Consumer Advertising Law Blog

Expedited Appeal in Lanham Act Cat Litter Case Will Address Sensory Perception Testing and Key Ingredient Testing

On January 17, 2012, the Second Circuit granted Clorox’s motion for expedited appeal in the cat litter case (Church & Dwight Co., Inc. v. The Clorox Company), which centers on sensory perception testing and key ingredient testing (along with other issues, including necessary implication and presumption of irreparable harm).  Earlier this month, Judge Jed Rakoff of the Southern District of New York preliminarily enjoined Clorox from airing a commercial claiming that carbon used in its Fresh Step cat litter was more effective at absorbing odors than the baking soda (which happens to be the active ingredient in Church & Dwight’s cat litter, although C&D products are not mentioned in the ad).  The court found that Clorox’s sensory perception test that was cited in the ad, using human “sniffers”, was not sufficiently reliable to permit (a) the explicit claim that the key ingredient (carbon) is superior to baking soda in controlling odor; and (b) the necessarily-implied claim that the overall cat litter product is superior at odor control based on the test.  The decision has some vulnerabilities on important issues. 

The Parties & Products.  The case concerned Clorox’s “Fresh Step” cat litter and Church & Dwight’s Arm & Hammer cat litter products, Double Duty and Super Scoop.  The Clorox product uses carbon as the odor fighting ingredient whereas Church & Dwight’s products use baking soda.

The Commercial.  The Clorox commercial features two laboratory beakers (one represented as “Fresh Step” which is filled with a black substance labeled “carbon”; and the other unidentified by brand, but filled with a white substance labeled as “baking soda”).  Green gas then fills the beakers, and rapidly evaporates in the carbon beaker but barely changes in the baking soda beaker.  Small text appears during this display that says “dramatization” and “based on a sensory lab test.”

The Claim.  A voiceover in the commercial states:  “we make Fresh Step scoopable litter with carbon, which is more effective in absorbing odors than baking soda.”  The express claim is limited to carbon and baking soda, not the cat litter products.

The Sensory Test.  The sensory lab test relied upon by Clorox involved separate sealed jars of cat urine and of cat feces, which were kept: (a) uncovered; (b) covered with carbon; or (c) covered with baking soda.  Each jar was permitted to mellow for 24 hours, and was then placed in a “booth” that replicated a small room (where cat boxes are normally kept).  The smell of the booth was later evaluated by eleven human panelists trained by Clorox.  The panelists would open a portal to the booth, which was approximately 6 feet away from the stimulus.  The results reflected that carbon was 32% superior to baking soda in reducing odor.

You Can’t Use This "Crane" To Build A Case Against An “Adjacent” Product Manufacturer

In recent years, some California appellate courts held that a product manufacturer or seller is obliged to warn consumers against foreseeable risks associated with dangerous products with which its product will necessarily be used. Where a manufacturer could plausibly be alleged to be aware of possible harms stemming from what are sometimes termed “adjacent” products, these cases created a potential basis for consumer fraud claims. In O’Neil v. Crane Co., the California Supreme Court unanimously rejected these opinions, and provided helpful guidance on whether, and in what circumstances, a business may be held liable for harms attributable to an “adjacent” product. 

“Adjacent” products include replacement components not manufactured by the original maker of the product or other, related products which are expected or required to be used in conjunction with another product. In Crane, the court of appeal followed earlier opinions holding that manufacturers of valves and pumps used in US Navy vessels could be liable for failure to warn servicemen who later handled replacement asbestos insulation not manufactured by the defendants. The Supreme Court reversed, notwithstanding that the harms suffered by the plaintiffs resulted from the foreseeable handling of asbestos products in connection with defendants’ equipment. 

Emphasizing that “foreseeability alone is not sufficient to create . . . a tort duty,” the court concluded that “requir[ing] manufacturers to investigate potential risks of all other products and replacement parts that might foreseeably be used with their own products and warn about all of these risks . . . would impose an excessive and unrealistic burden.”  The court further recognized that a contrary rule would have the “perverse[] [effect of] . . . inundating users with excessive warnings.”

The Supreme Court limited the breadth of its holding by identifying two circumstances in which claims based on adjacent products might nonetheless lie against a manufacturer.  These exceptions involve circumstances in which “the defendant bears some direct responsibility for the harm” because

1. the defendant’s own product “contributed substantially to the harm” or
2. the defendant “participated substantially in creating a harmful combined use of the products.”

Companies whose products may be used in conjunction with other products may wish to evaluate whether either exception might potentially come into play and, if so, take the Crane holding into consideration in fashioning disclosures and warnings directed to consumers.

- Matthew Heartney and Alex Beroukhim

Ninth Circuit Puts the Brakes on Nationwide Class of Auto Purchasers

A January 12, 2012 decision by the Ninth Circuit has established significant limits on the circumstances in which California’s consumer protection laws can apply to transactions in other states. At the same time, the decision establishes a useful precedent for defendants who seek to block certification of nationwide classes of consumers under state consumer protection laws in any jurisdiction. 

The Ninth Circuit case -- Mazza v. American Honda Motor Co. -- was brought by consumers from Florida and Maryland who purchased Acura RL cars equipped with the so-called Collision Mitigation Braking System (CMBS). The plaintiffs pointed to a product brochure, television commercials, magazine advertisements, Acura’s own website and magazine, and the owner’s manual, all of which, plaintiffs said, marketed CMBS’s functionality in a misleading way. Even though the plaintiffs bought their cars in Florida and Maryland, they argued that the advertising, which was created in California, violated California’s expansive and plaintiff-friendly consumer protection laws (the Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act). The district court certified a nationwide class of consumers who purchased or leased new or used Acura RL cars with CMBS, finding that the plaintiffs met their burden for class certification under Federal Rule of Civil Procedure 23. 

A panel of the Ninth Circuit vacated the class in a 2-1 decision (Senior Judge Dorothy Nelson dissented), finding that the lower court misapplied the “predominance” prong of Rule 23(b)(3), which requires that the questions of law or fact common to class members predominate over any questions affecting only the individual members. As to the questions of law, the court ruled that each class member’s consumer protection claim must be governed by the consumer protection laws of the jurisdiction in which the transaction took place, not only California. The court pointed to material conflicts between the consumer protection laws of California and other states (such as a scienter requirement of some state consumer protection laws but not others). Then, with sweeping language, the court explained why each state has an interest in having its own consumer protection laws apply to conduct within its borders:

More expansive consumer protection measures may mean more or greater commercial liability, which in turn may result in higher prices for consumers or a decrease in product availability. . . .  As it is the various states of our union that may feel the impact of such effects, it is the policy makers within those states, within their legislatures and, at least in exception or occasional cases where there are gaps in legislations, within their state supreme courts, who are entitled to set the proper balance and boundaries between maintaining consumer protection, on the one hand, and encouraging an attractive business climate, on the other hand.

The Ninth Circuit further drew upon the principles of federalism underlying the enactment of the 2005 Class Action Fairness Act, and noted that, if California law were applied to the entire class, foreign states would be impaired in their ability to calibrate liability to foster commerce. As the court concluded, “[t]he district court’s reasoning elevated all states’ interests in consumer protection to a superordinate level, while ignoring or giving too little attention to each state’s interest in promoting business.”  These words will no doubt be music to the ears of the defense bar. 

Having concluded that common questions of law did not predominate, the Court turned to whether common issues of fact predominated. In this analysis, the Court pointed to the “fairly limited” nature of the CMBS advertising. This fell short of an “extensive and long-term” advertising campaign needed to establish a common questions of fact. Thus, the court concluded, even if the class was restricted only to those who purchased or leased their car in California, common issues of fact would not predominate because the class includes members who were not exposed to, and therefore could not have relied on, Honda’s allegedly misleading advertisements.

There are two major takeaways from this decision. First, the conflict of law analysis represents a serious blow to the nationalization of California consumer protection laws. As this blog has noted before (e.g., here and here), California’s laws allowing private damages suits over even the most minor or technical omissions have made it a breeding ground for consumer class action litigation. And plaintiffs’ lawyers have worked hard to make those laws apply to consumer transactions in other states so long as the transaction has some arguable nexus to California. The Ninth Circuit’s decision should greatly curtail that trend, as it found that California’s consumer protection laws are not so far-reaching. Second, putative classes of consumers from multiple states will find it harder to have a single state’s consumer protection law cover all of their claims, which, in turn, will make it harder for the consumers to get nationwide classes certified in any jurisdiction. Undoubtedly, Mazza will be cited by product liability defendants in class certification proceedings throughout the country.

As a final observation, we find it interesting how little a role the Supreme Court’s  decision last June in Wal-Mart v. Dukes played in the decision. It seems pretty clear the panel would have viewed Mazza the same way even before Wal-Mart. Indeed, the only significant place Wal-Mart was cited was where the majority distinguished it by saying the Mazza plaintiffs, unlike the Wal-Mart plaintiffs, satisfied Rule 23(a)(2)’s “commonality” requirement, which leads one to wonder whether the Ninth Circuit fully absorbed what Wal-Mart said about commonality. When Wal-Mart came down last summer, the conventional wisdom was that it was front-loading a predominance-like inquiry into “commonality.” But Mazza -- just like another recent class action decision out of California that we recently wrote about -- seems to go on applying commonality in the same way that courts did before Wal-Mart. 

 - Matt Eisenstein and Rob Katerberg

Google Defeats AdWords Class, But Has Wal-Mart Really Sunk In?

Last week, in In re Google Adwords Litigation, a federal judge in California issued a decision on class certification in a lawsuit brought by businesses that had placed ads through Google.  The plaintiffs alleged that Google acted unfairly and deceptively by charging them for ads appearing on low-quality, low-traffic websites where not many people would see them. Last week’s decision provides a window into how the standards announced by the Supreme Court in last summer’s keynote Wal-Mart v. Dukes decision are being carried out in the lower courts.

The Google court denied certification because plaintiffs failed to clear Rule 23(b)(3)’s “predominance” hurdle (the requirement that common issues of law or fact predominate over those that would have to be resolved on an individual basis). The court acknowledged that whether Google made misleading omissions was a common question. But the issue of damages to class members was another matter entirely.

Even the threshold question of “which advertisers among the hundreds of thousands of proposed class members are even entitled to restitution would require individual inquiries” because some class members did benefit economically from the ads.  For those who were entitled to restitution, calculation of the appropriate amount would be a quintessentially individual inquiry because the prices advertisers paid were determined through a dynamic auction process that priced each ad and viewer’s click uniquely. A number of courts have previously held that individual issues solely as to the amount of damages do not preclude certification, so the California court’s focus on this issue should be helpful to the defense in future consumer fraud and antitrust cases involving industries and products where pricing is individualized.

So this decision shows Wal-Mart is having an impact, right? Well, maybe, maybe not. The court’s “predominance” analysis relied mostly on pre-Wal-Mart jurisprudence and concepts (not surprisingly, as Wal-Mart was a (b)(2) class action where predominance was not required). Ironically, on the precise legal point where Wal-Mart really moved the needle – the rigor of the “commonality” requirement of Rule 23(a) – the Google court seemed largely unmoved by Wal-Mart’s teachings. The Google court held the plaintiffs to a rather low bar of simply articulating a common question: “whether Google’s alleged omissions were misleading to a reasonable AdWords customer.” That part of the opinion reads a lot like the check-the-box approach to commonality that lower courts routinely took before Wal-Mart’s admonition that while “any competently crafted class complaint literally raises common questions,” the real question is the “capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation.”

Even so, the ultimate result the court reached is certainly consistent with Wal-Mart’s tenor.  No doubt we will have many more opportunities in the months ahead to see how Wal-Mart is playing into lower court class certification decisions.    

- Robert Katerberg

Seventh Circuit Announces Heightened Scrutiny of Class Action Counsel’s Conduct

In a decision last week called Creative Montessori v. Ashford Gear, the Seventh Circuit vacated a district court order certifying a class in a “junk fax” case under the Telephone Consumer Protection Act.  The appellate court rested that action on the relatively rare basis that alleged misconduct by plaintiffs’ counsel made them inadequate representatives of the class. The decision, written by influential judge Richard Posner, may augur more rigorous scrutiny of class counsel’s litigation conduct in future cases, giving defense counsel a new weapon against certification.

At issue in the case was defendant Ashford Gear’s use of mass faxes to advertise its goods, which allegedly violated the Act with its $500-per-fax damages provision. It is usually relatively simple and routine to get these cases certified. But this time, there was a problem. According to the Seventh Circuit, the law firm bringing the case had engaged in some questionable practices in recruiting the named plaintiff, a private school. First, the law firm allegedly tricked a marketing agent into disclosing the defendant’s identity. Second, when the law firm contacted the named plaintiff, it said “you are likely to be a member of the class,” which the Seventh Circuit found misleadingly implied there was already a certified class.

The Seventh Circuit was very troubled by these practices, finding “a lack of integrity that casts serious doubt on [the lawyers’] trustworthiness as representatives of the class.” This concern is at its zenith, the court said, “when the class members are consumers, who ordinarily lack both the monetary stake and the sophistication in legal and commercial matters that would motivate and enable them to monitor the efforts of class counsel on their behalf.”

In the past, courts have often treated class action lawyers more leniently, as did the district court in this case, relying on a 1972 Seventh Circuit precedent that had said “only the most egregious misconduct” could justify denying certification. No longer. Last week’s decision jettisons that old standard and serves notice on the plaintiffs’ bar that their conduct -- particularly in connection with ginning up the class action in the first instance -- will be open to scrutiny and may preclude certification.

So here we have yet another federal decision tightening up standards for class certification in federal courts. Indeed, just as Wal-Mart v. Dukes breathed new life into the so-called “commonality” requirement of Rule 23(a)(2), Creative Montessori could be seen as reinvigorating the adequacy-of-counsel requirement of Rule 23(a)(4) and (g), which had seldom been a major battleground in previous class certification wars. Defense counsel may also have more leeway now to take discovery of the circumstances of plaintiffs’ counsel’s identification and recruitment of the named plaintiffs, an area that has sometimes been off limits to them in the past.

- Robert Katerberg

Seventh Circuit Holds State AG Parens Patriae Actions Not Removable Under CAFA

To curb class action abuse, the Class Action Fairness Act of 2005 expanded the circumstances in which class actions filed in state court can be removed to federal court.  Over the past few years, a hotly debated issue has been whether certain “parens patriae” suits by state attorneys general -- in which the state seeks to recover damages on behalf of a large number of its citizens -- are removable as the functional equivalent “class actions” or “mass actions” under CAFA.  Last Friday, in LG Display v. Madigan, the Seventh Circuit added its voice to a growing chorus of appellate courts answering “no” to that question.

In LG Display, the Illinois Attorney General sued eight manufacturers of LCD panels for allegedly fixing prices of LCD panels.  Notably, the AG not only sought relief on behalf of the State of Illinois itself as a purchaser of the allegedly impacted products, but also pursued treble damages for all Illinois residents who had purchased the products.

In the latter respect, the parens patriae action seems the functional equivalent of a class action because a single entity gets to represent a massive class and try to win damages for them.  Yet parens patriae suits are not technically class actions.  They do not get “certified,” and do not have to meet the strictures of Federal Rule of Civil Procedure 23 or state equivalents. Courts have therefore puzzled over how exactly this unique animal should be treated under CAFA.

Before Friday,

• The Fifth Circuit had held that a suit by the Louisiana AG against the insurance industry seeking damages for insurance policyholders was removable under CAFA.
• A Pennsylvania district court followed the Fifth Circuit's logic in upholding removal of a suit by the West Virginia AG on behalf of individual cable subscribers against Comcast. 
• West Virginia’s home Circuit, the Fourth, disagreed earlier this year, holding that a different parens patriae suit by the West Virginia AG -- this time the target was the retail pharmacy industry -- was not removable under CAFA. 
• And just last month, in a different set of LCD panel antitrust cases (small world), the Ninth Circuit held that parens patriae suits by the AGs of Washington and California on behalf of indirect purchasers in those states should stay in state court.

So for those keeping score at home, the count is now 3-2 in favor of parens patriae actions being non-removable under CAFA, with all three of the most recent decisions having gone that way. Only time will tell whether the Seventh Circuit’s breaking the tie generates momentum for the rest of the Circuits to fall into line with what now seems the majority position, or is merely the latest ebb in a debate that may eventually have to be settled by the Supreme Court. 

- Robert Katerberg

 

Government Contractor Defeats Lanham Act False Advertising Claim

On October 27, 2011, a federal court in Virginia dismissed a Lanham Act claim seeking to hold a government contractor liable for statements contained in an environmental assessment report. US Demil v. ARA Group. Arnold & Porter LLP represented the Defendant.

Background:  Lanham Act applies to GoCo statements. The scope of “advertising” under the Lanham Act is broad and applies to non-traditional promotional statements such as those in emails and slide decks provided to government or business purchasers. In the government contracting sector, courts already have held that bid proposals even to government agencies can constitute Lanham Act false advertising. 

Plaintiff’s case. The plaintiff attempted to expand the reach of the Lanham Act to cover technical data, included in an environmental assessment report, prepared after the contractor was already working for the agency. The information in question was allegedly provided to the U.S. Army regarding a project to demilitarize munitions, and was provided pursuant environmental regulations. 

The court’s analysis. The court cited three reasons supporting the dismissal:  

1. Context. The court observed that “it is not just what is said but the context in which it is said, and given this context, I don't see how the Lanham Act can go forward as a matter of law.”  Here, the “purpose” of the statements was to provide data for an environmental assessment, which is distinguishable from a bid proposal, where the purpose is promotion / to induce a sale. 
2. Customer sophistication. The court considered the sophistication of the Army personnel requesting the data and the highly technical nature of the data. The court noted that the audience here was “not just your ordinary GSA person, but these are highly technical people, so you have also an audience much less likely to be duped.”
3. Policy considerations. The court commented on the need to limit the scope of the Lanham Act in the government contracting sector to prevent cases from being filed based on every communication sent to every government agency. The court sought to avoid a decision that would “open the floodgates,” noting that “the vigor with which competitors fight with each other in government contracting is well known.”

Significance. Although the defendant was able to dismiss the Lanham Act claim on the facts of the case, the case confirms that Lanham Act false advertising is a potential tool to police unfair competition in the government contracting sector. Before bringing a claim, however, plaintiffs should make sure that the Complaint contains detailed allegations to prove that the primary purpose of the communication is for promotion in a competitive context (and not for some other purpose such as to provide technical data for inclusion in an environmental assessment), and that the statements have the potential to mislead the target audience. 

- Randy Miller

NOTICE: ADVERTISING MATERIAL. Results depend upon a variety of factors unique to each matter. Prior results do not guarantee or predict a similar result in any future matter undertaken by the lawyer.  

Supreme Court Declines to Rule On Whether Disclaimers of Damages Above $5 Million Prevent CAFA Removal

Last week, the Supreme Court passed up an opportunity to weigh in on an issue of growing importance in consumer class actions:  whether plaintiffs can keep a class action in state court by purporting to disclaim damages above $5 million, the amount in controversy threshold for removal under the Class Action Fairness Act (CAFA).

CAFA, passed in 2005, was designed to curtail class action abuses by channeling more class actions into federal court. It allows defendants to remove many state court class actions to federal court if there is minimal diversity of citizenship and the amount in controversy exceeds $5 million. In the past few years, many plaintiffs’ counsel have tried to avoid CAFA removal, even where an objective estimate of the amount in controversy would surpass $5 million, by including language in the complaint saying that the class waives or disclaims any damages above that amount. After Wal-Mart v. Dukes, plaintiffs’ counsel now have more of an incentive than ever to use all possible means to keep their cases in state court, where Wal-Mart’s heightened standards for certification may not necessarily apply.

This tactic has been fraught with controversy. As Judge Easterbrook on the Seventh Circuit recently held, a class plaintiff “has a fiduciary duty to its fellow class members. A representative can’t throw away what could be a major component of the class’s recovery.” There are serious questions about whether such a waiver can bind a putative class, and whether a class plaintiff who would waive his fellow class members’ rights at the outset can possibly be an “adequate representative.” In any event, the practice smacks of the type of gamesmanship that led Congress to enact CAFA in the first place.

In the case the Supreme Court declined to take up last week, plaintiffs brought a class action against shoe company Skechers in Arkansas state court for alleged false and misleading claims about health benefits of wearing Skechers shoes. Although Skechers submitted proof that the potential damages could reach $38 million, its attempt to remove the case to federal court under CAFA failed because plaintiffs included language purporting to waive class damages above $5 million. The Eighth Circuit denied review.  Despite compelling amicus briefs by the US Chamber of Commerce and the Center for Class Action Fairness spelling out the profound ramifications, and what appears to be an emerging circuit split, so now has the US Supreme Court.

A denial of certiorari of course does not signal anything about the Court’s view of the merits. So the class action bar will have to wait another day for a definitive national resolution of this important question. With the circuits divided and the incentives for plaintiffs to keep their cases in state court mounting, it is a good bet that day may come sooner rather than later.

- Robert Katerberg

Sixth Circuit: Early Preemptive Strike Upheld in Dismissing Class Action

The Sixth Circuit Court of Appeals last week affirmed a denial of class certification in Pilgrim v. Universal Health Card, one of the first appellate opinions in the country relying on the Supreme Court’s watershed class certification opinion of Wal-Mart v. Dukes in a consumer class action. In the process, the Sixth Circuit may have also given new traction to a potent but rarely used tactic in the defense playbook, the early preemptive motion to deny class certification or strike class allegations.

The defendant company in Pilgrim marketed a healthcare discount program. Members were supposed to receive, in exchange for a membership fee, discounts at health care providers in the program’s network.  Two individuals found the program wanting because of a lack of participating providers in their area.  They sued claiming the companies’ advertising was deceptive, and sought certification of a nationwide class of about 30,000 people. Not long after answering, the defendant filed a motion to strike the class allegations. The district court granted that motion, and then dismissed for lack of subject matter jurisdiction because, stripped of class allegations, the named plaintiffs’ own claims fell short of amount-in-controversy requirements for federal jurisdiction.

The Sixth Circuit affirmed in last week’s decision, written by Judge Jeffrey Sutton, an influential jurist reputed to be on the short list for a Supreme Court nomination in a Republican administration, and whose views will carry weight with judges in other Circuits. The court first held that Rule 23(b)(3)’s requirement that common issues of law or fact predominate was not met because “each class member’s claim would be governed by the law of the State in which he made the challenged purchase, and the differences between the consumer-protection laws of the many affected States would cast a long shadow over any common issues of fact plaintiffs might establish.” In so holding, the Sixth Circuit echoes other courts (like In re Bridgestone/Firestone and Castano v. American Tobacco) that have been skeptical of nationwide class actions that try to join together claims under fifty different states’ laws, which often vary in material respects. How, after all, would the court possibly instruct a jury on all those different states’ laws?

Concepcion Not a Cure All for Avoiding Consumer Class Actions

Since the Supreme Court handed down AT&T Mobility LLC v. Concepcion, many consumer product and services companies have hoped to insulate themselves from consumer class actions by including a mandatory non-class arbitration provision in their sales and services contracts. Such companies expect that, if faced with a class action complaint, they can move to compel arbitration by relying on the takeaways from Concepcion, that state laws banning class waiver provisions as unconscionable are preempted by the FAA and that class waiver provisions in arbitration agreements must be enforced according to their terms.  If all goes according to plan, the court will dismiss the case and compel the consumer to arbitrate in an individual capacity, destroying the possibility of a class action swiftly and efficiently. 

A recent California Court of Appeal decision illustrates how this plan can go awry. In Sanchez v. Valencia Holding Company, LLC, a purchaser of a used Mercedes-Benz sued the dealership that sold him the car, asserting that the dealer made numerous false representations in connection with the purchase.  The consumer brought a purported class action and alleged various violations of state law.  The dealership moved to compel arbitration, pointing to Concepcion and a class action waiver in the arbitration agreement the consumer signed.  The Court of Appeal rejected the dealership’s argument.

As the Court of Appeal explained, Concepcion left open the possibility arbitration provisions could be invalid under the doctrine of unconscionability. In fact, the Court of Appeal stated, Concepcion is inapplicable where a court’s decision does not address a class action waiver or a judicially imposed procedure that conflicts with the purposes of the FAA. The Court went on to find that the dealership’s arbitration provision was unconscionable in numerous respects.  The provision was procedurally unconscionable because the dealership presented the provision on a take-it-or-leave-it basis, and it appeared on the back of the last page of the agreement in a small font with reduced line spacing.  The provision was substantively unconscionable because it imposed the following facially-neutral terms that in reality favored the dealership: (1) either party may appeal an award exceeding $100,000; (2) either party may appeal an award of injunctive relief; (3) the appealing party must advance the filing fee and any arbitration costs; and (4) self-help remedies, including the right to repossession, are excluded from arbitration.

It is unclear that other courts would have reached the same results. Indeed, some post-Concepcion decisions have upheld arbitration provisions with class action waivers, without considering much more than whether the consumer signed the contract. Other decisions have compelled arbitration, after lamenting how Concepcion rejected the idea that arbitration agreements are per se unconscionable when found in adhesion contracts. Yet, as the Sanchez decision shows, not all courts will shy away from a rigorous analysis of an arbitration provision under the unconscionability doctrine. Consumer product and services companies that intend to rely on Concepcion to defeat class actions by compelling arbitration should consider whether their arbitration agreements are sufficiently balanced to survive such an analysis.

- Matthew Eisenstein

Attend a Mock Lanham Act Argument Focusing on the “Havana Club” Case

The recent Havana Club case is potentially a huge development in Lanham Act false advertising law, and it is the subject of an ABA Antitrust-Private Advertising Committee teleseminar, tomorrow (October 11) at 12:30 eastern. 

It’s hornbook law that a literally truthful advertising claim can be enjoined because it conveys a false implied claim as measured by a survey.  Previously, the only real exception to this rule was the 7th Circuit’s Mead Johnson case regarding the claim “1st Choice in Doctors,” which Judge Easterbrook said could not be attacked with a survey because the claim was “objectively verifiable.” 

Mead Johnson has not really been followed, and previously was thought to be an issue unique to the Seventh Circuit. That is, until Havana Club.  There, the Third Circuit joined the Seventh Circuit and adopted the Mead Johnson rule that a literally truthful and unambiguous claim is not subject to attack by a survey. The court said that plaintiff could not introduce a survey to show that “Havana Club” conveyed a false implied message that the rum was made in Cuba -- because the bottle disclosed that it was actually from Puerto Rico. 

Thus, when a court decides that an implied falsehood theory is too tenuous, it can exclude and not even consider a survey (regardless of how well the survey is designed).

The implications remain to be seen.

Dial in for the free ABA teleseminar where Lanham Act litigators will debate a mock hypothetical that features the Havana Club issue. 

- Randy Miller

It’s as Natural as…

What is natural?  That is a question that has generated much buzz in the courts and in the press.  We previously blogged about the Snapple suit here  and noted that after the suit was brought against Snapple, the company swapped out the contentious corn syrup ingredient for sugar.  The Corn Refiners Association is also under heat from a lawsuit brought by major sugar companies alleging that the Corn Refiners’ commercials and other attempts to rebrand corn syrup as “corn sugar”, “co-opt the goodwill of ‘sugar’ and… sidestep growing consumer sentiment” and are false and misleading. 

A new slew of cases have begun to address the issue of which ingredients would render the “All Natural” label false. It seems that for companies wanting to be accepted by the public as a natural brand, it’s not as easy as removing most or all of the artificial ingredients.  A lawsuit against SkinnyGirl Margarita alleges that its “All Natural” and “Contains No Preservatives” label was false and misleading due to the use of the preservative sodium benzoate.  Shortly before the complaint was filed, Whole Foods pulled the Margarita off its shelf claiming that it wasn’t “all natural.” The company claims on its website that “[t]he litigation filed in relation to the labeling of Skinnygirl Margarita is frivolous.”As Bethenny Frankel stated more provocatively, “I’m not making wheatgrass here. If I could put an agave plant and some limes on a shelf I would.  [The Skinnygirl Margarita] is as close to nature as possible, while still being a shelf stable product.” 

In addition, a class action was recently brought against Kashi, owned by Kellogg, in the Southern District court of California claiming that Kashi’s “All-Natural” GoLean bars, instant hot cereal, chewy cookies, crackers, pita crisps, waffles, and pizza are anything but that.  Plaintiffs name sodium molybdate, phytnadione, sodium selenite, magnesium phosphate, niacinamide, calcium carbonate, calcium phosphate, calcium pantothenate as ingredients that they claim have already been declared synthetic by federal regulations.  They cite the definition of synthetic under the National Organic Program as “[a]substance that is formulated or manufactured by a chemical process or by a process that chemically changes a substance extracted from naturally occurring plant, animal, or mineral sources, except that such term shall not apply to substances created by naturally occurring biological processes.”  

Finally, ConAgra, a large Canola Oil Producer, has been sued for its use of the “100% Natural” labeling because the oil is made from genetically modified plants. 

*    *    *

The cases seem to keep on coming.  Part of the problem is that the term ”natural” is not governed by a comprehensive set of requirements.  The FTC abandoned an attempt to define “natural” in the 1980s.  The FDA’s website asks the question “What is the difference between natural and artificial ingredients? Is a naturally produced ingredient safer than an artificially manufactured ingredient? It responds with the answer of “[n]atural ingredients are derived from natural sources (e.g., soybeans and corn provide lecithin to maintain product consistency; beets provide beet powder used as food coloring). Other ingredients are not found in nature and therefore must be synthetically produced as artificial ingredients. Also, some ingredients found in nature can be manufactured artificially and produced more economically, with greater purity and more consistent quality, than their natural counterparts.”  The USDA’s website states that Natural, as applied to meat and poultry, is “[a] product containing no artificial ingredient or added color and is only minimally processed. Minimal processing means that the product was processed in a manner that does not fundamentally alter the product. The label must include a statement explaining the meaning of the term natural (such as "no artificial ingredients; minimally processed").” At least one state and some retail chains have similar policies relating to the presence of natural ingredients and minimal processing.

Given the flood of recent litigation perhaps it is the courts, and not the regulators, who will end up providing sorely needed definition.  Though one wonders whether the regulators aren’t better fit for the job. 

- Randy Shaheen and Deborah Birnbaum

A Change In The Wind For Google?

Google might not fare so well in the recent appeal before the US Court of Appeals for the Fourth Circuit brought by Rosetta Stone, the internationally-known language learning company. In Rosetta Stone Ltd. v. Google Inc., the Fourth Circuit considered a host of IP issues raised by the language learning company involving Google’s sale of Rosetta Stone’s trademarks as keywords. This case is made all the more interesting by the district court’s unusual and (in the authors’ view) misguided interpretation of the trademark and dilution laws. (In full disclosure, the authors represented more than a dozen major brand owners, among them Coach, The Professional Golfers’ Association of America, and Rolls Royce, as amici curiae who urged reversal of the lower court’s opinion on the issues of trademark functionality and dilution.)

Rosetta Stone initially brought suit against Google for selling its trademarks as keywords, including keywords to trigger paid advertisements (then known as “Sponsored Listings”). A panel comprised of Chief Judge William Traxler, Jr., Judge Clyde Hamilton, and Judge Barbara Keenan heard oral argument on September 22, 2011.

On summary judgment, the district court had ruled in favor of Google on all counts. But this ruling might well be overturned on appeal. The difficulty, from Google’s perspective, is that the district judge misapplied the law in some instances and went out on a limb in others, deciding issues in a novel and unsupported way. And this was not lost on the panel.

Advertising Offer to Beat “Anyone’s Price by 15% or It’s Free” Survives False Advertising Attack

A federal court in Massachusetts recently affirmed a jury verdict in favor of an advertiser who proclaimed it could beat the competition’s price by 15% (“or it’s free”) because of inadequate proof at trial. 

The case involved competing carpet and flooring companies:  National Floors Direct and Empire Today.  NFD advertised, including in television commercials, that it would beat any competitor’s price by 15% or would give its products away for free. Empire alleged that NFD was not providing the discount that it advertised and brought claims for false advertising under Massachusetts state law (Chapter 93(a)), which is governed under the identical standard as Lanham Act false advertising cases.  Empire sought approximately $5 million in damages.

At trial, Empire introduced evidence that NFD’s sales representatives complied with the advertising offer by “dividing the competitor’s price by 1.15.”  This method proved that the advertised offer was not being honored – dividing the competitor’s price by 1.15 “results in only 13% off the competitor’s price, whereas multiplying by 0.85 would result in a 15% price reduction.”  Notwithstanding this smoking gun, the district court concluded that this was simply an innocent “miscalculation” or was evidence of “an internal disagreement at NFD over a mathematical calculation.”  The court concluded that this type of “negligence” does not support a claim of false advertising.  (This part of the ruling is interesting given that “intent” to deceive is not a required element of a Lanham Act false advertising claim).

The court also was skeptical of Empire’s damages claim. Although Empire was able to show a diminishment in sales, the district court concluded that there were “a bounty of reasons” for plaintiff’s suffering sales, including “management issues.” Even though Empire was able to show that an increase in NFD’s sales corresponded to a decrease in Empire sales, the district court concluded that this evidence “only proves a correlation, not a causation.” 

This case underscores the difficulty of prevailing in a false advertising case in the setting of a trial to obtain money damages. Although the facts of this case could have supported injunctive relief, it fell short of the kind of proof necessary to collect damages. Practitioners should manage their clients’ expectations to let them know that even a technical showing of false advertising will not guarantee a money damages award. In cases like this, where the evidence appears to be anecdotal, a strategy intended for injunctive relief may be more appropriate. 

- Deborah Birnbaum and Randy Miller

Foreign Holding Company Makes the Cut in California Class Action, Surviving Defendant’s Personal Jurisdiction Challenge

The federal judge presiding over multidistrict litigation of unfair competition and personal injury claims against the makers and distributors of a popular dietary supplement products has denied the defense motion to dismiss for lack of personal jurisdiction. In the order, Judge Moskowitz of the Southern District of California ruled that the parent company could be sued in all of the states in which its US subsidiary was selling products.

In In re Hydroxycut Marketing and Sales Practices Litigation, 20 named plaintiffs filed a class action complaint, and numerous individual plaintiffs filed personal injury claims, alleging that a holding company, its subsidiaries, and several retailers marketed and sold the Hydroxycut products as being safe and effective for weight loss, when the claims were not clinically proven and were associated with serious health risks.

Although the Court dismissed several claims earlier in the year, the plaintiffs scored a victory by making a prima facie showing that the parent exercised sufficient control over its subsidiary to impose personal jurisdiction on the parent company, based on theories of agency and alter ego. Taking the plaintiffs’ version of the facts as true and quoting from an extensive factual record, the Court found the parent, rather than acting as a mere holding company in the business of managing its investments, was instead “in the business of developing and selling diet and nutritional supplements” through its subsidiaries. Based on the sole owner’s extensive day-to-day involvement with the manufacturers, distributors, and retailers for Hydroxycut on pricing, sales, promotions, credit, formulations, labelling and other activities, the Court found the parent “exercised pervasive domination and control over the subsidiaries,” sufficient to impute their activities to the parent. The Court’s findings were bolstered by allegations that a parent-owned website promoted the Hydroxycut products, and the holding company structure had recently been changed following an FDA statement that the products presented health hazards.

The Court’s ruling allows plaintiffs to proceed with the multidistrict litigation against the parent company for the acts of its subsidiaries. Plaintiffs’ detailed allegations served them well at this stage of this litigation, and led the Court to find personal jurisdiction based on operational control, despite concluding that the companies had complied with corporate formalities, did not commingle funds, and were not undercapitalized -- the other traditional earmarks of alter ego liability.

- Brian Condon and Anita Kalra

Guidance for Consumer Products & Services Companies: A Review of the Supreme Court's 2011 First Amendment and Class Action Decisions (Webinar)

The editors of the Consumer Advertising Law Blog wanted to let our readers know about an upcoming webinar that may be of interest to you, entitled, "Guidance for Consumer Products & Services Companies: A Review of the Supreme Court's 2011 First Amendment and Class Action Decisions".

In a panel presentation by members of Arnold & Porter's Appellate and Supreme Court practice and the firm's consumer industry group, this webinar will provide in-house counsel with practical analyses of the Supreme Court's 2011 decisions that focused on First Amendment and class action issues relevant to business. The panel will discuss how these decisions affect companies' ability to advertise and market, as well as the potential to limit litigation and class action risks.

This seminar will review the following cases and issues:

• Sorrell v. IMS: Commercial speech doctrine and free speech rights of regulated industries
• Brown v. Entertainment Merchants Association: Laws designed to protect children through regulation of how products are sold
• AT&T Mobility v. Concepcion: Limiting class action exposure
• Wal-Mart v. Dukes: Class certification in antitrust and consumer fraud class actions
• Goodyear v. Brown; J. McIntyre v. Nicastro; and Smith v. Bayer Corp.: Re-litigation of class certification in other courts after an initial denial and jurisdiction over foreign corporations

Panelists at the event will include: The panel, moderated by Amy Ralph Mudge will include the following Arnold & Porter attorneys:

• Lisa S. Blatt (Washington, DC), Head of the Appellate and Supreme Court Practice
• Angel A. Garganta (San Francisco)
• Robert J. Katerberg (Washington, DC)
• Christopher S. Rhee (Washington, DC)
• James F. Speyer (Los Angeles)

The event will take place from 12:00 PM to 1:30 PM ET/9:00 AM to 10:30 AM PT on September 20, 2011. 

UPDATE (9/28): Access to an audio recording of the event with slides can be found here.

 

The Ninth Circuit Speaks and Rejects the Presumption of Irreparable Harm

Earlier this month, in two separate decisions, the Ninth Circuit joined the growing number of appellate courts in rejecting the long-standing presumption of irreparable harm in determining whether a preliminary injunction should issue in intellectual property cases. First, on August 3, 2011, the Court rejected the presumption for copyright cases in Perfect 10 v. Google. And on August 22, 2011, the Ninth Circuit followed up with an opinion rejecting the presumption of irreparable harm in trademark cases in Flexible Lifeline v. Precision Lift. These opinions likely will have a substantial impact on plaintiffs’ ability to obtain preliminary injunctive relief in copyright and trademark cases, as irreparable harm must now be demonstrated and not merely presumed upon a showing of likelihood of success on the merits.

This sea change in preliminary injunction standards has been developing for some time. In 2006, the Supreme Court, in eBay, Inc. v. MercExchange, L.L.C., held that irreparable harm could not be presumed when determining whether permanent injunctive relief should be granted in patent infringement cases. Since ebay was decided, appellate and district courts have struggled with the question of whether eBay’s prohibition on the presumption of harm applies in copyright or trademark cases, in particular when the plaintiff is seeking preliminary relief. While many courts have continued to enter preliminary injunctions based on a finding that the plaintiff is likely to succeed on the merits followed by a presumption of irreparable harm, there has been a growing shift away from this approach. In Perfect 10 v. Google and Flexible Lifeline v. Precision Lift, the Ninth Circuit became the latest court to join this movement. Resolving a split among district courts within its Circuit, the Ninth Circuit found that eBay’s rejection of the presumption of irreparable harm in patent cases applies equally to actions for copyright and trademark infringement and to requests for preliminary relief.

In light of the decisions in Perfect 10 v. Google and Flexible Lifeline v. Precision Lift, a plaintiff seeking injunctive relief in the Ninth Circuit will have to do more than show a likelihood of success on the merits of its claims and will need to demonstrate through evidence the existence of irreparable harm from ongoing copyright and trademark infringement.

- James Blackburn and Alan Veronick

Dukes Helps Car Manufacturer Drive Out a Putative Class Action

Recently, Judge Gary Klausner of the Central District of California issued one of the first opinions in a consumer case applying the heightened class certification standards handed down by the Supreme Court in Wal-Mart v. Dukes. In Kruszka v. Toyota Motor Corp., et al., a case accusing Toyota of selling vehicles with shoddy paint in violation of California consumer protection and competition laws, Judge Klausner held that the plaintiff failed to demonstrate that the putative class of vehicle purchasers satisfied the commonality prerequisite for class certification as articulated in Wal-Mart.

In Wal-Mart, discussed in-depth in this advisory, the Supreme Court held that Federal Rule 23, setting forth the requirements for class certification, is not “a mere pleading standard.” Rather, parties seeking certification must “be prepared to prove” that Rule 23’s prerequisites are in fact met. Among these is the requirement of commonality, or the existence of “questions of law or fact common to the class.” Commonality, as expounded by the Court, requires that class members have “suffered the same injury.” According to Judge Klausner, this was not sufficiently demonstrated in Kruszka.

The plaintiff in Kruszka had purchased a new 2010 Lexus IS250 and alleged that its paint began immediately “chipping, scratching, and marring,” due to an alleged defect in the defendant’s paint and manufacturing process. He asserted that this defect affected all recently manufactured Lexus vehicles and sought to certify a class of “[a]ll current owners or lessees of model year 2007-2010 Lexus automobiles in the United States.” To demonstrate commonality, the plaintiff asserted that a “veritable library of internet sites have arisen dedicated to reporting and cataloging the ‘Lexus paint problem’” and a provided list of twelve internet posts on the topic. Judge Klausner, in following the Supreme Court’s directive to conduct “rigorous” Rule 23 analysis, held this “small number of internet posts ascribed to individuals identified only through usernames such as ‘draperysewer,’ ‘Carhop1,’ and ‘roadrunner4’” was insufficient to prove that all members of the class had suffered from the defendant’s alleged paint defect.

It remains to be seen whether it will be business as usual for class action counsel and courts will cabin Dukes as limited to the employment law context or whether Dukes will mean a sea change in narrowing the appropriate uses of Rule 23 in federal cases. Kruszka shows one lower court embracing the Supreme Court’s exacting class certification standards. At the very least, it is clear that defendants should be able to defeat class certification where plaintiffs offer nothing more than broad generalizations or isolated anecdotes to establish a common injury -- as it should be.

- Amy Mudge and Anita Kalra

Is it “Advertising”? The Threshold Issue in Lanham Act False Advertising Cases

A recent Florida federal case illustrates that Lanham Act false advertising defendants can win summary judgment on the threshold question of whether a communication to a customer qualifies as “commercial advertising” under the Lanham Act.

In Suntree Technologies, Inc. v. Ecosense Intern., Inc., the parties sold competing “baffle boxes,” which are “stormwater treatment structures that remove organic debris, trash, oil and other pollutants from stormwater before the stormwater reaches lakes, rivers and streams.” The baffle boxes are sold to cities and counties through a government contracting process.

The plaintiff challenged defendant’s product brochure and maintenance presentation provided to government purchasers as “false advertising,” including because the materials contained pictures of the plaintiff’s product and falsely suggested that the defendant’s product had the same features and performance as the plaintiff’s product.

The case law was on the plaintiff’s side in the sense that, although the Lanham Act is limited to “commercial advertising or promotion,” this definition is extremely broad and applies to: (1) non-traditional advertising such as emails, slide presentations and brochures; and (2) to communications made solely to business and government purchasers (which the general public never sees). Thus, the Lanham Act is not limited to advertising in the classic sense. Even a single letter or slide presentation to a business or government purchaser -- as long as it touts a product or service -- can be actionable under the Lanham Act as false “advertising.”

A key requirement, however, is that the plaintiff prove the statement was made to influence customers to buy defendant’s goods or services. In Suntree, the court found at least two reasons that the product brochure at issue was not “advertising”:

1. “the purpose of the maintenance presentation was not to influence consumers to purchase EcoSense's product but rather to provide training to those who had already done so”; and
2. plaintiff “failed to present any evidence relating to the brochure's dissemination, and, due to the sophistication of the consumers, it is unlikely that a simple product brochure could influence them to purchase EcoSense's baffle boxes.”

The court also rejected Plaintiff’s related trademark claims holding that the Plaintiff failed to prove likelihood of confusion.

Although the Lanham Act’s definition of “commercial advertising and promotion” is broad, litigants should not take this threshold issue for granted. As indicated by the Suntree case, to survive summary judgment, a plaintiff will have to affirmatively prove that the nature, purpose and use of the challenged statement qualifies it as “advertising” under the Lanham Act -- defendants should hold them to this burden.

- Randy Miller

Kardashian Tries to Corner the Market on C-U-T-E: Brings Suit Against Old Navy for Look-a-Like Model

The star of the hit reality tv show,"Keeping Up with the Kardashians," filed suit against Old Navy in federal court in California claiming that an Old Navy television commercial used a model that looks suspiciously like the reality tv star.

The Kardashian complaint alleges that she “has attained an extraordinary level of popularity and fame” and that her “name, likeness, identity and persona have become commercial assets.” She contends that Old Navy intentionally used a model that looked so much like her that it would confuse consumers and cause them to think that she endorsed the store’s merchandise. Kardashian claims that Old Navy knowingly took steps to confuse consumers by using a storyline in the commercial that is associated with her persona. The commercial introduces a new Old Navy clothing brand “Audio Threadz” through a simulated music video for a song called “Super C-U-T-E” that features the alleged Kardashian imitator shopping and interacting with paparazzi, among other things.

Kardashian is seeking a permanent injunction and unspecified damages for unfair competition in violation of the Lanham Act, as well as misappropriation in violation of California’s common law right of publicity and California’s Civil Code § 3344 . There is certainly some precedent for a celebrity getting an injunction against a ‘look-a-like’ commercial, but Kardashian may face an uphill battle as the model, Melissa Molinaro, is an actress in her own right. Kardashian will have to prove at a minimum that the commercial is likely to cause confusion to viewers. It remains to be seen how this lawsuit will play out. While California’s laws governing rights of publicity are well-established, only a handful of federal courts have even addressed whether the Lanham Act may embrace rights of publicity claims, making the approach novel and potentially ground breaking.

- James Blackburn, Marianne El Sonbaty, and Jocelyn Wiesner