Advertising Law - May 2016

by Manatt, Phelps & Phillips, LLP
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In This Issue:

  • Kanye's Promise of Exclusivity a Siren Song, Suit Says
  • Seventh Circuit Reinstates Data Breach Suit Against P.F. Chang's
  • Lanham Act Claims Against Competitor Not Preempted by FDCA, Ninth Circuit Affirms
  • U.S. Supreme Court Asked to Consider Disparaging Trademarks

Kanye's Promise of Exclusivity a Siren Song, Suit Says

Kanye West's latest drama involves the courtroom—specifically, a putative class action complaint alleging false advertising, unfair competition, and unjust enrichment.

In February, West tweeted that his new album The Life of Pablo "will never never never be on Apple. And it will never be for sale… You can only get it on Tidal." The tweet went viral and was picked up by news outlets and reported worldwide. West, a shareholder in the streaming music service, initially made good on his promise, and released the album exclusively on Tidal.

But just a few weeks later, West delivered an about-face, offering his album on his own website and a host of other services, including Apple, Pandora, and Spotify.

In response, California resident Justin Baker-Rhett filed a putative class action complaint against West and S. Carter Enterprises. Baker-Rhett claimed that he signed up for Tidal (at a cost of $9.99 per month after a free trial period) for the sole purpose of gaining access to The Life of Pablo.

The timing of West's purported exclusive Tidal release saved the streaming music service, which was "quietly teetering on the brink of collapse" in early 2016, Baker-Rhett alleged. The service similarly promoted West's album as an exclusive by tweeting, "We're bringing @KanyeWest's #TLOP to fans around the globe. It's streaming exclusively on TIDAL.com." The album was streamed 250 million times in the first 10 days of its release and the service's subscribers tripled, from 1 million to 3 million users, bumping the mobile app to the top of the download charts.

"In reality, neither Mr. West nor S. Carter Enterprises ever intended The Life of Pablo to run exclusively on the Tidal platform," Baker-Rhett claimed. "To the contrary, they—knowing that Tidal was in trouble but not wanting to invest their own money to save the company—chose to fraudulently induce millions of American consumers into paying for Tidal's rescue."

According to the plaintiff, Tidal and West not only gained new subscribers, they also benefited because subscribers provided personally identifiable information in order to sign up for the service. As a result, the defendants obtained valuable data, including e-mail addresses, social media accounts, and credit card information.

Baker-Rhett estimated that the promised exclusivity was worth as much as $84 million to Tidal. "Defendants reaped enormous benefits from the mass influx of new subscribers and the treasure trove of consumer data they collected from them," according to the complaint.

The suit seeks damages, disgorgement of profits, and restitution, as well as an order that requires Tidal to delete the private information of all class members (consisting of millions of individuals, Baker-Rhett said) and to cancel the negative-option subscriptions created during the class period.

To read the complaint in Baker-Rhett v. S. Carter Enterprises, click here.

Why it matters: "We fully support the right of artists to express themselves freely and creatively, however, creative freedom is not a license to mislead the public," Baker-Rhett's attorney said in a statement about the complaint. Advertisers should ensure that in their excitement for a new launch or effort to boost a sagging bottom line they don't overstate their offerings.

Seventh Circuit Reinstates Data Breach Suit Against P.F. Chang's

The Seventh Circuit Court of Appeals reversed the dismissal of a data breach suit against P.F. Chang's, holding that the risk of future fraudulent charges and identity theft created by a data breach constituted a "certainly impending" future injury to establish standing for the plaintiffs.

Like many other companies, the national restaurant chain recently suffered a data breach. In June 2014, P.F. Chang's announced that its computer system had been breached and consumer credit and debit card data had been stolen. As a precaution, the company switched to a manual card processing system at all locations in the United States. A few weeks later the company announced that it had determined data was stolen from just 33 restaurants and only one in Illinois.

Two Illinois residents filed separate suits against P.F. Chang's. Lucas Kosner alleged that a few weeks after he paid with his debit card at the restaurant, four fraudulent transactions were made. He cancelled the card immediately and, believing the charges occurred because of the data breach, purchased a credit monitoring service for $106.89. John Lewert dined at the same restaurant, also paying with his debit card. Although no fraudulent transactions were made with his card, his complaint stated that he spent time and effort monitoring his card statements and his credit report after he learned of the breach. Neither plaintiff dined at the Illinois restaurant identified by the chain as being impacted by the breach.

P.F. Chang's moved to dismiss the consolidated cases, arguing that the plaintiffs lacked standing to bring suit. A federal district court agreed, but a three-judge panel of the Seventh Circuit reversed.

As a starting point, the court referenced a prior decision on standing in a data breach case in Remijas v. Neiman Marcus Group, where the Seventh Circuit concluded that the plaintiffs' increased risk of fraudulent credit and debit card charges and identity theft was concrete and particularized enough to support Article III standing. Standing was further supported by the time and money class members spent protecting against future identity theft or fraudulent charges, the Remijas court said.

"In the present case, several of Lewert and Kosner's alleged injuries fit within the categories we delineated in Remijas," the court wrote. "They describe the same kind of future injuries as the Remijas plaintiffs did: the increased risk of fraudulent charges and identity theft they face because their data has already been stolen. These alleged injuries are concrete enough to support a lawsuit."

The plaintiffs also pled sufficient facts to establish standing on their present injuries, the panel added, with Kosner asserting that he already experienced fraudulent charges and Lewert claiming that he spent time and effort monitoring his card statements and other financial information.

The restaurant chain attempted to distinguish Remijas by arguing that the plaintiffs' data was not actually exposed in the breach, noting that Lewert and Kosner dined at a restaurant not identified as one of those impacted by the data theft. "To the extent this is a valid distinction (and that is questionable), it is one that is immaterial," the court said. The plaintiffs plausibly alleged that their data was stolen and that P.F. Chang's public statements addressed customers who had dined at all of its stores in the United States.

"This creates a factual dispute about the scope of the breach, but it does not destroy standing," the Seventh Circuit explained. "P.F. Chang's will have the opportunity to present evidence to explain how the breach occurred and which stores it affected. Perhaps it can trace which specific data files were stolen. Perhaps each individual location's data is behind a separate firewall. Or perhaps it is being too optimistic and the breach was greater than it suggests."

"When the data system for an entire corporation with locations across the country experiences a data breach and the corporation reacts as if the breach could affect all of its locations, it is certainly plausible that all of its locations were in fact affected," the court added.

Addressing the plaintiffs' other asserted injuries, the panel said the cost of their meals was not an injury, despite their claim they would not have dined at the restaurant had they known of its poor data security. Nor did the panel accept their contention that they had a property right in their personally identifiable data.

Lewert and Kosner did manage to satisfy the requirements for causation and redressability, however. The court again rejected the defendant's argument that they dined at a restaurant not hit by the hackers, as that would assume the answer to a disputed fact. "All class members should have the chance to show that they spent time and resources tracking down the possible fraud, changing automatic charges, and replacing cards as a prophylactic measure," the court said.

To read the decision in Lewert v. P.F. Chang's China Bistro, Inc., click here.

Why it matters: The Seventh Circuit has now firmly established itself as a plaintiff-friendly jurisdiction for data breach litigation, with the Lewert decision building upon the generous standing position adopted in Remijas. The Remijas ruling provided a road map for data breach plaintiffs to win the battle over standing. As noted by the panel, the Lewert plaintiffs alleged "the same kind" of injuries as the successful plaintiffs in the Remijas case. In addition, companies should note that the court relied upon statements released by P.F. Chang's after the breach to support the plaintiffs' contentions, including advice to review credit reports and comments on the scope of the breach.

Lanham Act Claims Against Competitor Not Preempted by FDCA, Ninth Circuit Affirms

Interpreting the U.S. Supreme Court's decision in Pom Wonderful LLC v. Coca-Cola Co., the Ninth Circuit Court of Appeals ruled that Lanham Act claims against a competitor were not precluded by the Food, Drug & Cosmetic Act (FDCA).

Dietary supplement manufacturer ThermoLife International filed suit against competitor Gaspari Nutrition (GNI), challenging its advertising claims for its testosterone boosters as "safe," "natural," "legal," and compliant with the FDCA as amended by the Dietary Supplement Health Education Act (DSHEA). Gaspari's claims constituted false advertising in violation of the Lanham Act, ThermoLife alleged.

Gaspari responded with a motion for summary judgment, arguing that the FDCA preempted the plaintiff's claims and that ThermoLife could not establish falsity, materiality, or injury. A federal district court agreed.

But in an unpublished opinion, the Ninth Circuit reversed and remanded. The panel first noted that the district court did not have the benefit of the Supreme Court's 2014 decision in Pom Wonderful, where the justices established that the FDCA generally does not preclude Lanham Act claims for false labeling of food. That case "squarely controls the issue," the court said. "Indeed, Pom Wonderful expressly rejected most of GNI's arguments on preclusion."

The defendant attempted to distinguish the Supreme Court opinion by arguing that ThermoLife's allegations would require litigation of the alleged underlying FDCA violation. The Ninth Circuit disagreed, "ThermoLife's claims that GNI falsely advertised its products as 'safe' and 'natural' require no interpretation of the FDCA," the court said, nor would ThermoLife need to demonstrate a FDCA violation to prevail on its claims that GNI falsely advertised its products as "legal" or "DSHEA-compliant."

Similarly, the plaintiff's unfair competition claims were not preempted, the panel added, particularly "where, as here, 'the state-law duty "parallels" the federal-law duty.'"

Turning to the other elements of ThermoLife's Lanham Act claims—falsity, materiality, and injury—the court again reached the opposite conclusion to that of the district court judge. GNI's claims that its products were "legal" and "DSHEA-compliant" would generally be inactionable because they purport to interpret the meaning of a statute or regulation, the court said. But an exception exists for an opinion expressed by a speaker who lacks a good faith belief in the truth of the statement.

"ThermoLife points to numerous emails indicating GNI was aware its products were not DSHEA-compliant," the panel wrote. "Therefore there is a triable issue of falsity."

The defendant's statements that its products were "safe" and "natural" were both actionable as statement of fact, not opinion, the court said, and the advertiser's claims were likely to influence consumers' purchasing decisions, making them material.

As for injury, a reasonable jury could infer that ThermoLife established a presumption of commercial injury based on evidence of direct competition and a likelihood of consumer deception, the court found. "GNI does not dispute it directly competed with ThermoLife in the market for testosterone booster products and GNI's literally false statements necessarily misled consumers," the panel said.

"[T]he district court … erred in granting summary judgment on ThermoLife's six Lanham Act claims and unfair competition claim," the court concluded. "Because the FDCA neither precludes nor preempts those claims and factual issues preclude summary judgment, we vacate the judgment and remand for further proceedings."

To read the memorandum in ThermoLife International, LLC v. Gaspari Nutrition Inc., click here.

Why it matters: The Ninth Circuit's decision reinforces the importance of the U.S. Supreme Court's holding in the Pom Wonderful decision that Lanham Act suits by competitors can peacefully coexist with FDCA claims. It also demonstrates that predictions about an increase in brand wars were not unfounded.

U.S. Supreme Court Asked to Consider Disparaging Trademarks

The U.S. Patent and Trademark Office (USPTO) has filed a writ of certiorari with the U.S. Supreme Court after a divided en banc Federal Circuit Court of Appeals struck down its rule prohibiting the registration of offensive trademarks on constitutional grounds. The USPTO had denied an Asian-American band's attempt to register the trademark "The Slants" (intended to "take ownership" of offensive stereotypes about Asians), based on a prohibition against registering "disparaging" marks.

After a panel of the Federal Circuit affirmed the denial, the band appealed on First Amendment grounds. The en banc court reversed, overturning decades of precedent. "It is a bedrock principle underlying the First Amendment that the government may not penalize private speech merely because it disapproves of the message it conveys," the court wrote. "That principle governs even when the government's message-discriminatory penalty is less than a prohibition."

Now the USPTO has requested that the U.S. Supreme Court take the case.

"Section 2(a) of the Lanham Act, 15 U.S.C. 1052(a), provides that no trademark shall be refused registration on account of its nature unless it '[c]onsists of … matter which may disparage … persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt, or disrepute,'" the agency wrote in its petition for a writ of certiorari. "The question presented is as follows: Whether the disparagement provision in 15 U.S.C. 1052(a) is facially invalid under the Free Speech Clause of the First Amendment."

The disparagement clause does not restrict free speech, the USPTO told the justices, because trademark rights are acquired through common-law use and the government is not prohibiting speech. While the federal registration system may confer benefits on owners, it does not actually prevent trademark holders from using non-registered marks to distinguish their goods or services in commerce.

"Section 2a does not prohibit any speech, proscribe any conduct or restrict the use of any trademark. Nor does it restrict a mark owner's common-law trademark protections. Rather, Section 2a directs the PTO not to provide the benefits of federal registration to disparaging marks," the USPTO argued in its cert petition. "The court of appeals disregarded this court's teaching that, when Congress does not restrict private speech or conduct, but simply offers federal benefits on terms that encourage private activity consonant with legislative policy, it has significant latitude to consider the content of speech in defining the terms on which the benefits will be provided."

The disparagement clause at issue is the same relied upon by the USPTO to invalidate the trademark for the Washington Redskins. In that case, a group of Native Americans pointed to Section 2a to argue that the National Football League team's marks disparaged their institutions and beliefs. That case is currently pending on appeal in the Fourth Circuit.

To read the writ of certiorari in Lee v. Tam, click here.

Why it matters: The case has significant implications for trademark law. If the Court were to accept the case and reverse the Federal Circuit's en banc opinion, the status quo would be restored, the Slants could not register its mark and the Redskins would lose its registration. Should the justices agree with the en banc Federal Circuit's free speech rationale, it could open the door to a variety of new trademark applications.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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