AD-ttorneys@law - February 2022 #2

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BakerHostetlerBunny v. Smaug

Did Annie’s smack down a snack-box slack-fill strike suit?

Batten Down the Package!

Did the folks at Blue Diamond, Kingsford and Mars Wrigley Confectionary call to congratulate the general counsel over at Annie’s Inc. when the company vanquished a recent slack-fill case?

All these companies at some point in the recent past have been under class-action assault by the scourge of the snack bar, a plaintiffs’ counsel that, for the purposes of professional discretion, we shall nickname Snack Dragon. We’ve covered its handiwork so often we feel like we’re about to go steady.

But this latest case threw us. The class action against kid-themed crunchy food company Annie’s, filed in the Southern District of New York back in October 2020, represents a new tack for our favorite plaintiffs’ lawyers. Instead of suing over the taste qualities of snack-food ingredients, Snack Dragon is bringing a slack-fill case.

Years of Treats

Plaintiff Jessica Klausner, by her own admission, purchased Annie’s Bunny Fruit Snacks – Tropical Treat product over a period of three years prior to the suit. At some point in her patronage, she realized that “over sixty percent of each box of Fruit Snacks [was] comprised of empty space or ‘slack-fill,’ which serves no functional purpose.” The sheer size of the box, she alleged, “makes it appear to consumers that they are buying more Fruit Snacks than they really are.” If she had known about the problematic packaging, she wouldn’t have purchased the snack — or at least not paid a premium for it, she claims.

The court had little time for Klausner’s arguments, however. Drawing on eight “nearly identical” cases, the Southern District granted Annie’s motion to dismiss, setting the cute little snack company free from the snare.

For starters, the timing of Klausner’s purchases was problematic. “Given her purchasing history, Plaintiff must be aware by now of the amount of slack-fill contained in a box of Fruit Snacks,” the court wrote. “Thus, ‘[h]aving learned that’ a box of Fruit Snacks ‘contain[s] slack-fill, there is no likelihood that [Plaintiff] will subject [herself] to future injury by repurchasing’ another box in the future.”

The Takeaway

On another front, the court turned Klausner’s wording against her. “Plaintiff alleges that she ‘intends to, seeks to, and will purchase the [Fruit Snacks] again when she can do so with the assurance that the [Fruit Snacks’] labels are consistent with the [Fruit Snacks’] components.’ The Court interprets this conditional statement to mean that Plaintiff will only purchase the Fruit Snacks again if and when the allegedly misleading packaging is fixed.” If that’s so, the court countered, then should “Defendant ... not alter the packaging ... Plaintiff simply will not purchase the Fruit Snacks again.” Or, conversely, she would purchase the snacks if the packaging was fixed; but “in either scenario, Plaintiff goes unharmed.”

Even more damning, the packaging itself clearly states the weight of the product within, a fact that the court points out generally indicates that a reasonable consumer would not be misled by any nonfunctional packaging space. The court, having dispensed with Klausner’s violations of New York State business law, waved off her other claims as well.

Given Snack Dragon’s track record, this is likely not their last slack-fill case. But if you’re interested in an inoculation, Annie’s victory points the way. Put the total product weight in a prominent, easy-to-read position on your packaging. It’s not complete protection — the shoddiness of the rest of this suit was also some help for Annie’s — but it’s a start.

Macy’s Thread Count Suit Survives Class Scrutiny

Everyone who buys sheets might chafe, says court

We’re Good at Cocktail Parties

If there’s a better cure for a bored attorney than advertising law, we’ve yet to learn of it. The range of subjects one encounters, and often must study deeply, in our discipline is impressive — from dental aligners to the history of fudge production, facial detection technology and all things Kardashian. The present case is no exception.

Hawes et al v. Macy’s, Inc. et al. is all about thread and thread count — topics we were never taught about back in law school. But here’s our rule: There’s been at least one lawsuit over every conceivable subject, no matter how obscure it is.

So, here we go.

Turns out there’s conflict about how to count threads when it comes to polyester strands. Textile makers bundle strands of polyester together, but to determine thread count, do you count each individual strand or the bundled bunches?

Frayed Standards

Our heroine of the esoteric du jour is one Sara Hawes, a California consumer, who claims in a 2019 amended complaint that department store Macy’s is radically overcounting the threads in its Chief Value Cotton product line. Macy’s, the complaint argues, counts the individual strands when it should be counting the bundles; the difference in method leads to radically different counts. According to Hawes, when Macy’s is advertising a 900-thread count, the true count is 249.

Filed in the Southern District of Ohio, Hawes’ class action alleges a slew of violations under Missouri and California state laws, which the court summarized as “she has suffered because the sheets she purchased with inaccurate thread counts did not perform with the same characteristics as sheets with the thread counts as advertised.”

Surely there must be an industry association standard that would render such a lawsuit unnecessary, no? Well ... almost. Both Hawes and Macy’s agree that the American Society for Testing and Materials Standard (ASTMS) 3775 is the appropriate standard, but both parties are waving around sheaves of paper penned by various experts containing hot takes on what the standard means.

The Takeaway

In a recent order, the court ruled that both sides’ experts could continue to weigh in, and that class certification, which Macy’s challenged, could proceed.

Macy’s had argued that Hawes hadn’t demonstrated that all members of the proposed class suffered the same misrepresentation, and therefore they did not share a common concern. “It is either true or false that the thread counting method used by Macy’s deceptively overinflates thread count by tallying each parallel strand in a bundle,” the court wrote. “Stated in the negative, it seems very unlikely that Macy’s thread-count labeling would afford a claim to only some members of the proposed class. In large part, it is an all-or-nothing proposition.”

The agreement of both sides to the ASTMS 3775 standard should have resolved this case before it even got started. This case emphasizes the need to thoroughly examine industry standards — and pinch off any possible wiggle room that a canny plaintiff might exploit.

In the meantime, we’re curious to see which of the parties’ arguments prevails in this case and why, just to see if that set of sheets our in-laws gave us for Christmas last year has a low enough thread count for us to resent them.

Eye Health Supplement Maker Takes Rival to Task

Products improve vision, but do they contain dangerous toxins?

Mon Frère, Mon Adversaire

What’s more dangerous than an informed competitor?

Whatever your line of business, you know all of the difficulties that arise for your competitors. You’ve faced the same hurdles: manufacturing and distribution challenges, struggles with regulatory bodies and, yes, even marketing headaches.

Perhaps this familiarity explains the terse economy of MacuHealth’s 15-page complaint against Vision Elements, filed in Florida’s Middle District in late January. Both companies are in the same business — creating dietary supplements that improve the health and performance of the human eye. MacuHealth, a Michigan company, produces eponymous products MacuHealth and MacuHealth Plus. Florida-based Vision Elements manufactures Vision Elements Early Defense, which offers similar benefits. So MacuHealth knows where to strike and how to do so efficiently.

But in case you think this suit is a takedown of Vision Elements’ performance claims, you’re wrong — this is something deeper.

Somebody’s Watching

MacuHealth alleges that Vision Elements has made several claims on its website and product pages that Early Defense is free of class 2 solvents — defined by the Food and Drug Administration (FDA) as chemicals that “should be limited in pharmaceutical products because of their inherent toxicity.” A representative tag boasts that Early Defense is “environmentally friendly, using no class 2 solvents, such as hexane, methanol, and acetone, typically found in other brands.”

But according to MacuHealth, hexane, methanol and acetone are used in connection with the manufacture of Early Defense, and the company’s tests prove that amounts of all three still appear in the product itself. Falsely claiming the contrary, MacuHealth asserts, is bad for its business: “These false advertisements ... induce or have the tendency to induce consumers into purchasing the Vision Elements Early Defense instead of MacuHealth’s directly competing products.”

MacuHealth’s suit alleges unfair competition through false advertising generally, along with specific violations of Florida state law.

The Takeaway

It’s not clear whether MacuHealth makes similar toxin-free claims regarding its own products that it believes are well-supported or simply refuses to make such claims because it knows that the appearance of class 2 toxins in such products is inevitable. But it doesn’t matter. In either scenario, MacuHealth knows something about the manufacture of competing products, and it is using that knowledge to challenge a rival’s advertising claims. In today’s litigation environment, it’s not just regulators and the class-action bar manufacturers need to fear. Competitors have a nuanced understanding of how products are made, and they’re keeping an eye on claims.

There’s an interesting subquestion that may become central to Vision Elements’ defense — what exactly does it mean for a product to be “free of” a given harmful ingredient in the first place? Does the concept allow for trace amounts left over from the manufacturing process? The levels of hexane, methanol and acetone reported by MacuHealth in the Early Defense product all seem to be lower than the permitted daily exposure defined by the FDA. Is that good enough for consumers — or not good enough at all?

We’ll see how the dispute develops.

FTC Says It Is Taking Aggressive New Approach to COVID-19 Scams

But the Commission’s latest statement feels like yesterday’s news

A Parliament of Wonks

The Federal Trade Commission’s (FTC or the Commission) Bureau of Consumer Protection Director Samuel Levine testified before Congress on Feb. 1, and while it sounds like the Commission has its hands full, we’re not sure what else to take away from his testimony.

The session, called “Stopping COVID-19 Fraud and Price Gouging,” was also attended by representatives of the U.S. Public Interest Research Group, the Better Business Bureau’s National Programs and the National Association of Attorneys General. You can check out all the testimony here, including PDFs and a lengthy video if you’re of the C-SPAN bent. The FTC’s own summary is here.

Braggadormant

The two main threads of the director’s testimony are his gratitude for the new powers granted to the Commission under the COVID-19 Consumer Protection Act (CCPA) and his discomfort with the AMG Capital Mgmt Supreme Court decision. Other than that, the testimony largely consists of facts and figures that shine a flattering light on the Commission.

Which is as it should be; the FTC should be allowed to toot its own horn. “Since January 2020 and as of January 28, 2022, the FTC has received more than 292,000 [COVID-19-related] fraud reports, reflecting $674 million in fraud losses,” the director shared. There’s a lot on the Commission’s plate.

Director Levine noted that the Commission, “deploying … new authority under the COVID-19 Consumer Protection Act of 2020 and its other legal authorities … seeks emergency injunctions, asset freezes, and civil penalties of up to $46,517 for each violation of the CCPA or other rules enforced by the agency as necessary to ensure that the public is protected.” The civil penalties allowed by the CCPA are certainly a welcome balm to the Commission in light of the AMG Capital decision restricting monetary relief under Section 13(b) of the FTC Act.

The Takeaway

The enforcement actions that Director Levine includes in his testimony are familiar, however, to anyone who has followed the Commission’s news feed. There’s some interesting new stuff in here, to be fair, including new outreach to ethnic and immigrant communities enabled by American Rescue Plan funds.

Potentially more noteworthy are the “market-wide initiatives to protect consumers” that the FTC is focusing its attention on now. These include impersonator fraud, false educational and earning claims, and deceptive health claims. None of these areas surprise dedicated readers of this newsletter as a focus for the Commission, but they are a helpful insight into the FTC’s thinking post-AMG Capital. To protect against impersonator fraud, the FTC is considering promulgating a rule that would allow it to seek civil penalties for this kind of misconduct. For false educational and earnings claims, the Commission has revived Penalty Offense Authority, which involves sending a Notice of Penalty Offenses to companies in a certain category, and again potentially allows the FTC to seek civil penalties. And for deceptive health claims, we’ve already discussed how the Commission is actively employing penalties available under the COVID-19 Consumer Protection Act. The FTC may have been down following the Supreme Court’s decision, but clearly it is not out. The Commission continues to get creative and find new avenues for pursuing monetary relief.

While the above shows the FTC is rather nimbly adapting to the fallout of the AMG Capital decision, ultimately it wants Congress to restore the level of recourse it previously enjoyed. The testimony wraps up with pointed comments to that effect. “Returning money to consumers harmed by scammers has been a cornerstone of the FTC’s law enforcement actions,” Levine said; “these payments are especially critical during this pandemic.” The Commission “requests legislation to restore its ability to return money to consumers harmed by illegal conduct.” The FTC wants its hammer back, but in the meantime, it has demonstrated its other tools can be effective too.

Title of ‘First’ NFT Is up for Grabs

Did an ‘expired’ blockchain give the lie to a $1.47 million Sotheby’s sale?

Erehwon

We feel strange just asking the question, but were you an adult in the 1990s?

If you were and weren’t living under some sort of a rock, you must remember the giddy, headlong rush our entire culture took into the unknown future of Internet technology. The ideological underpinnings of many of the structural choices made by technologists in those early days — from the essential anonymity of data to the notion that “information wants to be free” — were suffused with an almost sweet utopianism.

Looking back, it’s hard to believe that the most ardent exponents of early Internet culture could miss altogether the likelihood — or perhaps the certainty — that major advances in technology would create as many headaches as they cured.

For your consideration, then, the latest headache: disputes over the ownership of nonfungible tokens, or NFTs.

To put it simply, an NFT is data that is stored on a blockchain, so it can be identified and owned in ways similar to a physical asset. (We’ve covered NFT-related migraines before.)

Because blockchain technology assigns and identifies the owner of an NFT, it opens new possibilities for digital art that previously had to remain locked away on a single system or run the risk of being copied ad infinitum and distributed circum mundum. Blockchain essentially attached ownership and reproduction rights to digital works of art.

The Lying of Lot 49

In Free Holdings Inc. v. McCoy et al., filed in the Southern District of New York, we have a new kind of advertising lawsuit related to the peculiar nature of NFTs.

The suit concerns Quantum, a digital work referred to as the “first NFT.” Created by artist Kevin McCoy, Quantum was “minted” in 2014 through NameCoin, a version of blockchain software. While Quantum’s origins are no doubt revolutionary, the work itself is somewhat underwhelming; it looks like a trippy Windows screen saver circa 1999. There’s some footage of it, along with a decent summary of NFTs and digital art, here.

Quantum was purchased by one Alex Amsel, who goes by the handle @sillytuna, for $1.47 million in a Sotheby’s auction titled Natively Digital: A Curated NFT Sale. “So happy to own the first ever NFT, Quantum, from @mccoyspace,” Amsel tweeted. “A piece of history. Let’s see how we can continue its story.”

That story took a strange turn when McCoy, Sotheby’s and Amsel were sued by a Pynchonesque individual known only as the sole member of FreeHoldings Inc., a company that tweets as @EarlyNFT.

FreeHoldings’ complaint maintains that McCoy minted Quantum through NameCoin, but allowed the record for Quantum’s NameCoin blockchain to expire (apparently, NameCoin blockchains need to be renewed every 250 days). FreeHoldings claims to have scooped up the Quantum NameCoin record in April 2021.

McCoy and Sotheby’s, the complaint continues, began “marketing and promoting” the sale of Quantum as “the first NFT.” How could this be possible if FreeHoldings owned the original blockchain that was assigned to it?

“Sotheby’s and McCoy further stated that Quantum on the NameCoin blockchain had been ‘burned’ or otherwise removed from the NameCoin blockchain” and transferred to a blockchain on the Ethereum platform, FreeHoldings maintains. “This is false. A NameCoin blockchain record cannot be ‘removed,’ and the blockchain record for Quantum has not been ‘removed’ or ‘burned.’ Rather, the NameCoin blockchain record for Quantum remains active and under the control of Free Holdings.”

The Takeaway

The legal question, as framed by FreeHoldings’ suit, is this: Who gets to claim they own (and are able to sell) the first NFT?

McCoy allegedly ignored FreeHoldings’ attempts to persuade him to stop calling Quantum the first NFT in the course of the Sotheby’s sale. According to FreeHoldings, they are the owner of the original Quantum blockchain, and the “first NFT” tag rightly belongs to them. Therefore, “Sotheby’s and McCoy unjustly profited from the false and misleading marketing of their Ethereum-based NFT, which they deceitfully and intentionally promoted as having previously been ‘burned’ or ‘removed’ from the NameCoin blockchain.”

FreeHoldings is suing McCoy, Sotheby’s, @sillytuna and other parties for slander of title, deceptive and unlawful trade practices, and commercial disparagement.

FreeHoldings claims they’re not interested in money, just the right to the title “first NFT.” “Just so that we’re clear about the facts I am NOT looking for any money from any party despite what the article says,” they tweeted in early February. “All I want is an official statement from Sotheby’s correcting the lot description & acknowledging the existence of original NameCoin NFT. Should be simple, no?”

Well, no — not really. The possible discrepancy between the NameCoin and Ethereum “lineages” of Quantum reintroduces to digital art the uncertainty that blockchain technology was meant to banish. As one observer noted tweeted, “NameCoin’s manual renewal feature sits uncomfortably with the inherent uniqueness of #NFTs and the immutability of the #blockchain. Did McCoy’s #title lapse upon the NameCoin expiry in favour of @EarlyNFT, or subsist in the metadata?”

The physical reality of a work of art — its underlying marble, canvas, paint or weave — was once what verified its worth and ownership. Even an excellent copy would have to occupy a different point in space than the original.

Now, if FreeHoldings is right, we may have two Quantums —identical in their essence as a series of ones and zeros, but different because of competing ownership claims.

This seems to us to be a new sort of problem. Stay tuned.

Check Out Our Latest Blog Posts

Shifting Post-AMG Landscape – Changes to the FTC Approach to Law Enforcement

Ten months ago, the U.S. Supreme Court issued its unanimous decision in the AMG case, and with this decision, it put an end to the Federal Trade Commission’s (FTC) decadeslong reliance on Section 13(b) of the FTC Act as the primary tool to obtain monetary relief in federal court. It’s impossible to overstate the significance of this decision and its impact on the agency. And the quiet you hear is the sound of Congress not exactly acting quickly to legislate any sort of fix of the issue. (Although the House did pass legislation in the summer of 2021.)

Timely Federal Reminder that Love Stinks – Romance Scams with a Crypto Twist

For many years now, each February, the Federal Trade Commission (FTC) has issued a report reminding us that love is indeed a battlefield and that life is not always like an episode of Hart to Hart. The latest FTC data about romance scams states that the dollars (not including heartache) lost to online romance scammers have increased 80 percent since 2020, to a total reported value of $547 million in 2021. And keep in mind, the real problem is far greater; this report simply includes information that consumers have provided to the FTC or to other law enforcement agencies that share data with the agency.

FTC Administrative Process: Get Prepared for an Extended Engagement

One of the post-AMG predictions about Federal Trade Commission (FTC or Commission) law enforcement is that we will see more administrative litigation. And that appears to be coming true, but not at an exceptional pace. For the past few decades, FTC administrative litigation of consumer protection matters has been quite rare, but until recently, there were three consumer protection actions in administrative litigation. Based on my many years at the FTC, that is a high number, particularly given that the agency has one administrative law judge (ALJ), and we aren’t counting the competition matters that are also pending. (Although, news flash, a job posting went up in late December indicating that the FTC is hiring an ALJ; it’s unclear whether it is to replace the current ALJ or to increase the FTC’s capacity.)

Issues Guidance on Use of Consumer Reviews: Brands, Platforms and Comparison Websites Are in the Hot Seat

The use of consumer reviews as a marketing strategy has grown exponentially in recent years, and brands have become increasingly reliant on consumer reviews as a marketing strategy to drive consumer purchase behavior. In fact, a recent study by Bright Local revealed that over 85 percent of consumers trust online reviews as much as recommendations from relatives and friends, and a study by Northwestern University suggests that having at least five quality product reviews can increase the likelihood of a purchase by 270 percent. It’s no wonder that brands face enormous pressure to generate and present positive reviews on their own and through third-party websites and platforms.

in USA, Part Three – Materials Not Available in the US

This is our third blog in a series that is examining potential ambiguities in the Federal Trade Commission’s (Commission) Made in USA (MUSA) guidance – ambiguities that become particularly more important now that MUSA claims in labeling are the subject of a new Commission, the violation of which can lead to civil penalties.

[View source.]

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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