Misappropriation

Misappropriation Doctrine

Developing property rights in intangibles

“reap what you have sown”

INS v. AP

“The parties are competitors in the field…each party is under a duty so to conduct its own business as not unnecessarily or unfairly to injure that of the other.”

News has a public good feel

  • One party’s use does not deprive another’s use
  • No one has exclusive use of the news
  • News is expensive to create, cheap to distribute and extend use to other people.

Costs are a major issue in this case

  • It would cost AP much more to come up with stories rather than stealing them.

Misappropriation of news must be outlawed to stop free riders.

  • If free riders are not stopped, people will lose the incentive to create intangible property (i.e. the news)

It is very difficult to put a fence around intangible property

Benefits of Misappropriation doctrine

  • AP has incentive to continue collecting news
  • Other news collectors will not be discouraged from entering the news collection business
  • General fairness “He who reaps shall sow”
  • AP does not have to spend its own money to protect its stories against misappropriation.

Costs of Misappropriation doctrine

  • Hard to tell when the protection provided by this doctrine wears off.
  • Are costs too high for AP and INS if they have to race to every story?
  • Access Costs – If newspapers don’t pay costs to get AP stories, there is social costs because people won’t see stories
  • High costs of running a system of property rights in intangibles – enforcement and administrative costs for the state

How should the Misappropriation doctrine be limited?

Restatement: No general rule of law prohibits appropriation of competitor’s ideas, innovations, or other intangibles once publicly known

Elements central to an INS-style claim (for hot news) (See NBA v. Motorola)

  • P collects information at some cost or expense
  • Value of information is time sensitive (hot news)
  • D’s use of information constitutes free riding on P’s costly efforts to generate or collect it
  • D’s use of the information is in direct competition with a product or service offered by P.
  • The ability of other parties to free ride on the efforts of the P would reduce incentive to produce the news and P’s existence would be threatened.

Potential problem with misappropriation doctrine

  • Multiple sources of intangible property (news) could lead to many Ps.

Fads

  • Misappropriation doctrine shouldn’t apply to trendy things. If you are first in the market, you should reap the advantage of being first and that should be enough protection.

Unfair Competition

Unfair Competition Defined

Includes false, deceptive, and misleading claims

Attributes of false claims:

  • Nature and quality
  • Source of product (including geography)
  • Product disparagement

Unfair Competition laws are meant to make advertising more of a social benefit/provider of good information.

Economics of Advertising

Firms provide information (advertising) in order to sell more products

  • If it is more profitable to misinform the consumer, firms will do this.

A lot of the economics of advertising revolves around search costs

Types of goods:

  • Search
  • Attributes of product easily recognizable before purchase
  • False advertising occurs the least here because consumers can easily see if the firm is lying
  • Experience
  • Attributes which can’t be known until good is sampled
  • Advertising needed more here
  • Consumers might also rely on friends, consumer reports, and personal experience for info.
  • False advertising occur more often in this category but firms are careful because they don’t want to spoil customers when they are selling repeat products
  • Credence
  • Even after you have experience with a product, you can’t verify the claims of the good, product, or service

Claims of “afterlife” or durability, etc.

Claims of medical services, car repairs, vitamins

  • There is the most false advertising in this category because there is no way to verify claims

Rational actors, however, will discount unverifiable claims

Positives of Advertising

  • Modern view of advertising is that it is meant to provide information
  • Minimizes search costs for consumers
  • Because search costs are lower, consumers will search more and make competition more effective

Negatives of Advertising

  • Another view of advertising is that it is persuasive
  • Advertising allows companies to suck in consumers by making them feel inadequate so they have to buy high-priced products
  • Resource Waste
  • Firms could spend money on improving products instead of billions on advertising
  • High costs of advertising will barrier to entry of new firms

Social Loss from False Advertising claims:

  • People might misdirect their funds
  • Firms that make truthful claims might not be believed
  • Ex: If every firm says “handmade” on their garments, it makes it difficult to sustain “actual handmade” market.

Function of continuous advertising:

  • Attract new customers
  • Fend off new product entrants
  • Help continuous customers to recall their good experiences with a product (or remind a consumer it is time to restock)
  • Brand identification

Common Law False Advertising

Ely-Norris Safe Co. v. Mosler Safe Co.

  • Fraud necessary in common law for success with false advertising claim
  • Single Source Rule:
  • For recovery by P, they have to prove that the fraud of the D was the direct cause of loss in sales for the P. (This is a very tough test)

Modern Approach

  • In order to prove false advertising, must prove “Falsity has likely commercial detriment”
  • Material falsity
  • Reasonable Basis for believing that false representation has cause or is likely to cause a diversion of trade or harm to reputation/good will.

False Designation of Origin

Social Harm

  • Consumer probably paying a premium for a product from this location
  • Misappropriation
  • Free Riding
  • Destruction of Reputation – if copiers produce low quality goods, people will begin to assume all products from the that region are low quality

Under Lanham Act, there is “certification marks” which allow a group of firms to register and protect a mark of their region (Ex: Champagne)

To pass the Single source common law test, all manufacturers of the region must sue as parties

Passing Off

Passing off would satisfy single source lost sales requirements

Modern view is that you only have to show likely injury from passing off

American Washboard Case

  • B claims that his product is made by A
  • This satisfies the single source rule because consumer would have bought A’s real product if they didn’t think B’s product was really A’s.

Disparagement

Defined – saying something false or misleading about a competitor’s good

Social Harm:

  • Firm damaged – lose sales or forced to sell at a lower price
  • Information public is receiving is incorrect
  • Firm may have to spend resources to rehabilitate reputation

Defamation v. Disparagement

  • Defamation is a personal attack on P; Disparagement is an attack on P’s goods.
  • Burden of proof on P in disparagement case; Burden of proof on D in defamation case
  • Strict liability in defamation cases; Must be reckless disregard in disparagement cases (worse than negligence)
  • In defamation cases, you don’t have to prove damages; In disparagement cases, you do.

Lanham Act (§ 43(a)(1)(B)) requires:

  • A) False or Misleading description or representation of fact
  • B) in interstate commerce
  • In connection with goods, services, containers, or packaging
  • D’s must use the statement in commerc (not enough that P’s product is in commerce.)
  • C) through Commercial Advertising or Promotion
  • Excludes statements in consumer reports or news story
  • Product doesn’t need to be sold yet, but needs sufficient steps towards sale.
  • Look at context of statement; Statement needs to be for commercial/business by

A D who is in commercial competition with P

For purpose of influencing consumers to buy from D

And Statement must be sufficiently disseminated to relevant purchasing public.

  • D) Likely to damage P
  • E) Standard of liability is Strict Liability

Bose v. Consumers Union

  • What kind of standard of liability do we want for independent product reviewers?
  • While the statements were false, Consumers Union did not make them with reckless disregard and there was no malice. Therefore, there was no disparagement liability.
  • A factor is that Consumer Reports is not gaining from the claim in any way

Lanham Act § 43(a) (false advertising/unfair competition)

43(a)

  • Standing to sue
  • Any who feels they are likely to be injured has standing

Section 45 of Lanham Act says that the people who bring a 43(a) claim have to be other people in that business of commerce (regular individuals can’t bring Lanham Act claims)

43(a)(1) – Any person who uses, in connection with any goods or services, in commerce

  • any word, term, name, symbol, or device or,
  • false designation of origin or,
  • False or misleading representation or description of fact…

43(a)(1)(A) – Likely to cause confusion, mistake, deceive as to affiliation, connection, or association as to

  • Origin, sponsorship, or approval of his goods, services, or commercial activities by another

43(a)(1)(B) – In commercial advertising or promotion, misrepresents nature, characteristics, qualities, or geographic origin of her goods shall be held liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.

Commercial advertising or promotion is:

  • Commercial speech…
  • By a defendant who is in commercial competition with P…
  • For purpose of influencing consumers to buy from D…
  • Disseminated sufficiently to relevant purchasing public.

Four Important Aspects:

  • 1) Must show that Defendant made a claim in an advertisement or promotion.
  • It has to be an actual ad or promotion, not a newspaper article, etc.
  • 2) Must show that Defendant’s claim was false or misleading
  • 3) Must show the false claim was material (This is implicit in the injury requirement)
  • A substantial number of consumers must be misled
  • A substantial number of consumers must be likely to rely on the claim
  • 4) Must show a likelihood of injury to get injunction and an actual injury in order to get damages
  • These Four Aspects often are presumed and don’t need to be proved when the facts show that the Defendant knew that they were using false advertising and these factors are obvious.
  • If plaintiff has to prove these four factors, he needs to use survey data to prove that consumers are misled by the false advertising.

Case Law Analysis of 43(a) elements

Falsity

  • Is advertisement false?
  • Must consider ad in is entirety. Avis v. Hertz.
  • Statements of opinion are not grounds for Lanham Act liability. Groden v. Random House.
  • Prohibition only on false statements made about one’s own or another’s goods (not just false statements in general.) Groden.
  • Puffing that is merely general and not detailed or specific is not actionable.
  • False on its face:
  • If an advertisement is false on its face, there is no need to show public confusion. The only requirement is to show falsity.
  • Literally true, but still deceptive to consumers
  • P must demonstrate by extrinsic evidence that the ad had a tendency to mislead or confuse a statistically significant portion of consumers. Tums Case.

What do consumers find to be the message of the ad?

Survey evidence must be used

But, if the P can somehow show that the D intentionally tried to mislead the public with the ad, the burden shifts to the D to shown that the ad actually did not cause confusion. Tums.

  • Where challenged claim is one of superiority, P must prove D’s product is equal or inferior, but:

Where D claims that tests establish that D’s product is superior, P can prove falsity by showing that the test were unreliable. Castrol.

Solution: Avoid confusion by using a disclaimer (size of disclaimer has to be same size as prominent part of the ad itself)

  • Literally false but NOT deceptive
  • Consumers understand not to believe the advertisment’s claim. Avis.

Materiality

  • Substantial number of customers must be deceived
  • There must be a reliance on deceptive claims by consumers
  • The false ad must be likely to affect the choice or conduct of the consumer. Kraft.
  • FTC says materiality will automatically be found when:
  • An express false claim has been made
  • An implied false claim is made with evidence that the seller intended to make the false claim
  • Claims that significantly involve health, safety, or other areas of consumer concern. Kraft.

Likelihood of Injury

  • Only need reasonable basis for belief that P is likely to be damaged (logical connection.) Johnson & Johnson.
  • P does not need to prove existence of an injury caused by D. J&J.
  • However, if P does not prove actual injury, he can only win a “market free from false advertising.” Injury must be proven for a damages award.
  • Injury must come in competition
  • If there is competition between parties in a market, injury will be presumed. McCarty.
  • When a competitor is singled out in comparative false advertising, injury is presumed. Avis.
  • If D is free riding on P, injury will be presumed.
  • For presumption of injury, competition need not be direct (indirect competitors will be protected. J&J.
  • But, you still need a “reasonable interest to be protected.” Ortho v. Cosprophar.
  • Advertising linkage (without direct competition) does not establish sufficient proof of injury. Cosprophar.

Standard of Proof in 43(a) False Advertising is Strict Liability

Advantages:

  • Proof easier (lower administrative costs)
  • Deters people from making false advertising claims
  • Cheaper for small guy Ps to bring suits

Disadvantages:

  • Firms must take excessively expensive precautions before advertising
  • Same ad might convey a different message to different groups.

Remedies for 43(a) violations

Injunctions § 34(a)

Money Damages § 35(a)

Destruction of infringing articles § 36

There are no consumer remedies for 43(a) violations (Culligan v. Activities Club of New York).

Calculating Money Damages

§ 35(a)

  • D’s profits + Damages sustained by P + Cost of lawsuit
  • Treble damages are allowed as compensation (not penalty)
  • P only has to prove D’s sales, D has to prove elements of cost.

U-haul v. Jartran Method for Damages Calculation

  • D’s advertising expenditures (as a reflection of D’s profits) + P’s advertising expenditures to rebut false claims (as a reflection of P’s damages).
  • Typically you will see the greatest recovery in comparative false advertising cases because the damages will reflect the money you had to expend to counteract the damage done by a comparative false ad.
  • Are damages of this type limited to cases where you have comparative false advertising? NO (see Ralston case). It doesn’t have to be comparative false advertising, it can be general false advertising. You just have to show that you made additional advertising expenditures in response to the false claim. These rebuttal ads do not have to directly address the false ads, they can be in the form of general p.r., etc.

Ralston v. Alpo Calculation for Damages for Unintentional False Advertising

  • If willful or intentional false advertising
  • D profits + P damages
  • If false advertising is a mistake
  • P’s advertising expenditures to rebut false claims + goodwill + lost profits from lost sales and price reduction + any other relevant damages (like delay in receipt of stream of income)
  • You are not awarded D’s profits
  • Why distinguish between Willful and Unintentional?
  • You want a D to pay for a mistaken false ad, but you don’t want D’s to be too careful because it is socially inefficient.
  • Court also says (at pg. 116) that deterrence alone cannot justify award of D’s profits to a P.
  • This is like Torts. You can’t really deter an accident and Ralston’s ads were basically accidentally false. Appropriate remedy is usually the damages to the victim and not the profits of the defendant, so the courts thinks optimal deterrence will be reached by the defendant paying for the damages to plaintiff, not by also awarding the plaintiff profits of the defendant. Deterrence alone therefore, does not justify such a large award in this case.
  • To measure expenditures on responsive ads the court looked at planned advertising expenditures and then what ALPO actually spent on advertising and then awarded the difference (5.2 million). Then the court subtracted from that amount 1.6 million dollars because of false advertising on ALPO coupons that hurt Ralston.
  • The court then awarded 4.5 million to Alpo to compensate them because they had been delayed in having a national rollout by Ralston’s false advertising. Alpo was thus rewarded the projected profits from the national rollout. Essentially it discounts the value of the expected profit as it reaches farther into the future (assets today are worth more than projected assets, you have to discount for the time delay)

Alpo II

  • They reduce the 4.5 million judgment
  • They do this because they have to spend money now in order to make the 4.5 million later. Therefore, you have to reduce the 4.5 million in damages by the amount that ALPO made in profit by using the startup money somewhere else. Therefore, the damages are reduced by the amount made by the alternative use of the funds.
  • Why are damages multiplied by 50%?
  • Section 35 of Lanham act says that court may order judgment above amount of actual damages (not exceeding 3X). Such sum shall constitute “compensation” and not a “penalty”
  • How do you justify multiplied damages when they are not a penalty, but instead compensation?

You could say that even though we have tried our best to calculate damages, we usually understate the damages. Therefore, we just multiply by 1.5 to be fair.

Also, market distortions brought about by false advertising in a general way could justify the extra “compensation” because the damages from these market distortions would be difficult to quantify. (EX: If you miss your window of opportunity to market Crystal Pepsi, it isn’t going to come back. This is difficult to quantify)

Justified because it is a health claim being made and we really want to make sure people do not make false health claims.

Federal Trade Commission

Jurisdiction

  • Authority over “unfair & deceptive” practices in commerce
  • Private P does not have standing to enforce rule or decision of FTC
  • Courts have deferential standard of review towards FTC decisions

“Deceptive” acts or practices (no competitor necessary)

  • FTC can rely on its own analysis/expertise to determine if claims are misleading
  • It can do this as long as an advertisement’s claims are reasonably clear from the face of the ad.
  • No consumer survey needs to be done like under the Lanham Act.
  • Claims with a “capacity to deceive” are unlawful.
  • The FTC does not need to produce proof of actual deception to find a claim deceptive.
  • Fraud is not necessary, deception alone is enough for the FTC
  • Use of props may be deceptive. Colgate.
  • Marketing gimmick of calling a product “free” is deceptive. Mary Carter.
  • FTC policy statement on Deception (See page 160)
  • Puffing is okay

“Unfair” acts or practice (competitor needed)