FTC Eyes Contact Lens Trademark Settlement Agreements

Over a spirited dissent, and in a 3-1 decision issued on November 14, the FTC Commissioners held that 1-800 Contacts violated Section 5 of the FTC Action by entering into settlement agreements with competitors that (1) harmed consumers in the online sale of contact lenses and (2) harmed search engines by artificially reducing the prices paid for online advertisements.

The settlement agreements at issue resolved allegations by 1-800 Contacts that its competitors were infringing upon its trademark by bidding on paid search advertising with 1-800 Contacts’ trademark as keywords.  Search engines hold auctions for ads placed as results of certain search terms, and the settlement agreements prohibited competitors from bidding on keywords containing 1-800 Contacts’ trademark and also required competitors, when applicable, to employ 1-800 Contacts’ trademark as a “negative keyword” (which prevents competitors’ ads from populating the results of a keyword search for 1-800 Contacts’ trademark).  From 2004 to 2013, 1-800 Contacts entered into thirteen such agreements with competitors, and the FTC challenged this practice, reasoning that the agreements were inhibiting competition  in a “very important” channel of advertising that “effectively eliminat[ed] an entire channel of competitive advertising at the key moment when the consumer is considering a purchase.”

Last October, as we have previously reported, ALJ D. Michael Chappell issued an Initial Decision upholding the FTC’s complaint.  Judge Chappell concluded that, per the Supreme Court’s ruling in FTC v. Actavis, 570 U.S. 136 (2013), parties entering into trademark settlements are not immune from antitrust liability.  Upon de novo review, the Commissioners, in an opinion authored by Chairman Simons, agreed with Judge Chappell and engaged in an analysis of the conduct under the burden-shifting framework of the Rule of Reason.  The Commissioners first found that there was prima facie evidence that the settlement agreements resulted in anticompetitive effects: (1) that this specific type of restriction on advertising is “inherently suspect” and therefore does not require an elaborate analysis to show anticompetitive effects and (2) that the settlement agreements resulted in direct evidence of consumer harm, in the form of higher prices and a restriction of truthful advertising.  And, while the Commissioners found that 1-800 Contacts had two legitimate, plausible justifications for entering into the settlement agreements—the avoidance of litigation costs through settlement and trademark protection—the Commissioners ultimately reasoned that these justifications were not valid in the face of a showing that competition would likely be harmed by the settlement agreements.

In dissent, Commissioner Phillips criticized the majority’s finding of an anticompetitive effect, arguing that the settlement agreements were not “inherently suspect” because the likelihood of anticompetitive effects of such agreements could not easily be ascertained, especially when considering the competing federal policy of trademarks.  Further, Commissioner Phillips, like the majority, engaged in an extensive review of the factual record.  But, he concluded that there did not exist evidence of direct price effects.

Key Takeaways:  By categorizing these settlement agreements as “inherently suspect” under the antitrust laws, the FTC Commissioners are identifying conduct of this type as a “close neighbor” of a per se violation, the most serious violation of the antitrust laws.  And, even though the majority is careful to limit its holding to a specific fact-pattern, marketers and advertisers should be wary of any agreement among competitors to restrict advertising, even when entered into as part of a legitimate settlement agreement.  Indeed, this is an increasingly hot issue, and not just with antitrust enforcers.  Earlier this year, a proposed class action was filed against a group of companies in the hospitality industry asserting violations of Sherman Act Section 1 for alleged agreements to limit the use of branded keyword searches on prominent search engines.  Thus, marketers should be aware that agreements to restrict or limit advertising terms –particularly when entered by competitors—could very well face antitrust or other scrutiny, whether by antitrust enforcers or even private plaintiffs.

Zika Repellent Could Not Keep Away FTC

PR firm Creaxion Corporation and Inside Publications, LLC settled with the Federal Trade Commission (FTC) this week regarding promotional practices for Creaxion’s mosquito repellent. In its complaint, the FTC alleged that Creaxion planned a media campaign around its launch of the mosquito repellent during the Zika virus outbreak tied to the 2016 Summer Olympics. They engaged Inside Publications, which publishes Inside Gymnastics magazine, to help advertise the product – including the use of athlete endorsers.

Creaxion worked with two gold medalists to endorse their product (example is set forth below). Although each posted on social media endorsing the repellent, both failed to disclose their material connection to the advertiser. Inside Publications reposted the athlete endorsements but also failed to include any disclosures.

Based on this activity, the FTC argued that Creaxion and Inside Publications violated the FTC Act by (i) misrepresenting endorsements as independent opinions of impartial consumers, (ii) failing to disclose that the endorsers were paid or reimbursed, and (iii) misrepresenting that paid ads in Inside Publications were impartial opinions and statements.

The FTC’s order, in part, prohibits both companies from misrepresenting endorsers as impartial consumers and includes steps regarding compliance with online endorsers. Specifically, the companies must notify endorsers of their disclosure responsibilities, create a monitoring system and ensure compliance, and terminate any business relationship with a non-compliant endorser.

TAKEAWAY: This matter reinforces the FTC’s position regarding compliance requirements for endorsers – advertisers must ensure that endorsers are aware of their requirements, must monitor endorsers to ensure compliance, and ask endorsers to take down or fix non-compliant posts. Advertisers cannot get around these requirements simply by mischaracterizing an endorsement as an impartial review.

 

A License to Kill a License? SCOTUS to Resolve Trademark Bankruptcy Split

Trademark licensing is a driving force in business relationships. One common example is where one business owns a trademark, which it licenses out to other companies who manufacture and sell the products bearing the mark. But, what happens if the trademark owner goes bankrupt? Bankruptcy law gives a debtor the right to “reject” contracts to free itself of obligations, but if a trademark owner/licensor “rejects” a trademark license agreement, how does that affect the trademark licensee?

Currently, there are two countervailing schools of thought on this situation. One approach, articulated most famously by the Seventh Circuit, is that “rejection” of a trademark license through bankruptcy merely constitutes a breach of the contract, but not the termination of the agreement. The licensee retains the right to continue using the licensed mark and its obligation to continue complying with the terms of license. The other approach, advanced by the Fourth Circuit, is that “rejection” of trademark license through bankruptcy means rescission of the agreement in toto. That is, after bankruptcy of the licensor, the licensee retains no right to continue using the mark.

The Supreme Court recently granted certiorari in a First Circuit case called Mission Product Holdings, Inc. v. Tempnology, LLC to resolve this split. The First Circuit, following the Fourth Circuit’s reasoning, held that courts should not force debtors to monitor how their trademarks are being used because those are the very kinds of obligations that bankruptcy law is designed to void. Congress carved out exceptions for a debtor’s right to “reject” contracts involving patents, copyrights, and other forms of intellectual property, but left trademarks off the list. However, two amicus curiae briefs have already been filed, one by the International Trademark Association (“INTA”) and the other by a collection of bankruptcy law professors, that disagree vehemently with the First Circuit’s reasoning. Both favor the Seventh Circuit’s approach instead, arguing that it “enhances the value of trademark licenses and promotes the stability of the trademark system.” They argue that the Fourth Circuit’s original decision was based on a flawed reading of the bankruptcy statute, and that if someone built a business around licensed trademark rights it would be inequitable for them to lose those rights—and their entire business—just because the licensor went bankrupt.

Takeaway: This case will unify a glaring split in authority regarding trademark licenses, which may affect the negotiated value of license agreements and royalties. Trademark licensors and licensees are advised to monitor its resolution.

German State Media Authorities issue new guidance paper on marking adverts on social media

Recently, the German media regulators, the State Media Authorities (Landesmedienanstalten), issued a joint guidance paper on marking adverts on social media. For more information, click here.

 

 

New SCOTUS Case Could Sharpen FCC’s Teeth in the Courtroom

Earlier this month the Supreme Court granted certiorari in PDR Network, LLC v. Carlton & Harris Chiropractic, Inc., the resolution of which will impact the judiciary’s power to interpret agency rules. The facts underlying case appear unremarkable on their face; a health information service and publisher sent a single fax to a chiropractor’s office in December 2013 offering a free copy of its “2014 Physicians’ Desk Reference” e-book. The recipient of the fax, Carlton & Harris Chiropractic, then sued the publisher, PDR Network, in West Virginia federal court in November 2015 for allegedly violating a 2006 Federal Communications Commission (“FCC”) rule that interprets the Telephone Consumer Protection Act (“TCPA”) to prohibit unsolicited faxes even if the faxes only offer free products.

But, the district court dismissed Carlton & Harris’s suit, citing the famous 1984 case Chevron USA Inc. v. NRDC Inc. to hold that the court need not defer to the FCC’s interpretation of the TCPA. Carlton & Harris then appealed the dismissal. Fourth Circuit vacated the decision, holding that the district court had contravened the Administrative Orders Review Act—also known as the Hobbs Act—which “requires a district court to follow FCC interpretations of the TCPA,” according to its February 2018 opinion. PDR Network now argues that the Fourth Circuit went too far, and has upset the balance of power between the branches of government by “elevat[ing] those agencies identified in the Hobbs Act above even the judiciary, empowering agency orders to trump the courts’ fundamental ‘province and duty’ to interpret the law.” No amicus briefs have been filed, and the parties have yet to submit briefs on the merits.

Takeaway: In this case the Supreme Court will examine and resolve tensions between Chevron deference and the Hobbs Act, which may have greater implications beyond merely the FCC and solicitations by fax. Advertisers are advised to monitor its resolution.

Sunkist’s New Candy Packaging Is Forbidden Fruit, Welch’s Infringement Suit Says

Promotion in Motion Inc. (“PIM”) makes the popular Welch’s Fruit Snacks under a licensing deal with Welch’s, and Kervan USA LLC is a rival candymaker that has a similar licensing arrangement with Sunkist Growers Inc. PIM, however, contends that Kervan sought to capitalize on the fruits of PIM’s labors, and sued Kervan in the District of New Jersey for trade dress infringement. According to PIM’s complaint, examining the two fruit candies’ branded packaging is a far cry from comparing apples and oranges. Rather, Kervan “embarked on a concerted plan to knock off” PIM’s packaging and picked the low-hanging fruit that was “carefully calculated to siphon off the goodwill PIM has spent years in cultivating,” PIM alleges.

Kervan, refusing to be second banana, fired back. It answered suit, denied the infringement, and opposed PIM’s gambit for a temporary restraining order to halt Kervan’s use of the allegedly-infringing packaging. Whether PIM’s allegations of trade dress infringement are legitimate or merely sour grapes remains to be seen. The parties have been battling over the propriety of a preliminary injunction in this case since its inception this summer, and the court has not yet issued an order on the subject, though it has held multiple status conferences with the parties.

Takeaway: Trade dress infringement suits in a crowded market space can go pear-shaped rapidly. This is especially true where a product is unreleased. You be the judge; would you be confused as to the origin of the two candies based on a side-by-side comparison of their packaging?

NRA Is Full of Beans, Claims Sculpture Artist in Copyright Suit

The British artist Anish Kapoor, sculptor of the iconic Chicago art piece Cloud Gate, known colloquially as the Bean, filed suit against the National Rifle Association (“NRA”) for using imagery of Cloud Gate in online videos without his permission. Kapoor registered Cloud Gate with the U.S. Copyright Office in January 2016, and was “shocked and outraged” to learn the image of his work was featured in the NRA’s videos, which he described as “a clear call to armed violence against liberals and the media” in his June 2018 complaint. Kapoor’s complaint also details his attempts to have Cloud Gate images removed from NRA media, including through an open letter that was published by news outlets nationwide. Kapoor seeks an injunction to bar the NRA from continuing its allegedly unlawful conduct, $150,000 in damages for each infringement proven during trial, and disgorgement of any NRA profits obtained as a result of the video.

The case has not progressed on the merits since its filing, as the parties have been battling all summer and into the fall over which court should hear it. Now, the parties await the Northern District of Illinois’ decision whether to retain jurisdiction over the case or transfer it—as the NRA has requested—to the Eastern District of Virginia. The NRA’s motion to transfer and Kapoor’s motion for jurisdictional discovery both remain pending.

Takeaway: Advertisers should take care to seek permission from copyright owners before using any copyrighted works, especially in any political or potentially inflammatory advertising.

Harshing My “Vibes”: Kim Kardashian Fragrance Line Faces Trademark Infringement Suit

Kim Kardashian West’s fragrance company, KKW Fragrance LLC, is the target of a reverse confusion trademark infringement suit launched by Chicago-based mobile marketing company, Vibes Media, LLC. According to Vibes’ complaint, KKW Fragrance intentionally copied Vibes’ name and speech bubble logo in a new perfume also called “Vibes” that Kardashian launched as part of her new fragrance line, “Kimoji.” The bottle is shaped like a speech bubble, and has the word “VIBES” on its side in “a close facsimile” of Vibes’ registered trademark, which is also a speech bubble and the word “VIBES.” Vibes’ registered trademark is incontestable as of July 2018, according to the suit.

Vibes seeks to recover for trademark infringement, unfair competition and false designation of origin, and Illinois common law unfair competition. It requests a permanent injunction barring the sale of the perfume and the destruction or turnover of any allegedly-infringing material, as well as treble damages for willful infringement, disgorgement of KKW’s profits, compensation for corrective advertising, and attorneys’ fees. The Northern District of Illinois issued the summons as to KKW earlier this month, and KKW has yet to answer suit.

Takeaway: Reverse confusion occurs when a junior user of a trademark uses its superior brand power and market strength to overwhelm the senior user and confuse consumers into thinking the products are affiliated. Advertisers for high-profile companies and celebrities may be at risk for trademark infringement suits on theories of reverse confusion from smaller or inconspicuous senior users, even when the products may not appear to be identical or related.

Scientific Studies Are “SuperStarch” Kryptonite, Class Action Suit Says

Plaintiff Kevin McCann launched a putative class action against The UCAN Company (“UCAN”), which markets and distributes a line of sports performance products including “Generation UCAN SuperStarch Drink Mix,” “Generation UCAN Protein Drink Mix,” and “UCAN Snack Bars powered by SuperStarch.” The products all contain “SuperStarch,” which UCAN claims to be an easily digestible carbohydrate that promotes “‘sustained energy,’ ‘optimized performance’ ‘enhanced fat burn’ and ‘speedier recovery,’ all without the harmful and performance-impairing side effects associated with gastrointestinal distress.” SuperStarch is allegedly hydrothermally modified waxy maize starch, the carbohydrates in which have a lower glycemic index than those that are not hydrothermally modified.

But, according to McCann’s complaint, the science behind SuperStarch is anything but settled. Although one 2011 study showed that the starch did lead to lower insulin spikes and a higher level of fat breakdown than a sweetener called maltodextrin, but that there was no difference in performance between people who took the starch versus people taking maltodextrin. The white papers on the efficacy of SuperStarch were authored by a member of UCAN’s advisory board and “contain many unsubstantiated claims tricked up to look like science.” The complaint further alleges that a study by the Florida State University Institute of Sports Sciences and Medicine showed no improvement in athlete performance from taking SuperStarch before or during exercise, and that it actually hurt performance by causing digestive issues.

The suit seeks to join a national class of all persons in the United States who purchased UCAN’s the SuperStarch products and two subclasses for purchasers in states with similar consumer fraud laws under the facts of the case, and demands restitution, compensatory and punitive damages, and attorneys’ fees under various state consumer protection statutes. UCAN has yet to answer suit.

Takeaway: Advertisers should ensure any scientific claims linked to advertised products are substantiated by peer-reviewed scientific studies—not simply internal data— to avoid costly consumer protection suits.

Shedding Unwanted Pounds and Class Actions: Jenny Craig Settles TCPA Suit for $3 Million

Last month, a Florida district court granted preliminary approval of a $3 million class action settlement brought on behalf of recipients of unwanted Jenny Craig marketing text messages. The lead plaintiff, Zoey Bloom, alleges in her complaint that Jenny Craig used an automatic telephone dialing system to transmit two text messages that advertised Jenny Craig’s weight loss services without her prior express written consent. One such message Bloom received was: “”Hi Zoey, It’s Liz @ Jenny Craig again. Don’t want you to miss our best offer ever! Free 1 yr prog. + $17 off wkly menu for 12 wks. Interested?” She sought to join all persons within the United States who received similar text message advertisements from Jenny Craig without prior written consent since May 2014—about 628,610 individuals.

The settlement agreement includes an unopposed request for class counsel’s attorneys’ fees of up to 30% of the settlement fund and the legal costs to bring the suit. The speedy settlement came after “extensive arm’s-length negotiations, including a full-day mediation session, and subsequent negotiations lasting over one week,” and “provides relief for settlement class members where their recovery, if any, would otherwise be uncertain, especially given Jenny Craig’s ability and willingness to continue its vigorous defense of the case,” according to Bloom’s unopposed motion for preliminary approval of the settlement. The final approval hearing to determine the fairness and adequacy of the settlement is set for February 25, 2019.

Takeaway: The TCPA prohibits making calls or sending messages using any automatic telephone dialing system or “robodialing” to a number assigned to a cellular phone service, other than those made with prior express consent or for emergency purposes. Violations carry a minimum penalty of $500 per call or message. Advertisers should ensure any campaign involving robodialed calls, voice messages, or text messages are within TCPA standards.

 

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