the patron confused about at that point? 

On seeing the Sound Choice mark, a patron may believe that she is seeing and hearing content that was created by Slep-Tone. And she is. But what Dastar makes clear is that a consumer’s confusion must be confusion as to the source of the tangible good sold in the marketplace. A consumer of karaoke services like a patron of The Basket Case never sees a disc that is wrapped in Slep-Tone or Sound Choice packaging. He never sees a website offering downloads of Sound Choice tracks.… Any confusion, in short, is not about the source of the tangible good sold in the marketplace, as Dastar requires.

Nor did the embedding of the Sound Choice mark in the creative content of the track allow Slep-Tone to plausibly allege that consumers would likely be confused about its endorsement of the pub.  “The producers of communicative goods often embed their marks not only on the packaging of the good but in its content.”  Films have studio marks in their credits, and yet, when the copyright expires, “it is not a trademark violation simply to display the work without first deleting the mark that was inserted into its content.” For example, when a Universal film enters the public domain, “[s]o long as Universal’s mark is not overtly used to market the performance, there is no risk that a theater patron might think that Universal is sponsoring or endorsing the performance.”  Others are free to make and sell copies of the film without permission and without deleting Universal’s mark from the credits.  The court of appeals then cited nominative fair use cases—which actually supports a broader point, which is that Universal’s mark could be “overtly used” to market the performance as long as it was a truthful description of the original source of the creative content.

In the case at bar, there was no allegation that Basket Case promoted itself as offering Sound Choice karaoke products, so there was “no reason to believe that its patrons will think that Slep-Tone is sponsoring the performance of the copied karaoke tracks.” Likewise, because patrons saw only the creative content of the tracks rather than the particular medium from which the tracks are played, there was no reason to think that they believed that the digital file was itself produced or approved by Slep-Tone.

The court then addressed Slep-Tone’s concern about degraded quality. Not only did Slep-Tone fail to allege that defendants’ copies were noticeably inferior in the perception of patrons (something that’s presumably against defendants’ own interests), but that concern still didn’t involve a tangible good in the marketplace.  Defendants—or the people from whom they got their hard drives—might have committed a wrongful act, but not one that was actionable as trademark infringement.

Thursday, July 21, 2016

court grants motion to dismiss on nominative fair use grounds

Beachbody, LLC v. Universal Nutrients, No. 16-02015, 2016 WL 3912014 (C.D. Cal. July 18, 2016)

Beachbody sued Universal and Wal-Mart for using its “shakeology” mark on product packaging and purchase receipts. The court granted defendants’ motion to dismiss—apparently the standard is higher when you sue Wal-Mart.

Trademark infringement: the court found nominative fair use on the allegations of the complaint.  First, Beachbody alleged that its “shakeology” meal replacement shakes had a unique blend of ingredients that weren’t comparable to the ingredients in defendants’ OmniHealth shakes, and that its shakes were widely recognizable. However, the court found that Beachbody didn’t plead facts showing that consumers would readily identify Beachbody’s shakes without the use of “shakeology,” making the use necessary to identify Beachbody. 

Second, Beachbody alleged that defendants’ use of the term was almost identical to Beachbody’s.  But defendants said they didn’t use the same logo, font, or coloring scheme, and the court found that Beachbody didn’t plead facts showing that defendants used more of the mark than reasonably necessary to identify Beachbody.

Third, Beachbody alleged that the phrase “compare to the ingredients in shakeology” on the OmniHealth packaging would confuse consumers about Beachbody’s endorsement of the OmniHealth meal replacement shakes.  I would have called this “implausible,” but the court said that Beachbody didn’t provide evidence of actual association, and noted that the back of the OmniHealth boxes “clearly stated” the lack of association.  Moreover, Beachbody’s shakes are only sold on its own website, and they are sold for much more than defendants’ product.  Therefore, Beachbody didn’t sufficiently allege likely confusion about affiliation.

The use on the receipts was different (and I would have advised against this)—allegedly, receipts for purchases of the OmniHealth shakes say only “shakeology” as the product description.  But the court found that Beachbody didn’t allege any facts to show that consumers would likely associate the products based on the receipts.  Absent sufficient allegations to defeat the nominative fair use defense, the trademark infringement claim had to be dismissed.

Related claims such as contributory infringement and state-law unfair competition also failed, for the same reasons.

False advertising: “compare to the ingredients of shakeology” allegedly falsely suggested to consumers that the ingredients in OmniHealth shakes were comparable or similar to those in Plaintiff’s shakes. “Compare to ...” statements can convey a specific message and thus can be falsifiable.  However, such a claim of implicit falsity requires extrinsic evidence of consumer deception, and Beachbody didn’t plead any.  “Simply making the conclusory statement that Defendants’ ingredients are incomparable to Plaintiff’s proprietary blend of ingredients does not establish a plausible claim for false advertising.”  (So it has to have a survey in hand to sue?) 

Nor did the use of “shakeology” on Wal-Mart receipts constitute false advertising, because the use of the name on the receipt “would not be a significant factor in a consumer’s purchasing decision,” and therefore wouldn’t be an advertisement.  [Hunh?  This is under-reasoned; it first sounds like materiality (which is bold on a motion to dismiss).  The argument that a receipt isn’t “commercial advertising or promotion” is reasonable, but given that meal-replacement shakes are probably supposed to be purchased multiple times, a receipt might serve as a kind of ad for the next purchase.  The real problem is that this is really a trademark claim; the alleged falsity is about the source of what the consumer bought, and if anything a receipt that said “shakeology” would probably make it harder for the consumer to figure out that she can only get OmniHealth shakes at Wal-Mart.]

Commercial disparagement/trade libel failed too: Beachbody didn’t plead facts that if believed, could prove any special pecuniary damages from the Wal-Mart receipts. 

Thursday, July 14, 2016

Standard competitive bluster can be used as evidence of bad faith

Hillman Group, Inc. v. Minute Key Inc., 2016 WL 3654437,  No.13-cv-00707 (S.D. Ohio Jul. 8, 2016)

Hillman makes duplicate keys, sold in at mass merchants, home centers, automotive parts retailers, franchise and independent hardware stores, grocery/drug chains, parcel shipping outlets, etc.  Key duplication has traditionally been manual; a human identifies the proper blank key that fits the one the customer hands over, then cuts the duplicate.  Hillman has 60% of that market.

Self-service, automatic key duplication is a new trend. Kiosks allow retailers to devote fewer employees, less inventory, and less floor space to the process. Minute Key patented such a kiosk and sought to displace Hillman and its FastKey kiosk.  Minute Key placed 19 kiosks in Walmart stores across the country, then in 2012 signed a Walmart contract for a national rollout of 1000-1600 kiosks.  The rollout was delayed, and Minute Key found that it would have to compete against Hillman in a 100-store head to head pilot.  Minute Key believed that Hillman’s “very good relationship” with Walmart’s Tire Lube Express (TLE) team was at the root of the decision to extend the pilot and, in turn, delay Minute Key’s national rollout, which “practically put minuteKEY out of business.”

A Minute Key board member and investor, as part of discussions about the Walmart pilot, asked if its patent applications could be used to create “some FUD” about Hillman with Walmart.  In late 2012, Hillman won the pilot, with 900 stores going to Hillman and 300 to Minute Key.  A Minute Key principal responded, “in every retailer where we have gone head to head with fastkey @ Lowes, Menards, Meijer, Orchard Supply Hardware; our machine has won in every category; revenue, reliability, customer experience and accuracy. Is there anything we can do here to improve our position?”  (Etc.)  Discussions with Walmart revealed that Hillman succeeded in stores that also used Hillman’s transponder key program in their auto departments.  Another Minute Key person questioned whether it was time for Minute Key to consider “how/whether to use our patents to play offense.” There was further discussion of the patents, the threat they might pose to Hillman, and when the “patent card” should be played.

And there were some of the usual insider comments, which are almost inevitable; generally just bluster; and yet can be made to look bad.  E.g., “Fuck Hillman, they don’t know they are messing with a pirate.”/ “ it. Always need a competitor and we will whack them in time,” to which another responded, “Need to whack them now!”

The Walmart employee responsible for the Walmart decision then took a job at Hillman; his replacement looked at the trial and concluded that, based on revenue per square foot, downtime, returns, and customer experience, Minute Key, rather than Hillman, should have won:

In terms of profit per square foot, [Minute Key] was 25 percent more per machine per store. The customer experience was a little over a minute compared to between a little over three minutes. The downtime was a fracture [sic] of what the Hillman machine was. And the returns was [sic] significantly less, which all factor into customer experience.

Based on this, he started talking with Minute Key about rolling out at 1000 more stores, though Walmart had a three-year commitment to Hillman. 

In September 2013, Minute Key emailed Walmart that it would be sending Hillman a patent infringement notice when its patent was issued.  The email continued:

Our investment is only protected by our intellectual property, and thus we have no choice but to enforce our intellectual property against anyone who attempts to misappropriate it, such as by infringing our patent rights. The patent to be issued next Tuesday is only the tip of the iceberg of our intellectual property, and there are many more on the way.… It is flattering to be imitated by others, but it also is evidence of the significance of the contribution that MinuteKey’s technology has made to the industry, and our technology must be protected.

Walmart responded by deciding to give all kiosks at new stores/stores that requested kiosks to Minute Key, while Hillman would continue to install in its approved locations.  Walmart also requested a claim chart indicating which claims Minute Key alleged Hillman to be infringing.

Hillman sued for a declaration of noninfringement; Minute Key then provided Hillman with a covenant not to sue and argued that no case or controversy existed.  Hillman then sought to amend its complaint to add federal and state false advertising claims.

Courts have decided that, in cases involving statements about patent infringement, Lanham Act plaintiffs have to show bad faith in order to “give effect both to the rights of patentees as protected by the patent laws under ordinary circumstances, and to the salutary purposes of the Lanham Act to promote fair competition in the marketplace.”   The court found genuine issues of material fact precluding summary judgment.

First, Minute Key argued that its statements were opinion, not fact. In context, they were claims of fact, clearly declaring that Hillman was a patent infringer, and a jury could readily conclude that Walmart understood these as statements of fact.  Walmart’s counsel responded by asking Minute Key for a claim chart and Hillman to acknowledge its indemnification obligation; then Walmart suspended the deployment of key kiosks based on the patent claim.

Were the statements “commercial advertising or promotion”?  The relevant customer base as the market for self-service kiosks, not key duplication equipment generally. Hillman argued that Minute Key only seriously tried to get Walmart’s business (though why this should matter is unclear, since the key is distribution in the market, whatever that is, not how many entities in that market the defendant targeted).  Whether the market at issue was limited to Walmart was a factual question for the jury.

Bad faith: Minute Key argued that there could only be bad faith if its patent infringement claim was “objectively baseless.”  But Minute Key’s representation in marketing that its machine was fully automatic, while Hillman’s was not, could be taken into account in determining this, as well as the board member’s speculation about using patents to create “FUD” and “quips from its CEO such as ‘Fuck Hillman, they don’t know they are messing with a pirate’ and ‘Need to whack them now!’ and ‘Thinking about raising the patent card.’”

There were also questions of fact about damage to Hillman; though Hillman wasn’t guaranteed any extra stores, Walmart decided to use Minute Key for new stores/requests the day after Minute Key confirmed that it would be issuing a patent infringement notice to Hillman; before that, Hillman was the vendor of choice.  There was a dispute about whether Walmart offered, as a custom though not a contractual obligation, a “right of first refusal” to existing vendors for future business.  There was also a factual question about whether a delay in the already-promised kiosk rollout was due to the infringement claims, or whether the Hillman kiosks were still in production and then blocked by Walmart’s blackout period from mid-October to mid-January during which no vendor is allowed to place any kiosk.

Wednesday, July 13, 2016

Primary jurisdiction doesn't defeat supplement false advertising claim

Nutrition Distribution LLC v. Custom Nutraceuticals LLC, No. CV-16-00173, 2016 WL 3654277 (D. Ariz. Jul. 8, 2016)

The parties compete in the nutritional supplement market; defendant Custom sells Ostarine, a selective androgen receptor modulator (“SARM”) with effects similar to those of anabolic steroids.

Lanham Act claim: Distribution alleged that Custom labeled Ostarine products as “not for human consumption,” while simultaneously representing that Ostarine was a body-building drug and an “[e]asy to dose oral SARM.” Also, Custom allegedly failed to disclose that the World Anti-Doping Agency and the U.S. Anti-Doping Agency have banned the use of SARMs, while targeting competitive athletes.  Moreover, Custom allegedly represented that Ostarine has few side effects, when medical evidence suggests that it has potentially serious side effects.

Custom argued that the court should abstain from deciding these issues based on the primary jurisdiction doctrine. The court disagreed.  “The Court need not consult the FDA to determine whether it is false and misleading to label a product as ‘not for human consumption’ while touting the benefits of such consumption.”  Likewise, the materiality of the omission of the anti-doping agencies’ bans might not even implicate the FDA’s regulatory scheme; the FDCA doesn’t even prohibit all omissions that might be material to a consumer, but only those that are material “with respect to consequences which may result from the use of the article”:

Even assuming the FDA could require Defendants to disclose that their product has been banned by major sports agencies, the issue is not one that implicates the agency’s technical and policy expertise. Indeed, Plaintiff may have a superior understanding of how consumers of body building products would react to this information.

Not even the statements about side effects were beyond the court’s scope.  Though the FDA has primary jurisdiction to regulate statements about the side effects of drugs, Custom denied that Ostarine was a drug. “Having denied the FDA’s authority to regulate Ostarine as a drug, Defendants cannot invoke the same authority to avoid a suit under the Lanham Act.”  Though the FDA has the authority to determine whether Ostarine is safe enough to be sold in interstate commerce, this case was about whether Ostarine was as safe as Custom claimed, which didn’t require the court to opine on the technical and policy questions committed to the FDA.

RICO: no.

Volunteer moderator plausibly alleged to be agent of ISP for 230 purposes

Enigma Software Gp. USA LLC v. Bleeping Computer LLC, 16 CV 57 (S.D.N.Y. Jul. 8, 2016)

Eric Goldman probably won’t like this decision holding that a volunteer moderator may be treated as the ISP’s agent when the ISP gives enough status to him or her; I’m less bothered by the §230 ruling (except for the legal error, which the court may have a chance to correct later).

SpyHunter, an “adaptive malware detection and removal tool,” is plaintiff ESG’s flagship anti-malware product. Consumers can download a free scanning version of SpyHunter through a link on ESG’s website. Consumers can also buy a license to the full version of SpyHunter. That version includes the scanner, as well as tools to remove malware and other security protection tools.

Bleeping operates a website that offers information, advice, and resources about computer technology and security, and one of its focuses is anti-malware software. Bleeping gets commissions from designated “Affiliate” software companies for promoting their products on its website.  In the Bleeping forums, “staff members” “generate and control [the] content” posted. Bleeping has “Advisors,” whom Bleeping holds out as experts who “can be trusted to give correct and understandable answers to [users’] questions.” Above Advisors in the hierarchy are “Global Moderators,” who enjoy “special powers” to enforce rules governing the Forums, e.g., by “closing” discussions, editing the content of users’ posts, and suspending the posting privileges of users who violate the rules. Lawrence Abrams, Bleeping’s owner, is the overall “Admin” of the Forums.

Whenever an Advisor, Global Moderator, or Admin posts in Bleeping’s Forums, “Bleeping clearly identifies that the post has been made by [a Bleeping staff member]. Because Bleeping touts its staff as experts who can be “trust[ed] to provide correct, unbiased and truthful advice,” users allegedly rely on their advice when making purchasing decisions regarding anti-malware products. But Bleeping instead allegedly directs users to affiliates in order to promote its own financial interest, and also made false claims about ESG and SpyHunter  Bleeping also allegedly routinely removes links posted by users that endorse ESG’s products.

ESG allged that Quietman7, a Bleeping Advisor and one of only three Global Moderators, was a chief spokesperson for Bleeping’s “smear campaign” against ESG. In particular, Quietman7 accused ESG of deceptive advertising; labeled SpyHunter a “dubious” and “ineffective” program that generates false positives; and claimed that SpyHunter was a “rogue” product that was properly classified as malware. Quietman7 advised users to remove SpyHunter and replace it with a more “trustworthy” alternative—“invariably an Affiliate product, such as Malwarebytes Anti-Malware, for which he supplied an Affiliate Link.”  Users were allegedly influenced by this, saying things like “I’m convinced. Will buy a more trustworthy product when [SpyHunter] expires.”

First, the court held that, because §230 excludes IP claims, the Lanham Act false advertising claim wasn’t subject to §230.  The court cited two cases: Gucci Am., Inc. v. Hall & Assocs., 135 F. Supp. 2d 409, 413 (S.D.N.Y. 2001) (as you can probably guess from the plaintiff, this is a trademark infringement case); see also Ford Motor Co. v., Inc., No. 00 Civ, 71544 (DT), 2001 WL 1176319, at *1 (E.D. Mich. Sept. 25, 2001) (same). “On the basis of the statutory text, the Court, therefore, holds that the CDA does not bar ESG’s Lanham Act claim.” [Aaaagh!  Ahem, let me try again.  False advertising is not IP, even if trademark infringement is; §43(a), like 2/3 of Gaul, is divided into two parts. Or, in other words, it's not plausible to define the interest ESG is trying to protect as an interest in its intellectual property, rather than one in its reputation.]

Second, the court held that ESG sufficiently alleged that Bleeping was the provider of the problematic content because, on the facts pled, Quietman7 was acting as Bleeping’s agent when he posted them. Under New York law, an express agency is created through (1) “the principal’s manifestation of intent to grant authority to the agent,” (2) “agreement by the agent,” and (3) the principal’s “control over key aspects of the undertaking.”  Implied agency can also occur where the principal’s conduct, “reasonably interpreted, causes [ ] third [parties] to believe that the principal consents to have the act done on his behalf by the person purporting to act for him.”

Bleeping publicly designated Quietman7 as a “Global Moderator” and “Advisor”—the second and third highest “staff member” positions within the Bleeping member group hierarchy. Quietman7 since signed his posts as “Bleepin’ Janitor” and “The BC Staff.” Bleeping staff members are allegedly directed to promote affiliates’ products and discourage use of non-affiliates’ products, and are allegedly promoted as reliable sources of information. They’re authorized to enforce forum rules and suspend posting privileges for rule violations. This was enough to support the conclusion that Quietman was acting as Bleeping’s agent, at least its implied agent, when he posted the challenged content. 

Interestingly, the court cited two copyright cases in support of its finding of a plausible claim.  Court’s parentheticals: Capitol Records, LLC v. Vimeo, LLC, 972 F. Supp. 2d 500, 518–19 (S.D.N.Y. 2013) (triable issue of fact existed as to whether  employee-uploaders were acting as website’s agents, where uploaders served as “editorial voice” for website and website posted “staff badge” next to uploaders’ names on their posts); Columbia Pictures Indus., Inc. v. Fung, No. 06 Civ. 5578 (SVW), 2009 WL 6355911, at *13 n.21 (C.D. Cal. Dec. 21, 2009) (websites liable for moderators’ infringements, despite lack of evidence of actual authority, where “websites’ act of designating them as ‘moderators’ and providing them with specific forum-related powers [could] lead[] a ‘third party reasonably [to] believe[ ] the [moderators] ha[d] authority to act on behalf of the [website]”) (internal quotation marks and citation omitted).  Although other cases find that “moderator” status, without more, does not render a website operator liable for a moderator’s conduct (as these cases apparently do), ESG’s claim of agency wasn’t just about Quietman7’s designation as a “moderator.” He was designated a “staff member,” had special authority as an Advisor and Global Moderator, and was held out as an expert. Bleeping’s cases involved either moderators who had limited powers or didn’t themselves author the offending posts.

Nor did Quietman7’s volunteer status prevent him from being an agent. “New York courts have repeatedly held volunteers to be agents where the common law requirements for agency were met.”

After that, the court held that the claims weren’t time-barred; some posts occurred within the 1-year statute of limitations for defamation, and there was also an issue about republication because Quietman7 included links to older posts, with additional commentary, in new posts. And courts in the Second Circuit generally borrow the six-year fraud statute of limitations for Lanham Act claims.

Then, the court found that ESG stated a claim for defamation. Of possible interest, the court found that various statements about the allegedly scammy nature of ESG’s product were potentially falsifiable factual statements:

Viewed holistically, the “overall thrust” of Quietman7’s thematically similar and mutually reinforcing statements is that ESG is engaged in a deliberate and fraudulent scam in which it is peddling a product which is the precise opposite of what it purports to be: The challenged statements “reasonably imply” that ESG has intentionally designed SpyHunter, in its “free scanner” mode, to generate false positives so as to induce customers to buy a license for the full version to eliminate ostensible malware.… Such allegations … could reasonably be understood as assertions of objectively verifiable facts.

In isolation, words used in Quietman7’s posts such as “scam,” “rogue,” “dubious,” and “ineffective” “would likely be too imprecise to be capable of being proven true or false.” But, in context, they became more concrete and reasonably precise.  Nor did the statement that SpyHunter was “previously listed as a rogue product” avoid a claim that SpyHunter was a rogue product.  The context made a clear implication that the underlying practices that gave rise to that earlier classification persisted, because Quietman7’s said that “some users have reported [ESG] still engage[s] in deceptive advertising.” And his statement that SpyHunter was not currently targeted for removal by other security programs was followed by an allegation that “security vendors which have tried [to target it] in the past have received threats of legal action for attempting to do so or agreed to legal settlements as a result of litigation brought forth by Enigma Software.” “High rate of false positives” could also be verified or falsified by comparing SpyHunter’s rate with those  of competing products. “That an accusation is ‘somewhat . . . vague and difficult to prove’ does  not mean that it is not objectively verifiable.”

Moreover, the forum pages made the alleged statements more plausibly “anchored in fact.”  Bleeping allegedly held out the pages as tightlyregulated by its member groups, and assured users that its “expert” staff members “can be trusted to give correct and understandable answers to [Bleeping’s] members’ questions.” Quietman7 himself allegedly wrote: “Folks come to Bleeping Computer for advice, recommendations and other assistance. We provide that  based on our experience and expertise so they can make an informed decision.”  “The manner of Quietman7’s written  presentation—one using footnotes and citations—conveyed further that his advice was based on  an ‘investigation’ of verifiable facts.”

Thus, the court distinguished these cases from others involving online forums that were presumed to be places for exaggerated and nonfactual speech.

On the allegations of the complaint, the court declined to find that ESG was a limited-purpose public figure, and considered allegations about its reputation for litigiousness irrelevant because Bleeding didn’t identify a public controversy related to the litigation.

The alleged statements, if false, would constitute libel per se because they imputed “some form of  fraud or misconduct or a general unfitness, incapacity, or inability to perform one’s duties.”  However, ESG didn’t state a claim for trade libel or commercial disparagement; the claim was duplicative of the defamation per se claim, and also failed to allege special damages.

Finally, ESG stated a claim under the Lanham Act.  The key issue here was “commercial  advertising or promotion,” and the key question was whether the statements at issue were “part of an organized campaign to penetrate the relevant market.”

Commercial speech: Quietman7’s posts were commercial speech.  “In nearly all of them, Quietman7, after lambasting ESG’s SpyHunter, recommends that the  reader ‘remove [that] program and replace it with a trustworthy alternative,’ such as  Malwarebytes Anti-Malware and other Affiliate products.”  By promoting affiliate products, these posts were unmistakably ads, and went even further by providing purchase links.  Bleeping had an economic incentive to do this.

Further, the complaint sufficiently alleged that Quietman7’s posts were part of “an organized campaign by Bleeping to penetrate the market for anti-malware products” by repeating or linking to negative reviews of SpyHunter “any time a new forum topic mention[ed] or inquir[ed] about ESG,” not to mention removing pro-ESG posts by users.  “Reactive disparagement” could be sufficient if it reached enough potential consumers.  Given that Bleeping advertises itself as a “premier destination” for computer users seeking information about computer technology and recommendations regarding malware removal, and that the posts could be viewed by the “[more than] 3.5 million unique visitors [that visit Bleeping’s website each] month,” that was enough.

No competition between the parties was required after Lexmark, and anyway, if it were required, the court held that the affiliate relationship with ESG’s competitors sufficed. 

As for injury, the complaint alleged that Bleeping’s members often didn’t know the basics underlying computer issues, and relied on Bleeping’s representations, a fact that Bleeping touted.  “After disparaging ESG and SpyHunter4, Quietman7 trumpeted that ‘[s]ince we [Bleeping] do not recommend this program [SpyHunter], I doubt that  any of our members use it.’” 

Tuesday, July 12, 2016

Discoverable falsity is immaterial to sophisticated consumers

Reed Const. Data Inc. v. McGraw-Hill Companies, Inc., 638 Fed.Appx. 43 (10th Cir. 2016)

Allegedly false claims about the quality of construction project data offered by these competitors were, even if false, not material to consumers, because the consumers were sophisticated.  “Discovery revealed only one customer who arguably relied upon McGraw–Hill’s advertising in deciding between Reed and McGraw–Hill, while numerous other customers testified that they discounted the companies’ representations as to their own products and conducted independent evaluations.”  Even though McGraw-Hill’s marketing professionals “professed great enthusiasm for the advertising campaign at issue, the evidence from consumers makes clear that the market of sophisticated consumers relying largely on face-to-face sales was unmoved.”  Thus, no reasonable jury could have found materiality.

Monday, July 11, 2016

Pom and circumstance: Pom Wonderful wins against Pur Pom

Pom Wonderful LLC v. Hubbard, No. 13-06917, 2016 WL 3621281 (C.D. Cal. Jun. 29, 2016)

Disclosure: I consulted with Pom on an earlier iteration of this litigation, though I have not been involved subsequently.  Even when courts in the Ninth Circuit get outcomes right, their reasoning is often head-scratching, and this case is no exception.

Pom sued Hubbard and his company for trademark infringement over its PUR Pǒm flavored beberages.  The district court initially denied Pom’s motion for a preliminary injunction; the court of appeals reversed, but the district court again denied a preliminary injunction given the high standard set by Herb Reed.  Now we’re at summary judgment, where Hubbard counterclaimed for cancellation of Pom’s marks on various grounds.  Pom won summary judgment; Hubbard lost. The court included lots of pictures, which is great!

The parties’ products are sold in single serve containers in the refrigerated sections of supermarkets, at a retail price of $1.99 for POM Wonderful pomegranate juice and $2.00 for PUR Pǒm.

The parties' marks as used

Hubbard argued that Pom abandoned its standard character mark by only ever using a version with a heart in the place of the “o” in Pom, which it separately registered as a stylized mark. The court held that use of the stylized mark also constituted use of the standard character mark, and thus there was no abandonment.  The parties appear to think that abandonment is important because a standard character mark affords a registrant “a broader scope of coverage” compared to a stylized mark (citing McCarthy), even though that doesn’t actually affect the infringement analysis.  The court cites a number of registration proceedings/rulings about the significance of a standard character mark in the registration process, as well as the Ninth Circuit’s statement in this case, that the “‘POM’ standard character mark is extremely broad, covering the word in all types of depictions.” Pom Wonderful LLC v. Hubbard, 775 F.3d 1118, 1125 (9th Cir. 2014).  But then it went on to ignore that in the infringement analysis, focusing on the similarity between the mark Pom uses and the mark Hubbard uses.
Pom's stylized mark
If the specimen of use shows a display of the standard characters “in a distinctive manner that changes the meaning or overall commercial impression of the mark,” then the standard character mark can’t stand.  The PTO allows a stylized version to be separately registered if “the word [that forms the standard character mark] itself creates a commercial impression separate and apart from the designs in the letters.” The TMEP says: “If a mark remains the same in essence and is recognizable regardless of the form or manner of display that is presented, displaying the mark in standard character format affords a quick and efficient way of showing the essence of the mark.”

The TTAB allowed a standard character registration for OROWEAT with the specimen shown below, because the word “creates a commercial impression separate and apart from the merely ancillary design with which it is associated.”

The same with SPECTRAMET, even though the specimen depicted a stylized “C” consisting of “an arrow within an arrow in contrasting shades, in which the outer arrow is dark and surrounding the inner arrow in white.” 

Given this precedent, the court thought the result here was clearly mandated, because “POM” created a distinct commercial impression; the stylized lettering “does not alter the pronunciation or perception of the word; the standard character mark is both aurally and visually indistinguishable from the mark bearing a heart-shaped ‘O.’”

The TTAB’s contrary decision about the version of FOSSIL shown below was very different: the rights conferred by the standard character mark “FOSSIL” did not cover use of the mark coupled with additional words inside an oval.

The court then granted Pom summary judgment on Hubbard’s argument that the term “pom” was generic for pomegranates.  Hubbard submitted one Pom Wonderful advertisement and evidence of third-party use of the term “pom,” but the court found this failed to create a triable issue of fact, given Hubbard’s burden of proof.  Pom’s own generic use of the term was not repeated and consistent; it was one ad from 2002 that said, “The POM stands for pomegranate.” This single, isolated incident was insufficient.

As for third-party use, Hubbard testified in a declaration that he googled  “pom flavor,” which yielded 52,000 pages of results. He searched the first ten pages and located numerous generic uses in which third parties referenced “pom” as shorthand for pomegranate. Pom has also opposed 32 third-party applications with the USPTO to register trademarks containing the word “pom” as a component of the mark.

The Google search didn’t show anything about whether the term was generic when Hubbard’s product entered the market, in 2013, which was the relevant date for determining genericity.  Also, Hubbard’s URL list dump was unexplained and unanalyzed.  “It is impossible to determine solely from a series of hyperlinks whether competitors are actually using the term ‘pom’ as a proxy for pomegranate or whether these third-party references simply use ‘pom’ in a descriptive manner to designate the pomegranate flavor of their products.”  Hubbard also didn’t explain the relevance of the 32 trademark applications, some of which clearly made no reference to pomegranate, such as “Pom Poms” for cookies in the shape of pom poms.

This “anemic” showing didn’t create a triable issue of fact on genericness.

The parties' beverage containers

Pom’s trademark infringement claim: The court, unfortunately, found that “Pom” was suggestive because it “requires consumers to exercise some imagination to ascertain the nature of Pom Wonderful’s products.”  At this point, I guess I have to say this is not the test outside the 9th Circuit.  Everywhere else does it right: you don’t ascertain conceptual distinctiveness without considering the goods or services.  Is “pomegranate” inherently distinctive?  Well, that depends on what it’s for!  I might have to use imagination to guess that it was for computers, but not for beverages.

This error has limited consequence here because (a) the court considered suggestive marks “presumptively weak” and (b) Pom showed marketplace strength through ad expenditures and other evidence.

Similarities in the marks “abound[ed].”  The letters were the same; both had style variations on the “o,” a heart and a diacritical; they both used uniform casing (all caps and all lower case); they were both in white print on a dark maroon background.  Sound and meaning were also similar/semantically identical.  There were differences in sizes, fonts, and capitalization, as well as the emphasis given to the marks; the Pur product used a smaller “Pǒm” mark near the bottom of the can.  But overall the similarities made this factor weigh in Pom’s favor.

The goods were closely related, the marketing channels overlap (both were even at Albertson’s stores at one point), the degree of consumer care was low, and the remaining factors weren’t important under the circumstances—intent is minimally important, and no evidence of actual confusion is required. Five of the Sleekcraft factors “overwhelmingly” weighed in favor of Pom, and the only one that weighed in favor of Hubbard was intent.

The court then rejected Hubbard’s descriptive fair use defense.  The court first ruled that “pom” didn’t have a descriptive meaning, which seems really inconsistent with its treatment of the Google search results above, not to mention the classification of “pom” as suggestive; the court thought that, because “pom” didn’t have a dictionary definition, it couldn’t be used descriptively, “as it carries no inherent meaning or significance beyond its function as a registered trademark.”

Even if it could be used descriptively, the court (either failing to notice KP Permanent or, perhaps more realistically, doing what courts in the 9th Circuit do when confronted with KP Permanent) held that, in the Ninth Circuit, descriptive fair use is unavailable when there’s a likelihood of confusion.

Questionable branding

Not exactly on topic, but funny: Trader Joe's often uses some signals about what national brands one can compare its house products to. Here, while Cheerios and Spaghettios are hard to confuse, the result is two different kinds of Joe's O's, which could produce pretty funny results if people aren't paying attention.  Self-dilution for Joe's O's?

Joe's O's

Joe's O's compared to Cheerios
Also Joe's O's (compare to Spaghettios)

7th Circuit affirms rare right of publicity loss based on ad

Martin v. Living Essentials, LLC, No. 16-1370, --- Fed.Appx. ---- (7th Cir. Jun. 30, 2016)

The Seventh Circuit knocked this affirmance out quickly—here’s my discussion of the Jan. 2016 district court decision.

Guinness World Records lists Johannes “Ted” Martin as the open singles champion for consecutive kicks of a football; his record has stood since 1997. A 2013 Living Essentials energy shot ad featured “an actor who boasts that in just five hours—all because of 5-hour ENERGY—he disproved Einstein’s theory of relativity, swam the English Channel twice, found Bigfoot, and ‘mastered origami while beating the record for Hacky Sack.’ The actor, not to be mistaken for the 56-year-old Martin, appears to be folding an origami animal while kicking two footbags, not one.”

Martin contended that the reference to “beating the record” was a reference to him, and thus an unlawful commercial use of his identity, also tarnishing his reputation by suggesting that his record stemmed from performance-enhancing drugs.  The district court found that the ad was puffery, but Martin argued that he was bringing a false association/endorsement claim. Citing the execrable White v. Samsung, the court reasoned that, “With advertising, even a parody of a celebrity can trigger liability; the critical question is whether consumers are likely to be confused and believe that the aggrieved party endorses or approves of a product.”

The court of appeals found that Martin’s theory was “not reasonable.”  “[W]e cannot imagine how this ad would confuse anyone into thinking that Martin himself endorses 5-hour ENERGY or that his use of the caffeinated drink explains a record set before the product came to market.”  (But it’s plausible that consumers would think that Vanna White endorsed Samsung because a letter-turning blonde robot appeared in its ads?)  The mention of Hacky Sack was “sandwiched between obviously absurd achievements.”  Moreover, “the actor cannot be accused of impersonating Martin, since he brags of besting, not holding for years, a footbag record,” and Martin didn’t claim to have achieved his title while creating origami animals.  Furthermore, there was no reason to assume that it was Martin’s record that had been beaten; other records exist, including for kicks of two footbags (as shown in the ad).  Nor did Martin plausibly allege that he had “the degree of public notoriety necessary to support a claim under the Lanham Act for false endorsement.” 

Moreover, the district court properly held that Martin failed to state a claim under the Illinois Right of Publicity Act.  That law broadly defines “identity” to mean “any attribute ... that serves to identify that individual to an ordinary, reasonable viewer or listener.”  But the phrase “the record for Hacky Sack” is too ambiguous to call an “attribute” of Martin. “[N]o reasonable viewer would interpret the commercial for 5-hour ENERGY as referring to Martin, and because he does not plausibly allege that Living Essentials invoked his ‘identity’ through the actor’s statement, Martin fails to state a claim under IRPA.”  Note the implication: if there were only one prior record holder, another person’s claim to have beaten that record—even if truthful—would seem to be an appropriation of the loser’s identity.  That seems … overbroad.

Friday, July 08, 2016

Update: that's not actually the latest in B&B!

My mistake. The latest is that after the ruling I just wrote about, there was a jury trial, which produced findings that (1) Hargis infringed the federally registered mark, (2) there were no damages/profits awardable from the infringement and the infringement was not willful, (3) the registration/incontestability was procured by fraud, and (4) Hargis prevailed on its false advertising/false designation of origin counterclaims.  Because of (3), the judge granted judgment as a matter of law to Hargis on (1), since fraud on the PTO invalidates the entire registration.

B&B Hardware Inc. v. Hargis Indus. Inc., 06-cv-01654 (E.D. Ark. Jun. 26, 2016)

The court explained that, absent the benefits of incontestability, Hargis could’ve shown that the Sealtight mark was descriptive without secondary meaning.  Indeed, it did so in a 2000 trial, but then B&B renewed and filed for incontestability.  Then B&B sued again in 2006, and the court of appeals found that preclusion didn’t apply because of the change in the registration’s circumstances from contestable to incontestable.  (Should that affidavit even have been filed?  How could it possibly be correct to say there were no final determinations adverse to B&B’s ownership of a valid mark?  The 2000 trial sounds an awful lot like a final judgment that the mark wasn’t valid.  Something has gone very wrong with incontestability.)   Hargis thus couldn’t repeat its mere descriptiveness argument, but it did prove fraud on the PTO, which removed the conclusiveness provided by incontestability.  “Without incontestability, B&B does not have a change in circumstances that allows it to escape claim preclusion because the jury in 2000 found that ‘Sealtight’ lacks secondary meaning.” 

Anyway, B&B wasn’t entitled to a remedy.  No injunction, because protecting B&B’s registration in the future was no longer possible; Sealtight wasn’t registered any more.  (This seems to skip over some issues surrounding likely confusion, but I find it hard to blame the court.)  Disgorgement was unavailable because it was subject to the principles of equity, which did not favor B&B.  There was no intentional infringement; there were no diverted sales because the parties don’t compete; and there was no palming off.  True, B&B was without another remedy, but that was its own fault for failing to renew; B&B didn’t delay in asserting rights and filed 43 days after its mark became incontestable; and the public interest was served by enforcing valid trademarks. But it would be “unfair to disgorge Hargis of its profits under unjust enrichment or deterrence rationales when B&B did not lose a single sale as a result of Hargis’s actions and Hargis’s infringement was unintentional.”  Even if the fraud on the PTO claim didn’t survive the (inevitable) appeal, there’d be no justification for disgorgement.

Guess what the latest development in B&B v. Hargis is?

B&B Hardware, Inc. v. Hargis Industries, Inc., No. 06CV01654, 2016 WL 3615833 (E.D. Ark. May 16, 2016)

So, despite all the commotion surrounding this case, B&B forgot to renew its registration, which was duly cancelled.  A cautionary story for clients!  Also, incontestability is a really big deal, which deserves to be much, much better policed.

As you may recall, B&B sells self-sealing fasteners for the aerospace industry under the mark “Sealtight.” Hargis sells fasteners for the construction trade under the mark “Sealtite.” As the Supreme Court said, the full story of the litigation “could fill a long, unhappy book.”  And here we go again, denying Hargis’ motion for judgment on the pleadings.

B&B registered Sealtight in 1993.  It opposed Hargis’s 1996 application; Hargis sought to cancel B&B’s mark, and then B&B sued for infringement.  A jury found in favor of Hargis, holding that B&B’s mark was “merely descriptive” and had not acquired a “secondary meaning.” Hargis’s petition to cancel B&B’s trademark was dismissed in June 2003.  In 2006, B&B filed a declaration of incontestability, “negat[ing] the first jury’s findings on descriptiveness and secondary meaning.”  B&B then sued again.  Before the second case went to the 2010 jury, the TTAB found a likelihood of confusion; the jury again found for Hargis on all claims.  But the Supreme Court held that TTAB decisions have preclusive effect!  Thus, the 2010 judgment was remanded for further proceedings, “including what remedies may be awarded for infringement.” The Eighth Circuit instructed the trial court to “give preclusive effect to the decision of the TTAB on likelihood of confusion.”

But then!  After the remand, “Hargis discovered that B&B failed to renew its registration, resulting in its cancellation some time after the 2010 trial.”  The PTO’s official record of the cancellation says the mark was cancelled on February 29, 2016, but Hargis argued that the cancellation occurred some time prior, which I suspect is true given ordinary PTO practice but have not specifically investigated.  The cancellation record is a ministerial act; the registration lapsed when the Section 8 deadline passed. See Land O' Lakes, Inc. v. Hugunin, 88 U.S.P.Q.2d 1957, 2008 T.T.A.B. Lexis 47, at *4–5 (T.T.A.B.2008) (precedential) (“[T]he date of expiration of application's registration is not dependent on the date the Office undertook the ministerial function of entering the cancellation into the USPTO database.”).

B&B since reapplied for registration, which is pending, but obviously can’t provide B&B with priority over Hargis even if it’s ultimately granted.  (If it is, because confusion with Hargis’s use is unlikely and, though preclusion applies in court to TTAB holdings, the PTO isn’t bound by prior rulings on different marks, then Hargis will have a good argument for its saga replacing Bleak House as the definititive account of ridiculous litigation; I haven’t even mentioned some of the details of what went on before.)

The district court confronted the question: now what?

First, B&B didn’t waive review of the non-infringement claims such as unfair competition, nor was it estopped from relitigating them or barred by the law of the case.  “Considering how intertwined ‘likelihood of confusion’ is with the other claims, it cannot be ruled that B&B waived or is estopped from re-litigating the other claims when it explicitly argued that such an important element was improperly decided.”  Nor did the law of the case govern, because B&B “was certainly a significant development that changed the game for both parties.”  And the trial court’s earlier error about preclusion “also affected the admissibility of evidence. B&B was limited by pretrial rulings on how the decision could be used during trial.”  (Query: why would the TTAB ruling be admissible now?  Of course the arguments for why it’s not relevant now have a different basis.)

Then, the court ruled, “the Lanham Act does not require a registrant to maintain [its] registration through to trial.”  Sections 32 and 43(a) have the same basic elements, except that incontestability is conclusive evidence of validity (subject to various defenses).  Hargis argued that B&B could no longer rely on its registration, because it doesn’t have one.  “B&B argues that its mark was registered during the period of infringement and its subsequent cancellation only changes the theory on which it can rely for the time after cancellation.”

Hargis argued that the words “registrant,” “registered mark,” and “registered on the principal register” in the Lanham Act all require B&B to maintain its registration for the duration of the suit, rather than simply possess it when Hargis allegedly infringed.  The court considered this an issue of first impression.  (I’m dubious of the court’s reasoning here.  Consider the situation where the registration is directly and successfully attacked.  The court properly orders the registration cancelled.  It’s beyond peradventure that the presumptions accorded the registration, although they applied at the outset of the case, can’t still be accorded the former registration.  The registration did exist when the litigation started, but now it doesn’t.  Even if the mark is cancelled for reasons that are not absolute bars, this should be true.  Consider, for example, fraud on the PTO: the mark is in theory registrable, but the registrant deliberately lied to register it with the intent to deceive the PTO, then sues someone else.  The fraud is proven and the registration is cancelled.  The plaintiff claims that it still has common-law rights (say, secondary meaning for a descriptive term).  The defendant shouldn’t still confront the presumption of ownership/validity that existed at the outset of the case.)

The court reasoned that, when an unregistered mark becomes registered during the pendency of the litigation, that doesn’t change the fact that it was unregistered at the outset and thus no burden-shifting from the trademark claimant is appropriate.  But that seems completely different to me, because the initial basis of the claimant’s rights—its unregistered common-law rights—is still present in the case, and those rights simply continue.  It would be completely unfair to, say, a §33(b) remote good faith user to say that the registration relates back to the initiation of the case, when a key point of registration is to fix the date on which rights became nationwide as a matter of law.

But, for the very same reason, the result should be different here: registration provides statutory rights that are explicitly provided over and above the common law, and it was those things—nationwide priority, the very broad description of the goods in the specification, and, for incontestability, distinctiveness as a matter of law—that allowed B&B priority and victory in its likely confusion claim.  Those are now gone from B&B’s arsenal.  B&B should be able to claim whatever common-law priority it has, including rights concurrent with its federal registration, but the cancelled registration ought to be treated as if it had never existed.   

However, relying on the analogy to unregistered marks that become registered, the court held that “registration only impacts the theory of recovery during periods of infringement.”  The court also considered that its rationale was in line with constructive notice: even a nonrenewed registration provided constructive notice during the period of registration.  Action Temp. Serv., Inc. v. Labor Force, Inc., 870 F.2d 1563, 1566 (Fed. Cir. 1989).

But constructive notice and existence of rights are pretty different.  Indeed, the Action Temp court continued that the TTAB’s conclusion that an initially unlawful adoption of a mark stayed unlawful was “flawed.”  Though use during the pendency of another’s now-cancelled registration wasn’t “lawful” in the sense necessary to support a concurrent use registration, that was only one part of the question the TTAB had to resolve on remand, given that mere knowledge of a prior user isn’t itself bad faith precluding registration.  See also Action Temp, 870 F.2d at 1566 n.9 (citing Anderson, Clayton & Co. v. Krier, 478 F.2d 1246, 1248 (C.C.P.A. 1973), for the proposition that “whatever benefits a federal registration confers are lost when that registration is canceled”).

Unfortunately, the B&B court’s research failed to disclose the cases—few of them, to be sure—reaching the opposite conclusion.  Spin Master, Ltd. v. Zobmondo Entertainment, LLC, 2012 WL 8134013 (C.D. Cal. Jun. 18, 2012), for example, has some striking similarities with this case.  The Ninth Circuit held that plaintiffs’ registration, which was granted without a requirement of showing secondary meaning, entitled it to a presumption of inherent distinctiveness and therefore reversed a grant of summary judgment to defendants. While the case was back before the district court, however, the time for filing the section 8 affidavit expired.  Plaintiffs argued that the presumption of validity/inherent distinctiveness still applied to the time the registration was in effect.  The court disagreed, concluding that “[t]he statutory evidentiary presumptions attendant to a registration disappear when the registration lapses, including a lapse caused by the failure to file a timely Section 8 affidavit.” 

Along with a few other cases, the Zobmondo court pointed to TTAB practice of rejecting expired registrations as evidence of anything, including protectability, validity, use, likely confusion, or anything other than that the registration issued.  “When a registration lapses, the ‘applicant is now in much the same position it would have been had the prior registration never issued ....’”  See, e.g., In re Compania Tabacalera Santiaguense, S.A., 1999 WL 546830, at *3 (T.T.A.B. July 21, 1999) (“Once a registration has been cancelled under the provisions of Section 8 of the Trademark Act, however, it cannot serve as evidence of any existing rights in the mark.… By failing to timely file a Section 8 affidavit, applicant has opened up its mark to reexamination under present standards.”); In re Compania Tabacalera Santiaguense, S.A ., 1999 WL 546830, at *3 (T.T.A.B. July 21, 1999) (non-precedential) (“Once a registration has been cancelled under the provisions of Section 8 of the Trademark Act ... it cannot serve as evidence of any existing rights in the mark.”); cf. Kellogg Company v. Western Family Foods, Inc., 209 U.S.P.Q. 440 (T.T.A.B. 1980) (explaining that TTAB makes an exception to its practice and takes judicial notice of cancellations of relevant registrations that occur during the pendency of an opposition proceeding, because of the potential material effect of cancellation on parties’ rights).

In sum, the Zobmondo court held, the expired registration “is treated as never having been issued,” which is “a bright-line rule that does not turn on the factual and procedural nuances of a particular case. Thus, when the ‘830 registration lapsed, the statutory presumption of validity evaporated.”  As a result, the plaintiffs would now have to proceed without any rights conferred by registration, despite their victory at the court of appeals based on their registration when suit began.  See also Advance Magazine Publ’rs, Inc. v. Norris, 627 F.Supp.2d 103, 114 n. 2 (S.D.N.Y. 2008) (finding that the presumption of validity evaporated upon expiration of registration two years after suit was filed and “affording neither presumptions nor evidentiary advantages to any party”). 

The reasoning in ZipSleeve, LLC v. West Marine, Inc., 2015 WL 2380990 (D. Or. May 19, 2015), relies on Lexmark but reaches the same conclusion:

ZipSleeve was indeed the “registrant” of the registered trademark “ZIPSLEEVE” when West Marine allegedly began its infringing activity in 2011. ZipSleeve accordingly argues that its right to sue under § 1114 accrued at that time—and that the cancellation of the mark [for failure to renew during the pendency of the case] did not extinguish that right….
A statutory cause of action “extends only to plaintiffs whose interests fall within the zone of interests protected by the law invoked.” Lexmark, 134 S.Ct. at 1388. The constructive notice to competitors and evidentiary presumptions afforded the registrant are among the most important rights a trademark registrant has under the Lanham Act. By contrast, the right to exclude others from use of the mark comes not from registration, but merely from priority of use of a protectable mark. And that right may be protected, in the absence of a registered trademark, using § 1125(a). The weight of authority thus clearly indicates that Congress sought to protect only the interests of plaintiffs with registered trademarks under § 1114. Plaintiffs with unregistered trademarks are protected by § 1125(a), but do not fall within the zone of interests protected by § 1114. Therefore, the owner of a mark that was valid when issued but which has since lapsed has no cause of action under § 1114—not even for infringement that occurred during the lifetime of the mark.

The B&B district court’s conclusion was, by contrast, that:

“registrant” and “registered mark” do not refer to a claimant’s present condition, but only the situation at the time of infringement. Hargis’s argument inserts words into the statute, as the Lanham Act does not say that a mark must be “presently registered” or “currently registered.” B&B’s registration was not cancelled because it was obtained improperly, but merely expired when it failed to renew. 

I don’t understand that distinction, which does not explain why someone with a mark cancelled for a substantive reason wouldn’t also have been the “registrant” at the time the lawsuit began.  The statute also doesn't say "legitimate/ly" or "valid/ly" before registrant/registered.

Anyway, the court went on to hold that B&B’s requested remedies, an injunction and money damages, were both still available. An injunction was still available to prevent injury given that B&B filed a new registration application seeking expedited review.  “Should Hargis be found liable at trial, the parties may argue whether an injunction is appropriate.”  As for damages, willful infringement wasn’t a prerequisite; the court found that the statute was straightforward because of the more recently added language requiring willfulness for damages caused by dilution.  And anyway, there was a question of material fact:

Viewed in the light most favorable to B&B, Hargis knew of B&B’s concern for the confusing marks since the mid-1990s, and even after Hargis won at trial in 2000, Hargis knew that the PTO deemed B&B’s mark worthy of registration. Hargis had knowledge of B&B’s registration, and thus B&B’s right of exclusive ownership, and Hargis admits that it was aware of the PTO’s later determination of incontestability. Based on this limited record, this is sufficient to create a jury question on whether Hargis willfully infringed on B&B’s mark.

(Is that really sufficient for willfulness as to infringement? Ah well.)  Questions about equitable defenses also would have to be resolved after liability, if it were found.

Thursday, July 07, 2016

It depends on what the meaning of “is” is: Section 15 declarations and pending challenges

It turns out that Paleteria La Michoacana, Inc. v. Productos Lacteos Tocumbo S.A. De C.V., 2016 WL 3034150,  No. 11–1623 (D.D.C. May 27, 2016), is even more of a hairball than I realized.  The thorny legal and factual issues as delineated by the district court are plentiful enough, and at this point in the case there are also procedural questions about timeliness of arguments and the like which I can’t even begin to opine on.  

It turns out that there are also what appears to me to be mistaken Section 15 declarations wrongly accepted by the PTO.  Given that (1) the court found that the marks at the core of the controversy were geographically descriptive (whether the image of the Indian Girl was descriptive is a little unclear, so that too is an issue, but the decision is clear that the word marks are and its rationale would seem at least potentially applicable to the Indian Girl as well), and (2) the incontestability of one side’s marks was part of what let it prevail on priority, the PTO’s invited error might have been consequential and this case is even more of an issue-spotter than I thought.

Here’s what apparently happened: Prolacto counterclaimed in 2012 for cancellation of PLM’s older registrations on the grounds of fraud and abandonment.  (I understand that there were strategic reasons not to counterclaim for mere descriptiveness, but now that creates one of the procedural issues.) The court granted summary judgment in favor of PLM on these counterclaims in September 2014, at which point PLM filed for incontestability for its registrations of the Indian Girl alone, Nos. 2,905,172 and 2,968,652.

As with the bead dog case, TSDR clearly shows that this lawsuit is pending right before the Section 15 affidavit, but nonetheless the PTO, which doesn't conduct substantive examination of Section 15 affidavits, accepted the affidavit.  That affidavit stated that there was “no proceeding involving said rights pending and not disposed of in either the U.S. Patent and Trademark Office or the courts” (emphasis added).  That was just not true.  The law and the TMEP refer to proceedings and not to individual claims for cancellation, and rightly so: if the judgment is nonfinal, then, for example, the challenger could appeal and the court of appeals could reverse the district court on the nonfinally resolved issue—except, if the Section 15 affidavit is accepted in between the district court and court of appeals stages, then the court of appeals can’t rule on a challenge to distinctiveness or priority any more! 

There are cases indicating that if the trademark owner is a plaintiff, and no counterclaim challenging registrability was filed before the declaration was submitted, that’s not a problem. See TMEP §1605.04 (“The USPTO does not consider a proceeding involving the mark in which the owner is the plaintiff, where there is no counterclaim involving the owner’s rights in the mark, to be a ‘proceeding involving these rights’ that would preclude the filing or acknowledgment of a §15 affidavit or declaration.”).  And that too makes sense, because the mere fact that the trademark owner is fighting alleged infringers shouldn’t keep it from incontestability; at the point that no counterclaim has been raised, there is no element of the proceeding challenging the trademark owner’s ownership/right to register.  But that’s a completely different situation than a nonfinally rejected challenge to registrability. To maintain otherwise seems to me an implausibly tendentious reading of the word “is” that is inconsistent with the concept of challenges that are “pending” though not finally disposed of.

First, is it fraud on the PTO to file, claiming that there’s no pending challenge, in such a circumstance? Because the standard for fraud is so high I would say: not if there was a misunderstanding of the law (or the facts, though in this case the same firm handled the registration and the litigation), even an unreasonable misunderstanding.  (Though I think the lawyer should know better.)  Thus, the registration itself isn’t invalid. 

But, in my opinion, the Section 15 declaration still has to be revoked because the statutory requirements for incontestabilty weren’t fulfilled, even though the registration itself survives.  Because there’s no examination, this is the only way to keep the register accurate.  See Nahshin v. Product Source International LLC, 107 U.S.P.Q.2d 1257, 1258 n.1, 2013 WL 6040375 (T.T.A.B. 2013) (§ 15 affidavit filed after a petition to cancel was filed has no legal effect); cf. Duffy-Mott Co., Inc. v. Cumberland Packing Co., 424 F.2d 1095, 1100 (C.C.P.A. 1970) (noting that, because incontestability amounts to a “new right” as to the covered mark/goods, policing incontestability is of separate importance versus registration generally). I would think that the PTO, district court, or court of appeals, when informed of the problem, should revoke the acknowledgement of the declaration/order it revoked, as the PTO did with the bead dogs.

Here are the cases cited by PLM defending its position that it could take advantage of the gap between district court and appellate proceedings to file its affidavit: Sunrise Jewelry Mfg. Corp. v. Fred S.A., 175 F.3d 1322, 1327 (Fed. Cir. 1999) (no proceeding involving rights in the mark was pending because at the time section 15 affidavit was filed, no counterclaim challenging registration or validity of mark had yet been filed, though one was filed in between the filing of the affidavit and its acceptance by the PTO); Holley Perf. Prods., Inc. v. Quick Fuel Tech., Inc., 624 F. Supp. 2d 610, 616 (W.D. Ky. 2008) (section 15 affidavit of incontestability properly filed where counterclaim had not yet been filed); Levi Strauss & Co. v. Esprit US Distribution Ltd., 588 F. Supp. 2d 1076, 1083 (N.D. Cal. 2008) (no fraud where affidavit filer failed to investigate whether there was a pending challenge); J. H. Chapman Grp. v. Chapman, No. 95 C 7716, 1996 U.S. Dist. LEXIS 899, at *8-9 (N.D. Ill. Jan. 30, 1996) (same where affidavit filer didn’t disclose that a challenge had been threatened but not filed); 3 McCarthy on Trademarks & Unfair Comp. § 19:140 (4th ed.) (no challenge is pending until counterclaim has been filed); 1-4 Gilson on Trademarks § 4.03(2)(b) (Matthew Bender & Co. 2016) (reference to ability to file affidavit upon “successful termination of the litigation”; PLM's brief added the words “on the counterclaim challenging the registered mark”).

Other thoughts?  (I should disclose that PLM cites my earlier post on the case in arguing to the court that the judgment should be corrected because it doesn't make sense to cancel one of PLM's marks based on the existence of marks that infringe other, similar PLM marks.  I doubt it will want to cite this one.)