Klein Zelman Rothermel Jacobs & Schess LLP
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Internet Marketer of Health Supplements and Cleansers Ordered to Cease Advertising and Billing Practices

FTC v. Central Coast Neutraceuticals, Inc., No. 10C 4931(N.D. Ill. Aug. 5, 2010)
Federal Trade Commission
Press Release – August 16, 2010

FTC Allegations:

  • The Federal Trade Commission ("FTC") charged Central Coast Neutraceuticals, Inc. ("CCN") and related companies and individuals with certain marketing violations, including deceptive advertising of AcaiPure (an acai berry supplement) and Colopure (a colon cleansing supplement).
  • The complaint alleges that on their respective websites, defendants made dramatic claims about the products’ effectiveness.
  • The FTC further alleged that defendants deceived consumers with "free" or "risk free" trial offers, certain charges and refund terms, as well as with respect to potential, unexpected enrollment in recurring monthly membership programs.
  • Additionally, the FTC alleged that defendants falsely claimed that celebrities, including Oprah Winfrey and Rachel Ray, had endorsed products marketed by CCN.

Specific Conduct Challenged:

  • The defendants are charged with violations of the Federal Trade Commission Act (the "FTC Act"), the Electronic Funds Transfer Act ("EFTA") and Regulation E.
  • The alleged deceptive practices include:
    1. making false, misleading and unsubstantiated product efficacy claims;
    2. misrepresenting product endorsements;
    3. misrepresenting money-back guarantees;
    4. misrepresenting claims of "30-day trial offers";
    5. failing to disclose recurring monthly membership programs, upsells and return costs;
    6. submitting unauthorized charges on customer credit and debit cards; and
    7. initiating unauthorized electronic funds transfers from consumer bank accounts.

Court Order:

  • The District Court of the Northern District of Illinois issued a temporary restraining order requiring CCN to stop its allegedly illegal conduct.
  • The order also imposed an asset freeze and appointed a temporary receiver.

Summary:

  • The FTC is carefully scrutinizing the manner in which companies describe and advertise their products’ benefits.
  • False claims regarding "free trial offers" and deceptive marketing continues to be a hotly-investigated and penalized area on both state and federal levels.
  • It is imperative to have all programs and associated marketing creative carefully reviewed by counsel prior to promotional launch.

Publishers Clearing House Settles Deceptive Sweepstakes Marketing
Claims with 32 States and the District of Columbia

September 9, 2010

Parties:

  • Publishers Clearing House LLC ("PCH") operates various sweepstakes promotions that are offered on a nationwide basis.
  • 32 states and the District of Columbia brought suit against PCH, alleging various ongoing deceptive marketing practices.

Complaints:

  • Upon reviewing consumer complaints, as well as PCH promotional materials, investigators determined that the company was not fully complying with a prior agreement with state regulators.
  • Despite the restrictions contained in the prior agreement, investigators alleged that consumers were still confused by the language of some of the company’s sweepstakes promotional material.

Settlement Modifies 2001 Stipulated Judgment:

  • The settlement modifies a similar agreement reached in 2001 and increases protections afforded to consumers.
  • PCH has agreed to pay $3.5 million to settle the latest claims.
  • The company will also modify its marketing materials to respond to the states’ concerns.

PCH has Agreed to:

  • Alter the language it uses in mailings so that consumers are no longer led to believe that the more money they spend, the more likely they are to win prizes in PCH promotional contests.
  • Change some enticements, such as no longer telling recipients that their entry code contains a "key code" for the winning sweepstakes entry.
  • Stop sending communications from the "Board of Judges" to indicate that recipients are close to winning a sweepstake prize.
  • Appoint special compliance counsel and an ombudsman to review the company’s mailings and solicitations on a quarterly basis to ensure compliance with the 2001 and 2010 agreements.
  • Send a letter to every consumer who spends at least $1,000 a year on PCH merchandise informing consumers that no purchase is necessary in order to enter its sweepstakes.

Summary:

  • Companies conducting sweepstakes should carefully consider consumers’ potential interpretation of the language contained in their promotional materials.
  • Consumers must not be led to believe that they are required to spend anything in order to enter sweepstakes or that they have won when the applicable contest drawing has yet to take place.

General Knowledge of Infringing Material Insufficient to Trigger Duty to Search for Infringements

Viacom Int’l, Inc. v. YouTube, Inc., No. 07 Civ. 2103 (LLS) (S.D.N.Y. June 23, 2010)

Facts:

  • Defendant YouTube, Inc. ("YouTube"), operates a website allowing users to upload video files at no cost.
  • These files are copied and formatted by YouTube and ultimately available for public viewing on its website.
  • YouTube is considered a service provider under the Digital Millennium Copyright Act ("DMCA").
  • Plaintiff Viacom brought an action claiming that many of the videos on YouTube’s website infringed Viacom’s copyrights, asserting that YouTube was not only aware of, but also welcomed, the placement of infringing material on its website.
  • Specifically, Viacom alleged that, "Defendants had ‘actual knowledge’ and were ‘aware of facts or circumstances from which infringing activity [was] apparent,’ but failed to do anything about it."
  • However, according to the facts at issue, when YouTube received specific notice (a DMCA take-down notice) that a particular item infringed a copyright, they immediately removed it.
  • YouTube moved for summary judgment, arguing that they are entitled to the DMCA’s Safe Harbor protection against Viacom’s infringement claims.
  • Viacom cross-moved arguing that YouTube is not entitled to such protection for the following reasons: (1) YouTube had "actual knowledge" and was "aware of facts and circumstances from which infringing activity [was] apparent," but failed to "act[ ] expeditiously" to stop it; (2) YouTube "receive[d] a financial benefit directly attributable to the infringing activity" and (3) YouTube’s infringement does not result solely from providing "storage at the direction of a user" or any other Internet function specified in the statute.

Safe Harbor Provision at Issue:

  • Under the statute, an online service provider has the duty to take down infringing content when it has "knowledge of specific and identifiable infringements of particular individual items."
  • The central issue in this proceeding involves whether the statutory language: "actual knowledge that the material or an activity using the material on the system or network is infringing" and "facts or circumstances from which infringing activity is apparent" means a general awareness that there are infringements or rather an actual or constructive knowledge of specific and identifiable infringements of individual items.

Court Decision:

  • The court weighed the legislative history of the DMCA and determined that the statutory language describes knowledge of specific and identifiable infringements of particular individual items.
  • Further, the court pointed out that "mere knowledge of prevalence of such activity in general is not enough."
  • The court relied on the recent decision in Perfect 10, Inc. v. CCBill LLC, 488 F.3d 1102 (9th Cir. 2007), which essentially held that the "burden of policing" copyright infringement resides with the copyright owner. There, the Ninth Circuit refused to impose investigative duties on service providers.
  • Although a trademark infringement case, the court also cited to Tiffany (NJ) Inc. v. eBay Inc., 600 F.3d 93 (2d Cir. 2010), where the Second Circuit held that under the DMCA, if a service provider knows (by notice from the owner) of specific instances of infringement, the provider must promptly remove the infringing material. The Second Circuit further noted that "[g]eneral knowledge that infringement is ‘ubiquitous’ does not impose a duty on the service provider to monitor or search its service for infringements."
  • The court found the DMCA to be explicit: the safe harbor protection is not conditioned on "a service provider monitoring its service or affirmatively seeking facts indicating infringing activity."

Summary:

  • According to this decision and others like it, it seems that prompt attention to, and compliance with, DMCA take-down notices will protect an online service provider from liability.
  • Such online service providers have a duty to take down infringing items when they obtain knowledge of specific and identifiable infringements of particular individual copyrights.

Draft Consumer Privacy Bill - The Best Practices Act
Proposed Legislation Reviewed by Congress

H.R. 5777
"Building Effective Strategies To Promote Responsibility Accountability Choice Transparency Innovation Consumer Expectations and Safeguards Act"

Privacy Legislation:

  • On July 19, 2010, Representative Bobby Rush, Chairman of the House Communications, Technology and Internet Subcommittee, introduced a draft federal consumer privacy bill.
  • The main purpose of the bill, known as "The Best Practices Act," is "to foster transparency about the commercial use of personal information, provide consumers with meaningful choice about the collection, use, and disclosure of such information."
  • Among other things, the proposed legislation would regulate how organizations are required to disclose privacy practices, obtain consent to collect and use consumer information and protect stored consumer data.
  • In particular, the Best Practices Act would require entities that collect and store personal information to provide consumers with the ability to check what information is being collected and stored, as well as the ability to amend, modify and/or delete such information. In addition, businesses must publish in their privacy policies a link to the Federal Trade Commission’s consumer complaint form. Finally, businesses must provide direct notice to consumers of impending material changes to any privacy policies, as well as a thirty (30) day period within which to opt out of the use of their information in connection with any such changes.
  • According to the Center for Democracy and Technology, the draft bill "establishes a forward looking and flexible framework for protecting consumer privacy."
  • On July 22, 2010, the House Subcommittee conducted a hearing to discuss the newly-released bill.
  • Thereafter, on July 27, 2010, the Senate Committee on Commerce, Science, and Transportation held its hearing regarding online privacy practices and the future of consumer privacy protection.
  • On May 4, 2010, Representative Rick Boucher (D-VA) introduced a draft discussion bill that mirrors many of H.R. 5777’s provisions. Representative Boucher’s draft bill is more stringent than H.R. 5777 in terms of the consent required from consumers when both collecting information and transferring that information to third parties for marketing purposes. Boucher’s draft bill would, among other things, require opt-out consent for any collection of information and require affirmative opt-in consent for either the collection of sensitive information or the sharing of any information with third parties for marketing purposes.
  • We will continue to follow the evolution of both H.R. 5777 and the Boucher draft bill and provide associated updates as they occur.

Ninth Circuit Allows Use of LEXUS Mark in Auto Broker’s Domain Name

Toyota Motor Sales, U.S.A. Inc. v. Tabari, No. 07-55344, D.C. No. CV-03-08506-DSF (9th Cir. July 8, 2010)

Facts:

  • Defendants Farzad and Lisa Tabari are auto brokers -- they contact authorized dealers, solicit bids and arrange for customers to buy from the auto dealer that offers the best mix of location, availability and price.
  • Plaintiff Toyota Motor Sales, U.S.A. Inc. ("Toyota") is the exclusive distributor of Lexus brand vehicles in the United States.
  • Toyota objected to the Tabaris’ use of copyrighted photography of Lexus vehicles and the circular "L" Symbol design mark on their website.
  • Toyota also objected to the Tabaris’ use of the string "lexus" in their domain names, claiming that it was likely to cause confusion as to the source of the Tabaris’ website among the consuming public.
  • While the Tabaris removed the photography and logo upon receipt of the Toyota demand, and added a disclaimer disassociating itself from Toyota, they refused to surrender their domain names incorporating the Lexus mark.
  • Toyota brought suit.

District Court:

  • After a bench trial, the district court ruled that trademark infringement was present on the facts at issue and, as such, ordered the Tabaris to cease using the domain names and enjoined them from using the Lexus mark in any other domain name in the future.
  • The district court applied the eight (8) factor test for likelihood of confusion set forth in AMF Inc. v. Sleekcraft Boats, 599 F.2d 341 (9th Cir. 1979).
  • The Tabaris appealed (pro se).

Ninth Circuit Review:

  • In its review, the court of appeals noted that the Ninth Circuit has held that the Sleekcraft analysis does not apply where a defendant uses the subject mark to refer to the trademarked good itself.
  • In fact, the court held that such use "is a fair use, namely nominative fair use."

Nominative Fair Use:

  • If a nominative fair use defense is raised, courts review whether: (1) the product was "readily identifiable" without use of the mark; (2) defendant used more of the mark than necessary; and/or (3) defendant falsely suggested that it was sponsored or endorsed by the trademark holder. See Playboy Enters., Inc. v. Welles, 279 F.3d 796 (9th Cir. 2002).
  • If the use satisfies this three-factor test, the defendant will be found not to have infringed any rights.
  • Here, the court indicated that in order to uphold the broad injunction, it "would have to be convinced that consumers are likely to believe a site is sponsored or endorsed by a trademark holder whenever the domain name contains the string of letters that make up the trademark."
  • In conducting this review, the court emphasized the importance of focusing on the "reasonably prudent consumer" in the online marketplace -- someone who is accustomed to shopping online.

Court Decision:

  • The court held that the injunction is plainly over-broad and that the Tabaris’ use of the Lexus mark was a nominative fair use.
  • Applying the three-part test, the court found that the Tabaris’ use of the mark was necessary to let consumers know that they are brokers of Lexus cars, which would be nearly impossible to do without mentioning the Lexus name.
  • As for using more of the mark than necessary, the court pointed out that the Tabaris changed their site by the time of trial, eliminating the stylized mark and the "L" logo, while at the same time inserting a disclaimer in their place, which states: "We are not an authorized Lexus dealer or affiliated in any way with Lexus. We are an Independent Auto Broker."
  • As to the sponsorship or endorsement factor, the court found that once reasonable consumers arrived at the site, they would immediately see the disclaimer and be "disabused of any notion that the Tabaris’ website is sponsored by Toyota."

Summary:

  • The court here upheld third-party use of a trademark in a domain name.
  • A "nominative fair use" will not infringe on a mark owner’s rights.
  • It would appear that all three (3) factors of the test set forth above must be satisfied in order to incorporate another’s trademark in a domain name.

Court Upholds Google’s Use of Trademarks as Keyword Triggers For Sponsored Links

Rosetta Stone Ltd. v. Google Inc., No. 09-736 (E.D. Va. Aug. 3, 2010)

Facts:

  • Plaintiff Rosetta Stone Ltd. ("Rosetta Stone") is a corporation that provides technology-based language learning products and services.
  • Over the years, plaintiff registered various "Rosetta Stone" marks with the United States Patent and Trademark Office.
  • Defendant Google Inc. ("Google") is a company that owns and operates an Internet search engine.
  • Google’s AdWords program displays advertisements to users of its search engine in the form of Sponsored Links.
  • Through the AdWords program, advertisers may purchase words or phrases ("keywords") that will trigger a Sponsored Link to that advertiser’s website.
  • In 2009, Google revised its Trademark Policy to identify two (2) separate acceptable uses of any keyword: (1) as a trigger to the Sponsored Link advertisement; and (2) as part of the advertisement itself.
  • To enforce this policy, Google has a trademark team (the Trust and Safety Team) that responds to complaints about advertisements that allegedly violate various AdWords program rules and/or guidelines.

Allegations of Trademark Infringement:

  • Plaintiff claimed that Google, through its AdWords program, helps third parties to mislead consumers and misappropriate the Rosetta Stone marks by using them as Keyword triggers for their own Sponsored Links and using them within the text or titles of these Sponsored Links.
  • Specifically, plaintiff alleged that by giving these advertisers the right to use Rosetta Stone marks, or words, phrases or terms similar to the Rosetta Stone marks, as Keyword triggers that cause Sponsored Links to be displayed, Google is helping advertisers to misdirect Internet users to their competing company websites.
  • Google moved for summary judgment.

Court Decision:

Direct Trademark Infringement

  • The court held that Google was not liable for direct trademark infringement based on its practice of auctioning the plaintiff’s marks to third-party advertisers for use in their Sponsored Links titles and advertisement text.
  • Under the Lanham Act, a plaintiff must prove that "defendant used the mark in a manner likely to confuse consumers as to the source or origin of goods or services."
  • Here, the court was convinced that Google’s practice described above would not create a likelihood of confusion as to the source or origin of the advertisers’ products.
  • In so holding, the court sifted through a nine-part test, and found that there was no intent to confuse consumers, no actual confusion, the parties are not direct competitors and consumers of plaintiff’s products are "sophisticated."

Functionality Doctrine

  • Central to the court’s decision was the notion that the functionality doctrine protects Google’s use of the plaintiff’s marks.
  • The functionality doctrine provides that a product feature is functional (and not subject to the Lanham Act) "if it is essential to the use or purpose of the article or if it affects the cost or quality of the article." Traffix Devices, Inc. v. Marketing Displays, Inc., 532 U.S. 23, 32 (2001).
  • The court found that Google’s particular use of the trademarked keywords serves an "essential" function to its search engine services.

Contributory Trademark Infringement

  • The court found that Google did not intentionally induce or knowingly continue to permit third-party advertisers selling fake Rosetta Stone products to use the marks in their Sponsored Link titles and advertisement text.
  • The court noted that defendant’s desire for economic gain did not translate into contributory trademark infringement.
  • Further, according to the court, there is no evidence that Google is supplying a service to parties it knows or has reason to know are engaging in such infringement.
  • The court cited to Tiffany Inc. v. eBay, Inc., 600 F.3d 93, 107-09 (2d Cir. 2010) in its ruling, where the Second Circuit held that eBay’s generalized knowledge of infringement of a seller’s trademark on its website was insufficient to impose upon eBay an affirmative duty to remedy the infringement.

Vicarious Trademark Infringement

  • The court summarily dismissed this claim, noting that Google has no control over third-party advertisers’ Sponsored Links or their use of the Rosetta Stone marks in advertisement text.
  • Further, the court pointed out that the "mere fact that Google has a financial relationship with the alleged infringers does not demonstrate Google’s control of the Sponsored Links appearing on its website."

Trademark Dilution

  • Because Google is not in the business of selling language learning software, the court found that it could not be liable for trademark dilution.
  • Further, absent evidence that Google uses the plaintiff’s marks to identify its own goods and services, the court held that Google is not liable for trademark dilution.

Summary:

  • Under these facts, Google may continue selling trademarks as keyword triggers for Sponsored Links through its AdWords program.
  • For more information on Google’s revised trademark policy, see our July, 2009, Newsletter.
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