The Business of Security—Cyber Security Panel Discussion, May 28
Please join U.S. Bank and Manatt for an interactive presentation on “The Business of Security.” The program and luncheon will be held on Thursday, May 28 at the U.S. Bank Tower in Los Angeles.
Panelists Michael L. Kearn, U.S. Bank Information Security Officer (ISO) & Principal Security Architect for CISSP, Donna Wilson, co-chair of Manatt’s Privacy and Data Security and Financial Services Litigation groups, and Barrie VanBrackle, member of Manatt’s Privacy and Data Security practice group and co-chair of the Global Payments and Consumer Financial Services practice groups, will discuss tactics of organized cyber criminals—including malware and hacking trends—aimed at defrauding and causing significant harm to targets, and will share practical advice on data breach preparedness planning, data breach notification, and legal and operational issues relating to the governance of information across organizations. To reserve a seat, please click here.
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SPECIAL FOCUS: The Impact of the Supreme Court’s Octane Fitness Decision on Lanham Act Litigation
Author: Thomas Morrison
For the second time in recent years, a Supreme Court decision in a patent case is having a major impact on Lanham Act litigation. The Supreme Court’s decision in Octane Fitness broadened the circumstances under which attorneys’ fees may be awarded in patent cases. That decision is now being applied to trademark and false advertising cases arising under the Lanham Act.
eBay and Its Progeny
As we noted in this newsletter last October,1 the Supreme Court’s 2006 decision in eBay changed the landscape regarding injunctive relief in patent cases. Whereas injunctive relief had been virtually automatic in such cases, the Supreme Court held that the propriety of injunctive relief must be determined via application of the four traditional equitable factors: (1) irreparable harm; (2) inadequacy of legal remedies; (3) balance of hardships; and (4) the public interest.2
Because the Patent Act and the Lanham Act contain virtually identical language regarding injunctive relief, it was inevitable that the courts would apply eBay to Lanham Act trademark and false advertising cases. This has proven to be the case. As a result, the presumption of irreparable injury, which was typically applied in many trademark and false advertising cases, is becoming a thing of the past. Instead, trademark and false advertising plaintiffs must now prove that their injury is truly irreparable and that injunctive relief is warranted under the traditional equitable criteria.3 The eBay experience is now being repeated in connection with the availability of attorneys’ fees under the Lanham Act.
The Octane Fitness Ruling
In April of last year, the Supreme Court handed down its decision in Octane Fitness.4 The District Court had granted defendant Octane’s motion for summary judgment of non-infringement, but denied Octane’s motion for attorneys’ fees under section 285 of the Patent Act. That statute provides that “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.”5
The District Court based its denial on an earlier Federal Circuit ruling that a case may only be deemed exceptional within the meaning of Section 285 in two limited circumstances: (1) where there has been some material inappropriate conduct in the course of the litigation; or (2) where the litigation was brought “in subjective bad faith” and was “objectively baseless.”6 In Octane’s appeal, the Federal Circuit affirmed both the award of summary judgment and the denial of attorneys’ fees. The Supreme Court granted certiorari to review the denial of Octane’s request for attorneys’ fees.
In a unanimous opinion, the Court stated that the earlier Federal Circuit’s standard was “unduly rigid” and “impermissibly encumbers the statutory grant of discretion to district courts.”7 The Court went on to hold that:
[A]n “exceptional” case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated. District courts may determine whether a case is “exceptional” in the case-by-case exercise of their discretion, considering the totality of the circumstances.8
Significantly, the Supreme Court cited the definition of “exceptional” in a Lanham Act decision by the D.C. Circuit (authored by then Circuit Judge Ginsberg and joined in by then Circuit Judge Scalia). According to the Supreme Court, that case defined the term “exceptional” as it was used in the Lanham Act to mean “uncommon” or “not run-of-the-mill.”9 The Court also rejected the earlier Federal Circuit rule that a party’s entitlement to attorneys’ fees must be proven by “clear and convincing evidence.”10
Attorneys’ Fees in Lanham Act Cases
Like Section 285 of the Patent Act, Section 285 of the Lanham Act11 provides that: The Court in exceptional cases may award reasonable attorney fees to the prevailing party. Prior to Octane Fitness, the courts had adopted a variety of tests for an award of attorneys’ fees in Lanham Act cases. But like the prior rule in patent cases, most circuits had adopted relatively rigid requirements. The following four tests were typical:
Second Circuit: Attorneys’ fees are recoverable only on a showing of fraud, bad faith or willful infringement.12
Third Circuit: The court must first determine whether there was “culpable conduct,” such as bad faith, fraud, malice or knowing infringement. If such conduct is established, the court must then determine whether the circumstances are sufficiently “exceptional” to warrant a fee award.13
Seventh Circuit: Defendant’s infringement must have been “malicious, fraudulent, deliberate or willful.”14
D.C. Circuit: No attorneys’ fees may be awarded unless there is a showing of “willful or bad faith conduct.”15
Octane Fitness and the Lanham Act
Since the Lanham Act and Patent Act fee award provisions are identical, the courts have not taken long to announce that the Supreme Court’s Octane Fitness ruling is applicable to attorneys’ fees under the Lanham Act.
The first appellate court to apply Octane Fitness to the Lanham Act was the Third Circuit. In a decision handed down last September in a trade dress case, the court noted that the Supreme Court, by citing a Lanham Act case in its Octane Fitness ruling, “was sending a clear message that it was defining ‘exceptional’ not just for the fee provision in the Patent Act case, but for the fee provision in the Lanham Act as well.”16 The court went on to hold that a Lanham Act case may be deemed exceptional where:
(a) there is an unusual discrepancy in the merits of the positions taken by the parties or (b) the losing party has litigated the case in an “unreasonable manner.”17
The court added that, while there is no requirement that the losing party acted “culpably,” that party’s “blameworthiness” can play a role in determining whether a case is exceptional.
Last month, the Sixth Circuit reached the same result. In that case, a trademark case, the District Court had denied defendant’s motion for attorneys’ fees. The Sixth Circuit remanded the case to the District Court for determination of the fee request under the Octane Fitness decision. The court pointed out that the fee-shifting provisions of the Patent Act and the Lanham Act “are identical” and that “statutes using the same language should generally be interpreted consistently.”18
Two District Courts have also reached the same result.19 Surprisingly, a District Court in Connecticut reached the opposite result, holding that in Octane Fitness the Supreme Court was “interpreting only the Patent Act and not the Lanham Act.” It therefore applied the more restrictive Second Circuit law on Lanham Act fee awards.20 This ruling is unlikely to withstand scrutiny by the Second Circuit, or even by other District Courts in the Circuit.
There is little doubt that the Supreme Court’s ruling in Octane Fitness will be universally applied to attorneys’ fee awards in trademark and false advertising cases under the Lanham Act. It is also likely that such awards will gradually become more frequent in Lanham Act cases. The party against whom a fee award is sought will no longer be able to insist that such an award cannot be made because there was no showing of bad faith, fraud, willful misconduct or the like. The party seeking attorneys’ fees will be free to make a more general argument that, under all the facts and circumstances, the case is exceptional in that it “stands out from the others” in terms of the lack of strength in the other party’s “litigation position”21 or the “unusual discrepancy in the merits of the positions taken by the parties.”22 At the very least, this will lead to a surge of attorneys’ fee applications in trademark and false advertising cases.
Why it matters: In the past, the high standard a party had to meet to recover attorneys’ fees in trademark and false advertising cases created an informal restraint on attorneys’ fee applications. Now that strict standards are a thing of the past, that restraint will be removed. More prevailing parties will now pursue attorneys’ fee awards. This should, in turn, cause counsel to be more cautious in the positions they take and the arguments they advance. In addition, as has happened in the patent field, defendants may be more willing to fight frivolous lawsuits rather than settle them in order to save litigation costs. A recent study by the Federal Bar Association reports that attorneys’ fee motions by accused patent infringers virtually doubled in the 11 months following Octane Fitness, and the success rate of such motions increased from 13% to 36%.23
_________________________
1Advertising Law Newsletter, “The Impact of eBay on Lanham Act False Advertising Litigation” (October 3, 2014).
2eBay Inc. v. MercExchange, LLC, 547 U.S. 388, 394 (2006).
3See cases discussed in “The Impact of eBay,” fn. 1, supra.
4Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749 (2014).
535 U.S.C. § 285.
6Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005).
7Octane Fitness, supra at 1755.
8Id. at 1756.
9Noxell Corp. v. Firehouse No. 1 Bar-B-Que Restaurant, 771 F.2d 521, 526 (D.C. Cir. 1985).
10Octane Fitness, supra at 1768.
1115 U.S.C. § 1117(a).
12Conopco, Inc. v. Campbell Soup Co., 95 F.3d 187, 194 (2d Cir. 1996) (false advertising case); Patsy’s Brand, Inc. v. I.O.B. Realty, Inc., 317 F.3d 209, 221 (2d Cir. 2003) (trademark case).
13Green v. Fornario, 486 F.3d 100, 103 (3d Cir. 2007) (trademark case).
14BASF Corp. v. Old World Trading Co., 41 F.3d 1081, 1099 (7th Cir. 1994) (trademark case).
15Alpo Petfoods, Inc. v. Ralston Purina Co., 913 F.2d 958, 971 (D.C. Cir. 1990) (false advertising case).
16Fair Wind Sailing, Inc. v. Dempster, 764 F.3d 303, 315 (3d Cir. 2014).
17Id. at 315.
18Selp-Tone Entertainment Corp. v. Karaoke Kandy Store, Inc., 2015 U.S. App. LEXIS 5475 at **6-7 (6th Cir. 2015).
19BMW of North America, LLC v. Cuhadar, 2014 WL 5420133 (M.D. Fla. 2014) (trademark case) and Reynolds Consumer Products, Inc. v. Handi-Foil Corp., 2014 U.S. Dist. LEXIS 98059 (E.D. Va. 2014) (trade dress case).
20Romag Fasteners, Inc. v. Fossil, Inc., 2014 U.S. Dist. LEXIS 171256 (D. Conn. 2014) (trademark case).
21Octane Fitness, supra at 1756.
22Fair Wind Sailing, supra at 315.
23“One Year On, Octane Causing More Hard-Fought Patent Cases,” IP Law 360 (May 1, 2015).
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Yet Another Data Security Bill Hits Congress
In the latest proposal to be presented to lawmakers, Sen. Patrick Leahy (D-Vt.) put forth the Consumer Privacy Protection Act (S.1158) that was co-sponsored by Sens. Richard Blumenthal (D-Conn.), Elizabeth Warren (D-Mass.), Al Franken (D-Minn.), Ed Markey (D-Mass.), and Ron Wyden (D-Ore.).
For businesses that store sensitive personal or financial information on 10,000 customers or more, the bill would establish minimum data security requirements with civil penalties for companies that fail to comply. Covered entities would be obligated to notify consumers within 30 days of a data breach when it includes generally accepted personally identifiable information such as name, address, and Social Security number, and fields that are not as common such as geolocation, photos, videos, biometric data and fingerprints.
“Today, data security is not just about protecting our identities and our bank accounts; it is about protecting our privacy,” Sen. Leahy said in a statement. “Americans want to know not just that their bank account and credit cards are safe and secure, they want to know that their emails and their private pictures are protected as well.”
However, in a departure from the other data security bills currently pending in Congress, S. 1158 would not preempt more protective state laws. “In crafting federal law, we must be careful not to override the strong state laws that took years to accomplish with weaker federal protections,” Sen. Leahy said. “We must ensure that consumers do not lose privacy protections they currently enjoy.”
With a current patchwork of 47 different data breach notification laws on the books in states across the country, the need for a single national standard has been an important issue. But consumer groups and some lawmakers have expressed concern that other proposed laws would preempt the state versions at the cost of consumer protection.
For example, the Data Security and Breach Notification Act introduced earlier this year by Reps. Peter Welch (D-Vt.) and Marsha Blackburn (R-Tenn.) generated criticism from legislators and the Federal Trade Commission. Testifying at a hearing before the House Subcommittee on Commerce, Manufacturing, and Trade, the agency’s Director of Consumer Protection, Jessica Rich, expressed concern that the proposed law does “not provide the strong protections that are needed to combat data breaches, identity theft, and other substantial consumer harms.”
According to Sen. Leahy, his legislation’s cap on preemption makes it the most consumer-friendly and has garnered support from groups like the Center for Democracy & Technology and Consumers Union. “All lawmakers who support consumers should support this bill,” Sen. Leahy said.
Why it matters: As federal lawmakers consider data security legislation this term and the number of data security bills mount, the likelihood that a law will actually pass remains unclear. In addition to the Consumer Privacy Protection Act and the Data Security and Breach Notification Act, Reps. Bobby Rush (D-Ill.) and Joe Barton (R-Texas) reintroduced the Data Accountability and Trust Act, Sens. Tom Carper (D-Del.) and Roy Blunt (R-Mo.) pushed the Data Security Act, and Sens. Bill Nelson (D-Fla.) and Mark Warner (D-Va.) both proposed their own legislation.
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Bogus Claims, False Celebrity Endorsements at Center of FTC Action
The Federal Trade Commission took action against a company selling weight loss products like Premium Green Coffee and Premium White Kidney Bean Extract that allegedly deceived consumers with bogus claims and unauthorized celebrity endorsements.
Since 2012, California-based Sale Slash and related individuals sent spam e-mails to consumers regarding diet pills that claimed to result in dramatic weight loss, the FTC said. Purported endorsements from celebrities like Oprah Winfrey, who had no relationship with the company or its products, accompanied the claims, which were also repeated in banner ads and fake news sites.
The e-mails were sent by affiliate marketers using stolen e-mail accounts so the messages appeared to be from a friend or family member, the agency said, but included no information on how to opt out of future messages.
Claims for the weight loss supplements in the e-mail messages typically featured brief messages like “Breaking news…” or “Hi! Oprah says it’s excellent” with hyperlinks. The links in the e-mails led to fake news sites with headlines like “Insider Report: Oprah and Other Celebrities Lose 4lbs/Week of Belly Fat With This Secret Our Readers Can Try Now!” that were intended to trick consumers into thinking they were an independent source of information and not a paid advertisement.
In banner ads, the defendants marketed the Pure Garcinia Cambogia and Pure Caralluma Fimbriata Extract with claims like “1 Tip for a tiny belly,” “Cut down on a bit of your belly every day following this 1 old weird tip,” and “Garcinia Cambogia Exposed—Miracle Diet or Scam?” To spur consumers to action, the ads cautioned, “Due to recently being featured on TV, we cannot guarantee supply.”
In response to the FTC’s complaint alleging the defendants violated both the Federal Trade Commission Act and the CAN-SPAM Act, a federal court judge in California enjoined further business operations and froze the defendants’ assets. The agency is seeking to recover funds from the defendants to provide refunds to duped consumers.
To read the complaint and the temporary restraining order in FTC v. Sale Slash, click here.
Why it matters: “Sale Slash is a fraud trifecta,” Jessica Rich, Director of the FTC’s Bureau of Consumer Protection, said in a statement about the case. “The company made outlandish weight-loss claims for its diet pills using fake news sites, phony celebrity endorsements, and millions of unwanted spam emails.” The case is by no means the first the agency has brought against companies touting weight loss products via phony news sites or relying on false celebrity endorsements—two surefire ways to arouse the FTC’s attention.
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ABA Reviews NAD, Offers Suggestions for “Increased Efficiencies”
For the first time, a Working Group from the American Bar Association, which included a member of Manatt, Phelps & Phillips’s Advertising, Marketing and Media group, conducted a review of the National Advertising Division and released a report offering recommendations for improving the self-regulatory body.
Initiated at the request of Advertising Self-Regulatory Council (ASRC) president Lee Peeler, the Advertising Disputes and Litigation Committee and the Consumer Protection Committee (as well as others in the industry), the Working Group began its review last June. The final report—“Self-Regulation of Advertising in the United States: An Assessment of the National Advertising Division”—recognized “the value” and “success” of the NAD, and concluded that overall the current system “works well.”
However, the Working Group also made several improvement suggestions that include raising additional operating funds from direct contributions or cy pres awards from false advertising litigation. The NAD could also increase the appearance of objectivity by having an attorney review and decide the case and a different attorney to investigate the prospective case for an NAD-initiated proceeding.
With regard to filing a claim, the Working Group suggested that the ASRC clarify the rules governing the NAD’s jurisdiction, specifically the scope of “advertisers” over which the self-regulatory body has authority. Reconsideration of page-limit restrictions for complaints and briefs and the possibility of a private, mutual settlement agreement between the parties—terminating the case by the NAD without its approval and without a press release—were also proposed.
The Working Group next evaluated the presentation of a case. While the current “case-by-case approach” to survey evidence should continue, some Working Group members noted that the industry would value additional guidance on the type of survey evidence considered persuasive by the NAD. The report suggested that the NAD adopt different tracks or a tiered approach to case management based on the complexity and number of claims involved in a case and reconsider its current expedited review procedures. It suggested that the NAD proceed more quickly in cases with only one or two claims at issue, implement strict limits on page numbers and witness statements, and raise the current filing fee.
Turning to the issue of decisions and press releases, the Working Group advised the NAD to use a “single and shorter synthesis” of relevant facts to reflect the positions of both parties in lieu of the current separate, more detailed statements setting forth each side’s position. Decisions should be issued in a more timely manner after the final briefs are submitted, the Working Group added. The Group also suggested that meeting schedules be set at the beginning of a case, that videoconferencing technology be used, and that tracked or tiered brief schedules based on the number and complexity of the claims at issue be established.
Funds should be prioritized to modernize the ASRC’s online archive, the report stressed, “allowing for reliable and efficient searching across all NAD decisions, providing proximity search functionality, and highlighting search terms within decisions.”
The report further suggested that abstracts or summaries of NAD decisions be published in lieu of the current system of press releases, unless an advertiser refuses to participate and the NAD has referred the matter to a regulatory agency. “The Group believes that this will conserve resources and ensure consistency between the information publicly disseminated and the case decision itself,” the report stated.
The appeals process and standards could also use improvement, the Working Group concluded. It suggested that the NARB review decisions de novo and that new arguments (but not new evidence) should be accepted. The NAD should not be a party to an NARB appeal, but should be “present and available” to answer questions from the panel.
Other suggested changes included revisions of certain rules to offer new evidence in support of a claim that has previously been found to be unsubstantiated in certain circumstances, shortening the time period for an advertiser’s response to the NAD’s initial recommendation and final decision, and an increase in time for the advertiser’s response to a compliance inquiry.
To read the Working Group’s report, click here.
Why it matters: “The Group hopes this Report will be an initial step in a dialogue that will continue in future months and is prepared to assist in implementing or further exploring the Report recommendations,” the Working Group wrote. While many of the recommendations are supported by the majority of the Working Group and likely amenable to the industry, others—the adoption of new technology and issuing decisions in a more timely fashion, for example—could prove challenging to the ASRC’s limited budget and staff.
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California Courts Struggle With Song-Beverly Act
In the latest developments surrounding consumer class actions brought pursuant to California’s Song-Beverly Act, the Ninth Circuit Court of Appeals certified a question to the state’s highest court.
If a consumer would not reasonably believe that the request for personally identifiable information—such as a zip code—was actually necessary to make a credit card purchase, can retailers ask for it? Seeking guidance, the Ninth Circuit certified this question to the California Supreme Court for an answer.
Tammie Davis visited a retail clothing store owned by Devanlay Retail Group in April 2010. To pay for a purchase, Davis handed her credit card to the cashier. As she was placing the card back in her purse, the cashier asked, “What’s your zip code?” Davis could not recall whether she had already received her receipt when the request was made.
Davis filed a putative class action against Devanlay, alleging that the retailer violated the Song-Beverly Act by requesting and recording her personal identification information. A federal court judge granted summary judgment to the retailer after applying an objectively reasonable consumer test to determine that Davis would not have perceived the store’s request for information as a condition of the use of her credit card.
The plaintiff appealed and the Ninth Circuit—finding no controlling precedent and acknowledging that the “answer to this question could have a significant impact on the practices of thousands of California retailers”—punted the issue to the California Supreme Court.
Section 1747.08(a)(2) of the Act provides that “no person, firm, partnership, association, or corporation that accepts credit cards for the transaction of business shall do any of the following: … Request, or require as a condition to accepting the credit card as payment in full or in part for goods or services, the cardholder to provide personal identification information, which the person, firm, partnership, association, or corporation accepting the credit card writes, causes to be written, or otherwise records upon the credit card transaction form or otherwise.”
A number of federal district courts in California have interpreted this provision of Song-Beverly to require an objective consumer perception test to establish a violation. Davis argued that the statute contains no such standard and the Act should be read as imposing strict liability on violators, regardless of a consumer’s perception.
“We find support for both the district court’s and [Davis’] interpretations in the decisions of California’s Courts of Appeal, as well as in the statute’s language and legislative history,” the Ninth Circuit wrote, adding that the “ambiguous language” of the Act itself offered little guidance.
“Because we find no controlling precedent, and because the meaning of the statute is ambiguous, we are uncertain whether the district courts are correctly applying California law in construing Song-Beverly to require an objective test of consumer perceptions,” the panel said. “We therefore respectfully request that the California Supreme Court answer the [certified question].”
In a second dispute, an appellate panel concluded that a retailer could not be liable under the Act for the collection of a consumer’s personal information during an online credit card transaction when the data was necessary for fraud prevention reasons.
The case involved a customer who purchased alcoholic products on Beverages & More’s Web site and opted to pick them up at the retailer’s physical location. Michael Ambers claimed that the collection of his address and telephone number during the online credit card transaction violated the statute because he had to visit the store to claim his merchandise and his personal identification information was therefore not necessary to complete the transaction.
BevMo responded that Section 1747.08 did not apply to an online purchase transaction where personal identification information is the only means to prevent fraud during the purchase, citing Apple Inc. v. Superior Court, 56 Cal. 4th 128 (2013), for support.
The appellate panel agreed. Under the terms and conditions of the BevMo Web site, the parties agreed that title to the merchandise purchased online transferred to the buyer at the time of purchase—not when the buyer took physical possession.
While Song-Beverly’s primary purpose is to provide consumer privacy protection, “the legislative history also reflected an effort to balance that purpose against the need to protect both consumers and retailers from the risk of fraud,” the court explained. Online retailers need some form of identification to combat fraud and identity theft, the panel added.
The Apple court limited its holding to online purchases of electronically downloadable products, but the panel said the decision’s “reasoning and analysis … apply here with equal force.”
“Like the online retailer in Apple, BevMo had no means, without obtaining plaintiff’s personal identification information, of verifying that plaintiff was an authorized user of the credit card number entered on BevMo’s website before the purchase transaction was completed,” the court said. Verification was “necessary in the instant case because ownership of the merchandise purchased on BevMo’s website passed immediately to plaintiff upon completion of the online transaction, when plaintiff’s credit card was charged.”
The court affirmed judgment for BevMo.
To read the order in Davis v. Devanlay Retail Group, click here.
To read the opinion in Ambers v. Beverages & More, Inc., click here.
Why it matters: Companies should keep a close eye on the Davis case. As the Ninth Circuit noted, the answer to the question could have a “significant impact” on retailers in California, “as a broad construction of Song-Beverly could prohibit many retailers’ practice of requesting personal identification information from customers immediately after they have completed a credit card transaction.” The California Supreme Court has been known to adopt a broad reading of the statute, having started a tidal wave of consumer class actions in 2011 with Pineda v. Williams-Sonoma, where the court held that retailers cannot collect zip codes from consumers who make purchases with their credit cards, as they are considered personal identification information under the Act. As for the Ambers decision, it not only provides online retailers with relief from potential class actions, but also offers a road map to safely collecting information by passing title at the time of purchase.
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Noted and Quoted . . . Brody and Shah give a lesson on legal implications of cause marketing campaigns in Marketing News Magazine
Many companies might not know about the laws and regulations that apply to campaigns aligned with charitable organizations. Manatt attorneys Jesse Brody and Suemyra Shah have outlined some best-practices for companies that plan to implement charitable sales promotions or cause marketing campaigns.
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