Energy Shot Producer’s Distribution of Recall Notice Could Be False Advertising

This posting was written by E. Darius Sturmer, Editor of CCH Trade Regulation Reporter.

The producer of a two-ounce energy shot drink known as "5-Hour ENERGY" could have engaged in false advertising in violation of Sec. 43(a) of the Lanham Act by distributing a letter, entitled "Legal Notice," to retailers notifying them of a court-ordered recall of a competing "6 Hour" energy shot product, the U.S. Court of Appeals in Cincinnati has decided. Summary judgment in the producer’s favor was reversed as the false advertising claim, although it was affirmed as to a competitor’s monopolization and attempted monopolization claims.

False Advertising

The complaining company, which marketed one of several "6 Hour" energy shots not subject to the recall, offered sufficient evidence to create a genuine dispute as to whether the notice was misleading and tended to deceived its intended audience, the court held. The language of the recall notice "teeter[ed] on the cusp between ambiguity and literal falsity" both descriptively and grammatically. A statement in the contested letters that the 5-Hour maker "won a decision against a "6 Hour" energy shot" was not literally true, as the 5-Hour maker had actually won a decision against a particular "6 Hour" competitor’s use of an overall product image, the court explained.

Moreover, confusion could ensue from the recall notice’s uses of the prefatory words "a" and "any" to refer to a 6 Hour energy shot—incorrectly suggesting that any shot bearing the name 6 Hour was subject to recall. Also problematic was a subsequent use of "the," which implied that there was only one specific product at issue, though the statement as a whole failed to specify exactly what product.

A lower court’s exclusion, on hearsay grounds, of documentary and testimonial evidence from the complaining company, distributors, and brokers showing confusion as to whether 6 Hour POWER had been recalled was erroneous, the appellate court said. Phone calls from retailers to distributors were not relied on to show the content of the conversations, but to show that the conversations occurred and the state of mind of the declarants. That so many people called the complaining company immediately after receiving the notice at the very least raised a genuine issue of material fact as to whether a significant portion of the recipients were misled, in the appellate court’s view.

The defendant’s characterization of the calls as "non-actionable customer inquiries" could be rejected by a jury, in light of testimony that many distributors had called to stop buying the complaining company’s product after the notice was issued, that sales growth for the product dropped significantly, and that the company lost an estimated $3.4 million in sales as a result of the recall notice. All of the calls evidenced a belief that 6 Hour POWER had been recalled; had the called lacked such a mistaken belief, the calls would not have occurred, the court reasoned.

Monopoly, Attempt

The producer of "5-Hour ENERGY" did not engage in monopolization or attempted monopolization in violation of Sec. 2 of the Sherman Act through its actions against the competitor, the court also ruled. The producer allegedly undertook a broad anticompetitive scheme that included: (1) asserting a fraudulently obtained supplemental trademark registration for its product; (2) false advertising in connection with its distribution of the Legal Notice letter to retailers; (3) offering incentives to retailers for superior product placement, (4) requesting that retailers sell its product at the exclusion of other energy shot products, and (5) registering certain Internet domain names similar to the names of a competitor’s product.

Because the complaining competitor specified damages resulting only from the recall notice, only the anticompetitive effects of the recall notice could lead to antitrust liability. However, there could be no harm to competition from the recall notice, even if the notice amounted to false advertising. The complaining competitor was able to—and did—counter that information by sending notices that its product, 6 Hour POWER, had not been recalled.

The decision is Innovation Ventures, LLC, v. N.V.E., Inc., 2012-2 Trade Cases ¶78,053.

Jury Award for False Advertising, Trademark Infringement, Cybersquatting Upheld

This posting was written by John W. Arden.

An Internet and telephone-based advertising service for skydiving customers (Skyride) was properly held liable for trademark infringement, cybersquatting, and false advertising against a skydiving center (Skydive Arizona, Inc.), justifying a total award of $6.6 million, according to the U.S. Court of Appeals in San Francisco.

The court of appeals upheld jury awards of $2.5 million in actual damages for trademark infringement, $2.5 million in disgorged profits from trademark infringement, $600,000 for cybersquatting, and $1 million in actual damages for false advertising. It overturned the district court’s doubling of actual damages.

Skydive Arizona, Inc. has operated under the SKYDIVE ARIZONA mark sine 1986, becoming one of the most well known skydiving centers in the world. It hosts between more than 145,000 skydives per year, furnishing airplanes and personnel for skydiving events in 30 states outside Arizona. The company has been featured in television programs and advertises on the Internet and in Yellow Pages, magazines, and newspapers.

Skyride essentially acts as a third-party advertising and booking service for skydiving centers, providing national telephone and Internet promotional services to skydiving “drop zones” around the U.S. Customers pay Skyride for certificates that can be redeemed at various drop zones around the country. Upon redemption, Skyride must pay the skydiving facility used by the customer.

Skyride owned and operated numerous websites, describing skydiving opportunities in multiple locations without reference to specific drop zones, in addition to websites referencing Arizona, including PhoenixSkydiving, ScottsdaleSkydiving, TucsonSkydiving, skydivearizona.net, skydivingarizona.com, and skydivingarizona.com.

Skydive Arizona brought an action against Skyride, asserting claims of (1) false designation of origin and unfair competition under Section 43(a) of the Lanham Act; (2) trademark infringement, and (3) cybersquatting. Skydive Arizona alleged that Skyride misrepresented ownership in skydiving facilities in Arizona in order to attract customers and sold skydiving certificates by trading on Skydive Arizona’s goodwill and misleading customers into believing that Skydive Arizona would accept its certificates.

The federal district court in Phoenix entered summary judgment in favor of Skydive Arizona for false advertising. A jury subsequently found in favor of Skydive Arizona on the remaining claims, awarding the $6.6 million in damages. The district court doubled the actual damages for false advertising and trademark infringement, resulting in $5 million for trademark infringement and $2 million for false advertising.

False Advertising

On appeal, Skyride challenged the summary judgment ruling on the false advertising claim, contending that the evidence on materiality was ambiguous. The Ninth Circuit disagreed, finding that a declaration of consumer James Flynn constituted direct evidence that Skyride’s statements were likely to influence consumers’ purchasing decisions. Flynn stated that he purchased Skyride certificates based on false representations that he could redeem them at Skydive Arizona. Skyride’s advertisements were misleading and false and had actually confused a consumer, the court held. Skyride further challenged the award of damages.

Actual Damages

In awarding actual damages for infringement, the jury considered “an array of customer service evidence and three different financial record exhibits.” The district court referred to “voluminous evidence” concerning Skydive Arizona’s stellar business reputation and the hundreds of thousands of dollars it spent in developing and advertising its business. Its failure to provide a specific mathematical formula for the jury to use in calculating actual harm to its goodwill did not undermine the jury’s finding, according to the appeals court..

Disgorgement of Profits

When reviewing an award of lost profits, a court does not ask whether the substance of the evidence was correct or even credible, but only whether the award was based on reasonable inferences and a fair assessment of the evidence. Questions of evidentiary admissibility or credibility must be raised before or during trial, the court held.

In the lost profits analysis, Skydive Arizona’s expert estimated Skyride’s revenues from Arizona by calculating the number of Arizona residents in Skyride’s records, increasing that number to account for files missing residence information, and multiplying that number by an average transaction amount. He added an interest factor of 10 percent as allowed by Arizona law.

On appeal, Skyride alleged that the calculations were clearly erroneous because they did not deduct vendor payments or overhead costs. However, Skyride did not raise these arguments until after trial. The district court held these untimely, and the appellate court agreed.

Damages Enhancement

The Ninth Circuit did reverse the award of double damages for the trademark infringement and false advertising claims. Although the Lanham Act permits a district court to enter damages not exceeding three times the amount, such an enhancement must constitute compensation rather than a penalty.

In this instance, the district court emphasized the purposefully deceitful nature of Skyride’s conduct. “Instead of discussing the appropriate award to compensate Skydive Arizona or to deter SKYRIDE, the district court focused on the need for SKYRIDE to ‘appreciate’ and ‘accept the wrongfulness of their conduct’ ”

Accordingly, the award of twice actual damages was reversed and the jury’s original award was reinstated.

The decision is Skydive Arizona, Inc. v. Quattrocchi, No. 10-16196, March 12, 2012.

Appraisers Have Standing to Sue Software Developer for False Advertising

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

Real estate appraisers had standing to sue the software developer FNC, Inc. under the Lanham Act for falsely advertising that appraisal-report data submitted for FNC's AppraisalPort was accessible only by client lending institutions, when FNC allegedly used the data to build its National Collateral Database, which lending institutions consulted instead of commissioning new appraisals, the U.S. Court of Appeals in New Orleans has ruled.

The case fell just within the outer limits of the zone of interests protected by the Lanham Act, the court held, applying a five-factor test for determining prudential standing.

Nature of Injury

The nature of the injury weighed in favor of standing because the alleged false advertising about AppraisalPort injured the appraisers' interest in generating new business as competitors of the National Collateral Database. Deterioration of competitive position was precisely the kind of injury the Lanham Act was intended to redress, the court said.

Directness of Injury

The relatively indirect relationship between the alleged misconduct and injuries weighed against prudential standing. The appraisers were injured by the allegedly false advertising about AppraisalPort because FNC allegedly made the decision to misappropriate the data it received from the appraisers, the court noted.

Proximity to Injurious Conduct

The proximity of the appraisers to the allegedly injurious conduct weighed in favor of standing. No identifiable class of persons could be more immediate to the misappropriation of work product than the persons to whom the work product rightfully belonged, according to the court.

Speculativeness of Damages

That the damages claim was not speculative weighed in favor of standing, the court determined. The appraisers alleged that they suffered damages in the form of lost business and profits as a result of lenders' use of the National Collateral Database and that FNC earned substantial profits on the database that it would not have been able to earn in the absence of the misrepresentations it made in its advertisements for AppraisalPort.

Risk of Duplicative Damages

Finally, there was little risk that allowing the suit to proceed would subject FNC to a risk of duplicative damages or require a complex process of damages apportionment, according to the court. To the extent there was a risk that difficulties might arise with allocating damages between the members of the alleged class of appraisers, those difficulties were to be addressed in deciding the request for class certification.

Because FNC’s allegedly false advertisements were not, of their own force, injurious to the plaintiffs’ commercial interests, the plaintiffs’ injury was less direct than was typical under Sec. 43(a), the court observed. Critically, however, there was no participant in the market who was more directly injured by FNC’s anti-competitive conduct.

Each additional step in the asserted chain of causation involved a wrongful act by FNC, the court found. FNC’s alleged decision to couple its false advertisements with other forms of anti-competitive conduct did not make the false advertising any less unfair as a method of competition, the court concluded.

The February 24 opinion in Harold H. Huggins Realty, Inc. v. Torres will be reported at CCH Advertising Law Guide ¶64,185.