The Nuances Of False Advertising Law And Other Sundry IP Issues

Monday, May 3, 2010 - 01:00

Editor: Please tell our readers about your practice.

O'Rourke: Our clients generally are big consumer products companies that are concerned about either trademark issues or false advertising issues as well as copyright and related issues. Larry and I also service our firm's entertainment clients all over the country especially in the music industry, and we assist them with their intellectual property cases. The firm also has a preeminent sports practice, and we do a lot of intellectual property and other work in that area as well. In the false advertising area, we have been using some of our patent colleagues with greater frequency to assist on the scientific issues that come from some of our pharmaceutical cases and other complicated scientific cases.

Weinstein: It is sometimes said that we do "soft IP" litigation. The phrase "soft IP" is generally understood to mean IP litigation other than patents. In reality, though, our cases almost always involve complex science and statistical issues. For example, our litigations frequently involve FDA regulated products (drugs, medical devices, foods), and scientific issues are almost always at the core of those cases. In fact, it is hard to think of a case we have had lately, particularly in the false advertising area, that is not about science.

Editor : What is Section 43(a) of the Lanham Act? Can you explain what "puffery" is?

Weinstein: Section 43(a) of the Lanham Act is the federal unfair competition statute, which provides causes of action for the infringement of unregistered trademarks and trade dress, and for false advertising. Trade dress refers to characteristics of the visual appearance of a product or of its packaging that serve as an identifier of the source of the product.

"Puffery" is a defense to a claim of false advertising. Puffery refers to an advertising statement that is either so obviously exaggerated, so obviously non-quantifiable, or so obviously a statement of personal opinion that no reasonable consumer would view it to be a statement of fact on which the consumer could rely.

Editor: Why is the Bose decision important? Has it affected your practice?

O'Rourke: For trademark practitioners, it is very important because until the Bose decision by the Court of Appeals for the Federal Circuit, the Trademark Trial and Appeal Board (TTAB) had relaxed the standard for proving fraud in the prosecution of trademark registrations. The test had always been whether one made or omitted a material fact for the purpose of misleading the TTAB in obtaining registration. The TTAB included a "should have known" standard, which is more of a negligence standard then a fraud standard. The Federal Circuit reversed the TTAB and held that to constitute inequitable conduct, one has to show the scienter requirement, namely that a material representation or omission was made with a specific intent to mislead the TTAB.

On the counseling side, Bose hasn't really affected our practice because we have always been very conservative in our advice concerning what needs to be disclosed to the TTAB. Our clients are some of the best run companies in the world, and they all take their obligations under the Trademark Act very seriously. However, the Bose decision has affected the strategy when clients find themselves in a dispute concerning the registration of a trademark. The question becomes whether the client would want to bring a counterclaim for inequitable conduct on the heightened standard of showing an intent to deceive by clear and convincing evidence.

Editor: The Second Circuit provided a clearer picture of its false advertising doctrine in the DIRECTV case. Has that decision affected your clients?

Weinstein: It has provided a bit of clarity in some respects, but I would characterize the decision as predictable and not groundbreaking.

I found two aspects of that case to be fairly noteworthy. One was that the Second Circuit explicitly adopted for the first time the doctrine of necessary implication. In a nutshell, the necessary implication doctrine refers to circumstances in which an advertising statement can be viewed as communicating an unambiguous message without doing so in exact words.

There is a fundamental difference in false advertising law between the proof required to demonstrate that an advertising statement is "literally false" and the proof required to demonstrate that an advertising statement is "impliedly false." Generally speaking, a literally false statement is an unambiguous statement that is demonstrably false on its face. An example of a literally false statement is that the advertiser's product "works faster to alleviate headache pain than a competitor's product," when in fact, the competitor's product either works faster than or just as fast as the advertiser's product.

By contrast, an impliedly false statement is one that (a) either is literally true, or is capable of multiple reasonable meanings, at least one of which is literally true, but (b) nonetheless has the tendency to mislead consumers. Consider the statement: "Product A works faster than Product B to help relieve headache pain." Assume that Product A does indeed work faster than Product B to begin to reduce headache pain, but that Product A generally provides only incomplete pain alleviation while Product B, although it starts to work more slowly, actually provides greater relief over time than Product A. Under this hypothetical, the statement "Product A works faster than Product B to begin to reduce headache pain" cannot be found to be literally false, because Product A does work faster than Product B. However, it is possible that this statement might also communicate the implied, untrue message that that Product A alleviates headache pain at least as well, and not just faster, than Product B.

It is well established that literally false statements do not require proof of how consumers actually interpret the statement's meaning. Instead, it is for the finder of fact (court or jury) to determine whether a claim is a literal claim, in other words, capable of only a single meaning. By contrast, for a statement to be impliedly false, the challenger must offer proof, typically via a consumer survey, of the message or messages that relevant consumers understand the advertising statement to have communicated. Thus, in the examples above, the plaintiff can prove false the statement that Product A works faster than Product B to begin to reduce headache pain only by offering scientific evidence that in fact, Product B begins to work faster or just as fast; no evidence of what consumers understand the statement to communicate is necessary. However, if the plaintiff wants to prove that this statement communicates the implicit, false message that Product A relieves headache pain as well as Product B, the plaintiff must produce evidence that a significant percentage of consumers take away that message when they see the advertisement.

A statement that is false by "necessary implication" is considered to be a literally false communication for which no survey evidence is required. Assume that the above statement "Product A works faster than Product B to begin to relieve headache pain" appears in a commercial showing a Product A user to be symptom free, and a Product B user to appear to be in continued pain. In such circumstances, a finder of fact might conclude that, taking the statement and visual images together, the commercial unambiguously communicates the false message that Product A relieves headache pain better than Product B, even though those words are not stated in the advertisement. This would be an example of an advertisement that is literally false by necessary implication.

Before the Second Circuit did so, several other federal appellate courts had adopted the doctrine of necessary implication, as had several district courts within the Second Circuit. So in that sense, while DIRECTV marked the first time the Second Circuit adopted the necessary implication doctrine, this result was not at all surprising.

The other interesting aspect of DIRECTV was the Second Circuit's discussion of "puffery." Previously, the Second Circuit had focused more on whether a statement was objectively measurable in determining whether or not it was puffery, it generally being the rule that a statement that is objectively measurable is not puffery. The focus of the court in the DIRECTV case was on the exaggerated nature of the statement in the advertising in question. However, I don't view this aspect of the decision as groundbreaking either. The Second Circuit's discussion of puffery was consistent with the generally understood meaning of the term. Certainly, the decision did not hold that all exaggerated statements would be treated as non-actionable "puffery." Such a result would have been flatly inconsistent with earlier decisions, including a major case that we tried, the so-called Goldfish case, in which the Second Circuit held that the exaggerated advertising in that case was false advertising in violation of the Lanham Act, not "puffery."

Editor: What is the standard for measuring whether an advertisement is impliedly false? Is it a community standard, or perhaps a national standard?

Weinstein: I don't believe that any of the federal appellate courts has ever said that the meaning of an advertisement is to be determined locally. However, the law is clear that for advertisements that are not literally false, extrinsic evidence, usually in the form of a survey, must be offered by the plaintiff. Typically, if the advertisement is national in scope, the survey expert conducts his or her survey in a variety of geographically dispersed areas. It is possible, though in my experience not common, that consumer reaction to an advertisement can vary by geography.

Editor: Brendan, what are "trademarks in cyberspace"?

O'Rourke: That is such a broad term, but it has come to be known to cover any use of trademarks over the Internet, including the registration of domain names, a whole subject area unto itself. It also involves the sale of counterfeit products on websites like E-bay and other sale sites where the issue is the liability of the web host as opposed to the individual who is selling a counterfeit item. It also involves key word advertising where say, Google or Yahoo, might be selling key words that will result in preferred placement as a result of a search. If you buy the word from the web browser, you may come up first in the sponsored links. The trend has gone back and forth, but the trend now appears to be in favor of finding that type of conduct to be unfair competition.

Editor: Larry, almost everyone reading this column has been affected by the Napster infringement case. Can you tell our readers about your participation in that case?

Weinstein: Actually, both of us were involved in that case, which really was groundbreaking. It was the first of a line of cases to have addressed the issue of whether people can use the Internet to obtain the creative work product of musicians and composers for free, against the will of the owners of the artistic works. I was deeply involved in obtaining the preliminary injunction that ultimately put Napster out of business.

We, along with a few other firms, represented the recording industry, through the trade association to which all the major record companies belong. My area of the case principally involved consumer surveys but not the kind of surveys used in false advertising and trademark cases. These were consumer surveys relating to how people were using Napster, and they were an integral part of our proof that the users were committing copyright infringement and that Napster knowingly was facilitating these infringements.

Editor: Brendan, what was your role in the Napster case?

O'Rourke: My part of the case related to showing injury and the resulting damage. I flew around the country and took depositions of independent record store owners. One after another lined up to swear under oath, telling basically the same story. Primarily college students would come into record stores and go to the listening stations. They would make lists of the songs that they liked, and they would walk out of the record store and never buy an album. I think that we presented compelling evidence through a large number of record store owners that the sharing of music files over Napster was devastating to their businesses.

Weinstein: Napster was a very important decision, but the impact that even major litigations can have on technology-driven social and behavioral change is limited. We helped the record industry win that case flat out, but we could not alter the fact that the development of the Internet inexorably led to significant reductions in the sale of albums in tangible formats. Obviously the recording industry is not making as much money through the sale of music over the Internet as it made before the popularization of the Internet. But what was accomplished in the Napster case was the creation and adoption in law and in practice of a means by which owners of music-related IP can earn money from the downloading of music from internet websites.

Editor: What are the advantages of bringing a case before the National Advertising Division of the Council of Better Business Bureaus?

O'Rourke: NAD correctly bills itself as the low cost alternative to litigation. They also bill themselves as expeditious, and that is true. Unfortunately, because of the number of cases they have, it is difficult for them to get all their cases through to the decision stage as quickly as they and the participants would like. But they really do a great job. So one of the advantages is obviously the money saved that one otherwise would spend on litigation. There's also no discovery before NAD, and the parties submit virtually any evidence that they want.

It's also advantageous to competitors who don't want to share confidential information. An advertiser who is challenged at NAD has no obligation to show substantiation of its claim to the challengers if the information is propriety and confidential. Further, NAD views itself, correctly so, as expert in interpreting advertising claims. So even if it's not literally a false claim, but an implied claim, NAD does not require survey evidence, which can cost upwards of $75,000-$100,000. One other important advantage for the challenges is that the burden is on the advertiser to substantiate its claims before NAD, whereas if you bring a challenge in the court, the burden is on the challenger to show that the ad is false.

Weinstein: The lawyers at NAD have developed extraordinary expertise about advertising communications, and that expertise has allowed for some very carefully nuanced decisions that benefit both advertisers and challengers alike. In this economy, where even the largest companies have been affected by the economic downturn, the vastly lower cost of NAD proceedings when compared to Lanham Act litigation is a tremendous boon for the entire advertising industry. So it's a very desirable forum for our clients. However, as a self-regulatory body, NAD does not have the authority to award damages or to grant injunctive relief. Nor, as a practical matter, does NAD have the capability of resolving advertising disputes within a matter of days or a few weeks, as sometimes is necessary to get truly egregious advertising off the air. So there are circumstances where NAD is not the appropriate forum, but in most advertising disputes, it has become the preferred forum.

Weinstein: There is one issue regarding NAD that so far has not been a significant concern, but I fear is becoming one. We are seeing more and more advertisers being dragged into consumer class action deceptive advertising cases brought under state unfair competition laws, and of course from time to time many companies that appear before NAD also find themselves in Lanham Act false advertising litigation.In some of these cases, counsel is citing to, and wanting courts to rely on, NAD decisions. This is troubling because, as terrific as NAD is, it is designed as an informal mechanism to determine individual advertising disputes, and its decisions are not intended to have precedential effect in litigations.

At the NAD, the parties do not confront each other at a hearing. There's no discovery, and there's no testimony taken, so that the procedural protections inherent in litigation do not exist at NAD. There are significant, indeed, possibly constitutional concerns about NAD decisions being accorded any kind of precedential weight in courts because of the lack of the procedural protections that litigation provides and NAD does not. NAD is not at fault here at all, but I predict that this issue is going to become a hot button issue in the near future.

Editor: About 18 months ago, the House of Representatives passed HR 4279, known as the "Pro-IP" Act. In it, there was a proposal to create a new department in the Executive Office of the President at cabinet level headed by an "IP Czar." Is that still a viable concept? Do you support the creation of a federal department to address IP issues?

O'Rourke: In concept it's a good idea, but if you read the bill, it is just a measure that amends the copyright and trademark statutes to provide enhanced remedies. The part that's even trickier is the IP Czar part. Does the President need someone at almost a cabinet level talking to him or her about IP issues? Although the issues are there, and they're important, I am a bit skeptical that there is going to be someone who's actually sitting at the table with the President.

Editor: Are there national security issues involved in IP such that an IP Czar would be somebody who might have the ear of the President?

O'Rourke: I don't know that we're there yet, but you now see counterfeiting being done in connection with all types of products that you never would have thought would be a problem, such as Caterpillar's gigantic earth-moving machinery and component parts for important technologies. I can see counterfeiting in the information services area becoming a real big problem. The other area is that we know that terrorists make money by selling drugs. It's one of their biggest sources of income depending upon which type of a terrorist organization it is. Because terrorist organizations are increasingly using counterfeiting as a way of raising revenue, in that sense the government should be very concerned.

Weinstein: Certainly in the IP area there are enormous security concerns with regard to computer hacking. Whether an IP Czar actually is required to solve the national security-related problems is beyond my pay grade. I'm still skeptical about it, but that may have more to do with my view of all sorts of competing government bureaucracies from a political point of view.

Editor: What new false advertising issues have evolved with the conversion of society into a digital world?

Weinstein: The conversion of our society into a digital world has brought monumental change to how companies advertise, but not to the law of false advertising. Although there are certain things that have changed slightly, false advertising is still false advertising. There are certainly differences between how advertising works on the internet and how it works in traditional media, but overall the law has stayed largely the same.

Editor: Larry, you spoke before about consumer class actions. Are these common in the context of false advertising litigation? Are these Lanham Act cases or something else?

Weinstein: They are not Lanham Act cases, but rather are brought under state common and statutory law. They have become increasingly common in recent years, and they present very significant risks to advertisers. The bottom line is that any inside or outside counsel charged with reviewing and approving a company's proposed advertising should take the possibility of a consumer class action into account in advising his or her client as to the risks associated with the proposed advertising.

Although there are some differences between the various federal appellate courts as to who has standing to sue for violation of the false advertising provisions of the Lanham Act, it is uniformly accepted that consumers do not have standing to bring a Lanham Act false advertising suit. Many, many years ago, some enterprising members of the plaintiff's class action bar, recognizing that the Lanham Act did not confer standing on consumers, got the idea of bringing class action false advertising suits under state consumer protection laws. In the early days, California and Massachusetts were probably the leading jurisdictions that recognized these suits, and handed down plaintiff-friendly rulings. In recent years, there have been two recognizable trends in consumer class action false advertising cases: (1) more and more plaintiff's lawyers have jumped on the class action false advertising bandwagon, leading to a large increase in these suits, and (2) the judicial decision pendulum has begun to swing in favor of defendants, including in California and Massachusetts.

At the risk of oversimplifying what is actually a complex issue, it is fair to say that in contrast to Lanham Act cases, which quite often are litigated through to a verdict after trial, consumer class action false advertising cases rarely are. Instead, they tend either to get dismissed on an early stage motion, to disappear after class certification is defeated or (if neither of these occur), to settle.

Full blown discovery in these cases can be quite expensive, and the few cases that are tried to verdict demonstrate that jury awards can be quite high. Thus, from the defense lawyer's perspective, the "holy grail" is to successfully move to dismiss a class action suit for failure to state a claim.

We have been very successful at obtaining early stage dismissals of these cases. While I am not shy about saying that these successes have been the result of terrific legal work by our team and our clients' in-house lawyers, they also mirror a growing trend. This trend includes (1) decisions by state courts requiring that class plaintiffs clearly allege the elements of reliance, injury and causation as a result of an allegedly false advertisement, (2) two recent decisions by the United States Supreme Court, Iqbal and Twombly , which have clarified that under the Federal Rules of Civil Procedure, complaints must obtain a sufficient description of the alleged facts to demonstrate that the plaintiff has stated a plausible claim for relief, and (3) decisions by various courts recognizing that the state laws on which plaintiffs based their claims either were preempted by federal law or regulations, or within the primary jurisdiction of a federal agency. Just a few weeks ago, we were able to get a class action suit against one of our clients dismissed by a California federal judge on primary jurisdiction grounds.

Please email the interviewees at lweinstein@proskauer.com or borourke@proskauer.com with questions about this interview.