Arrgh! Social Media Post Lands “Pirate Joe’s” in Hot Water

In the highly-publicized case about unauthorized reselling of Trader Joe’s merchandise by renegade Canadian merchant “Pirate Joe’s,” social media provided the powder keg for Trader Joe’s arbitration enforcement demand. The case set sail in May 2013, when Trader Joe’s sued Pirate Joe’s proprietor Michael Hallatt for federal trademark infringement and violations of Washington state consumer protection and trademark dilution laws.  A Washington federal judge dismissed that suit on jurisdictional grounds, but the Ninth Circuit brought Trader Joe’s federal trademark infringement claims back from the deep on appeal.  The parties entered arbitration, obligating Hallatt to cease reselling Trader Joe’s merchandise while they parleyed a confidential final settlement.

Last June, however, Hallatt posted to the Pirate Joe’s website “We re-opened today for good. … The law is on our side and I’ve got everyone addicted, so it’s only fair I keep up supply!” Trader Joe’s immediately moved to confirm and enforce the arbitration award, parroting this post as key evidence in its papers, which the court approved in August.  The court made shark bait of Hallatt’s motion to reconsider affirming the arbitration award last month.

Takeaway: Advertisers that use social media or website posts regarding litigation may provide the opposition with ammunition to sink their case.

Cracking Open a Cold One: Plaintiffs’ False Advertising Suit Against Brewer Survives Dismissal

Earlier this year, two plaintiffs launched a putative class action against Portland-based Craft Brew Alliance, the fifth largest brewing company in the U.S. and parent company of Kona Brewing Co. Craft Brew acquired Kona in 2010, emblazoning its bottles and cans with images and text that conjure Hawaii’s scenery and lifestyle.  There’s just one issue:  most of Kona’s draft beers are actually brewed in Oregon, Washington, Tennessee, and New Hampshire.  The plaintiffs allege Craft Brew knowingly duped consumers into paying more for “Hawaiian” beer in violation of various false advertising and consumer protection laws.

Although marketing with geographical imagery may not solely support false advertising actions, U.S. District Judge Freeman of the Northern District of California recently refused to dismiss the case. She focused on particular details of the packaging, such as the address and map of Kona with an invitation for customers to visit “the brewery,” implying there is only the one.  Although there is a real brewery at the Hawaii address on the bottles, nearly all of the beer sold in the mainland United States is in fact made on the mainland.  This implication, Judge Freeman stated, gives rise to a dispute about what a reasonable mainland consumer would view when buying the beer in stores.

Takeaway:  Geographically-inspired product packaging may give rise to false advertising claims if the imagery implies that the products are made at the stated location.

Judge Agrees – YouTube Mockery Protected by Fair Use

Readers may be aware of YouTube celebrity couple Ethan and Hila Klein, better known by their social media moniker @h3h3productions. They rose to Internet fame producing comedic “reaction” videos that ridicule and comment upon other Internet content, boasting 4.9 million subscribers on their YouTube channel.  Not everyone laughed along though, particularly fellow YouTuber Matt Hosseinzadeh, whose own comedy video the Kleins mocked on their channel.  Hosseinzadeh sued the Kleins for copyright infringement in April of last year for appropriating excerpts of his content in their reaction video.

U.S. federal Judge Katherine B. Forrest of the Southern District of New York recently granted summary judgment in favor of the Kleins, holding that fair use doctrine protects the Kleins’ mockery of Hosseinzadeh’s video. Although the Kleins used excerpts of Hosseinzadeh’s copyrighted work in their reaction video, Judge Forrest concluded:  “Any review of the Klein video leaves no doubt that it constitutes critical commentary of the [Hosseinzadeh] video; there is also no doubt that the Klein video is decidedly not a market substitute for the [Hosseinzadeh] video.”  The Kleins continue to produce comedy videos, although Hosseinzadeh’s channel appears to be on hiatus.

Takeaway: Advertisers should urge caution with the outcome of this case.  Although a court concluded that the use by an individual was a fair use, advertising commercial speech may not receive the same protections.

227k Consumers to Receive Refund Checks from Dietary Supplement Company Settlement

Roughly 227,000 consumers will receive an average of $43 each in an effort by the Federal Trade Commission (FTC) to send refunds to purchasers of dietary supplement products sold by Health Formulas LLC.

The $9.8 million total refund is the result of a 2016 settlement with the company, its owners, and related companies, such as Simple Pure Nutrition. The FTC had alleged in 2014 that Health Formulas LLC had violated the Restore Online Shoppers’ Confidence Act (ROSCA), which prohibits marketers from charging consumers in an Internet transaction, unless the marketer has clearly disclosed all material terms of the transaction and obtained the consumers’ express informed consent. The company, which also made misleading claims about its weight loss products, allegedly used fake “free trials,” misled consumers into disclosing their credit and debit card information, and enrolled them in negative-option membership programs without their permission, causing them to be charged for monthly shipments. Consumers were unable to stop the automatic charges.

The charges for weight-loss supplements, with names like Pure Green Coffee Bean Plus and RKG Extreme ranged from $60 to $210 per month. Advertisements for the products made claims including “Burn fat without diet or exercise” and “Extreme weight loss!”

The enforcement action against Health Formulas LLC was the first that the FTC brought alleging violations of ROSCA. The Commission has used the law a number of times since then to challenge negative option arrangements and other deceptive billing practices. We covered a recent settlement here.

Takeaway: Companies should be cautious when using “free trials” and negative options to market their products. While the diet supplement industry has been a particular focus of the FTC’s scrutiny, the Commission is paying attention to all marketers that use these tactics without proper disclosures.

 

 

 

 

Gatorade Agrees to Stop Hating On Water

Gatorade recently handed $300,000 to California to settle false advertising and unfair competition claims that boil down to making water look bad. The company released an app in 2012 called “Bolt!” that featured an animation of Jamaican Olympic gold medalist, Usain Bolt, racing to recapture gold coins from pirates. Gatorade icons boosted performance and water hindered performance. The tutorial explicitly advised users, “Keep Your Performance Level High By Avoiding Water.” According to the complaint, users downloaded the app over 2.3 million times and played the game over 87 million times—and over 70% of them were 13-24 years old.

The final judgment enjoins Gatorade from making apps or games available for download that create the misleading impression that water hinders or adversely affects athletic performance, water should generally be avoided in favor of Gatorade, athletes avoid consuming water, or water consumption should generally be avoided. The judgment further enjoins Gatorade from making any other statements that disparage water or its consumption. Additionally, Gatorade must make reasonable efforts to include provisions in endorsement contracts that require endorsers to clearly and conspicuously disclose their relationship with Gatorade and to abide by the PepsiCo Policy on Responsible Advertising to Children.

Takeaway: Companies should pay extra attention to health claims, including those which may simply compare their products to water.

FTC Provided Guidance Regarding Affiliate Marketing

The FTC alerted consumers to the truth behind online advertisements connected to affiliate marketers in a September 20th blog post titled, What’s affiliate marketing? Should I Care? The FTC took action against an online marketing operation this summer over a low-cost trial scam involving tooth-whitening products. According to the FTC, many consumers remain unaware that merchants use affiliate networks and marketers to promote products and services and that affiliates are paid if they make a purchase, sign up for a “free” trial, or simply click on an advertisement.

The FTC believes that affiliate marketing is an acceptable—and useful—method for merchants to promote products and services provided that it is conducted truthfully. The affiliate structure itself increases the risk of misleading consumers through deceptive advertising, particularly in the context of trial offers involving subscriptions or multiple product charges in the eyes of the FTC. Notably, the FTC considers the terms and conditions underlying these transactions when evaluating the truthfulness of such campaigns.

 

“Pact” Health App Breaks Pact, Settles With FTC

Pact, Inc. settled charges with the FTC on September 21, 2017 that the mobile software application company engaged in deceptive acts and practices, unfair billing practices, and failure to disclose material terms relating to its Pact app.

The Pact app is premised on paying members that complete health-related weekly “pacts” with funds generated by users that fail to do so. Members set targets and penalty amounts between five and fifty dollars in case they break the pact. For example, GymPacts involves committing to exercise a specified number of times per week and VeggiePacts involves committing to eat a specified number of fruit and vegetables per week. Pacts automatically renew on Monday nights, and the app assured consumers it would never charge them unless they fail to complete a pact. According to the complaint, Pact, Inc. did not pay consumers for successfully-completed pacts—and in some cases charged them—and continuously charged consumers after cancellation.

In addition to deceptive acts and practices and unfair billing practices, the FTC charged Pact, Inc. with a specific violation of section 4 of the Restore Online Shoppers’ Confidence Act (ROSCA) due to the Pact app’s negative option feature, defined by FTC Telemarketing Sales Rules as a provision in which consumer silence or failure to take affirmative action operates as acceptance. 16 C.F.R. § 310.2(w). Information regarding recurring charges was buried in 4,400 words, or forty-three screens on an iPhone 5S. Consumers either could not locate instructions or took proper steps to freeze or stop charges but were charged nevertheless. In some cases, Pact, Inc. charged consumers hundreds of dollars even after they had deleted their accounts.

The proposed order includes a $1,500,000 money judgment in favor of the FTC and permanently restrains and enjoins Pact, Inc. from three key things: (1) misrepresenting material facts concerning the app such as total costs, restrictions, limitations, conditions, or aspects and characteristics of the app; (2) charging consumers without first obtaining express, informed consent; and (3) violating ROSCA by obtaining billing information for transactions involving a negative option feature without clear and conspicuous disclosure.

Takeaway: Companies should carefully consider compliance issues relating to recurring charges before incorporating negative option features into terms of products and services.

Delta Airlines Uses RICO Statutes To Enforce Trademark Rights Against Counterfeit Pet Transit

Delta Airlines, Inc. (“Delta”) sued a handful of defendants in Federal court last week over a pet shipment website that appears to be affiliated with the company. Delta is seeking an injunction and damages against John Doe defendants. The complaint alleges federal trademark infringement and counterfeiting, wire fraud, unfair competition, tarnishment of a famous mark under the Lanham Act, federal and state civil Racketeer Influenced and Corrupt Organizations Act (RICO) violations, deceptive trade practices, and unjust enrichment.

The defendants registered the domain “DeltaPetTransit.com” with NameCheap, Inc. and used the company WhoisGuard, Inc. as a proxy registrant to hide their true identity. The counterfeit website displayed a Google phone number and email address, along with an additional phone number and address in Simi Valley, Nevada that do not exist. Delta alleges the defendants appropriated Delta marks in an effort to advertise fake pet shipping services on the website while pretending to be owned and operated by Delta. Specifically, the complaint claims the defendants infringed Delta’s trademarks with “counterfeit marks”, tarnished a famous mark through misappropriation of marks such as DELTA, WIDGET LOGO, and LIVERY, and engaged in unfair competition through false designations of origin and false advertising.

Federal and state civil RICO violations also make an appearance in the case. According to Delta, the defendants violated state and Federal racketeering laws through participation in the infringing scheme. In addition to treble damages and attorney’s fees under RICO, Delta seeks a preliminary and permanent injunction, an order to deliver all materials in possession for the purpose of destruction, special and general damages to be proved at trial (including quasi-contractual relief for an unjust enrichment claim), and punitive damages.

Takeaway: Advertisers that find themselves defending trademark infringement suits may wish to consider the civil remedy provisions in RICO statutes in the event that the infringers are engaging in criminal schemes which injure a company’s business or property—including injuries sustained as a result of trademark infringement.

 

“Local” is a Claim Requiring Substantiation in False Advertising Action

U.S. District Court in Utah decided an interesting case involving whether an advertiser can use the word “local” in Bimbo Bakeries USA, Inc. v. Leland Sycamore et al.  Defendant Leland Sycamore had invented the trade secret process and formula for making “Grandma Sycamore’s Home-Maid Bread.”  After securing trademark registration for the bread packaging design, Leland sold Grandma Sycamore’s and its related intellectual property rights to Plaintiff Bimbo Bakeries.  Bimbo then sued Sycamore’s son, his company, and related entities for trade secrets misappropriation, trade dress infringement, trade dress dilution, false designation of origin, false advertising, and unfair competition.

One defendant, U.S. Bakery, the entity that purchased the allegedly misappropriated breadmaking process, moved for summary judgment on all of Bimbo’s claims. The court denied U.S. Bakery summary judgment on all claims except that for trade dress infringement.  As to the false advertising claim for U.S. Bakery’s “Fresh. Local. Quality.” tagline, the court observed that “[b]ecause the term local does not carry a set definition, whether the term is false or misleading is a question appropriate for the fact finder.  Summary judgment is denied because whether “local” is misleading is a factual question.”

Takeaway:  Advertisers who wish to use the word “local” in connection with their products’ source of origin should be cautious, as this court determined that such a word is a verifiable statement of fact, as opposed to non-actionable puffery.

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