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Presuming False Advertising Injury in Two-Player Market

Posted by James Juo | Jul 05, 2023 | 0 Comments

To demonstrate that a representation was false or misleading, a plaintiff must show that it was either “literally false, either on its face or by necessary implication” or that it was “literally true but likely to mislead or confuse customers.” Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1139 (9th Cir.1997).

False Advertising of Supplements' Ingredients

In Vitamins Online, Inc. v. Heartwise, Inc., 2023 WL 4189604, — F.4th — (10th Cir. Jun. 27, 2023), Vitamins Online sued Heartwise (d/b/a NatureWise) under the Lanham Act for false advertising about the ingredients of nutritional supplements and manipulating those products' Amazon reviews.

The supplements involved garcinia cambogia and green coffee extract. The Dr. Oz Show, which is a known driver of sales in the supplement industry, had endorsed the supplements formulated by Vitamins Online.

            In March 2013, NatureWise's founder began testing its first green coffee product and found that some lots did not match the label claims. NatureWise nevertheless continued selling the product without recalling any lots.

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            NatureWise launched its first garcinia cambogia product in January 2013. NatureWise's founder was aware of Vitamins Online's garcinia cambogia product when it launched its own product, and even used Vitamins Online's product information on Amazon to develop the claims for NatureWise's garcinia cambogia. Although NatureWise's garcinia cambogia did not contain SuperCitrimax, NatureWise's founder specifically wanted to advertise SuperCitrimax because Vitamins Online was selling it, and thus NatureWise referenced SuperCitrimax on its Amazon product page and included the SuperCitrimax logo on the garcinia cambogia label. NatureWise also advertised its product as being clinically proven and having a patented form of 60% HCA bound to calcium and potassium, which implied that the product contained SuperCitrimax. NatureWise's founder was aware that it did not have the authority to make these claims, since NatureWise was unable to obtain a licensing agreement for SuperCitrimax. This SuperCitrimax advertising by NatureWise eventually ceased at an unspecified date.

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NatureWise asked its employees—who complied— to up-vote good reviews for its products and down-vote its products' bad reviews (known as “block voting”), thereby affecting which reviews appeared at the top of the products' pages. This was a violation of Amazon's policies, and so NatureWise's management did not want Amazon to learn of this practice. In addition, NatureWise offered free products to customers in exchange for a review. This also violated Amazon's policies.

After a bench trial, the District of Utah ruled in favor of Vitamins Online and ordered disgorgement of NatureWise's profits for 2012 and 2013. In particular, the district court found that NatureWise's block-voting and offering free products in exchange for reviews (so the reviews were not unbiased) were misrepresentations. The district court also concluded that Vitamins Online was entitled to a rebuttable presumption of injury because the markets at issue were essentially two seller markets, so it could be presumed that sales wrongfully gained by NatureWise were sales lost by Vitamins Online.

On appeal, the Tenth Circuit affirmed the district court.

Presumption of Injury

When a defendant uses a false advertisement to compare its product to the plaintiff's product, there is a presumption of injury. This theory originated in the Second Circuit. See McNeilab, Inc. v. Am. Home Prod. Corp., 848 F.2d 34, 38 (2d Cir. 1988); see also Castrol, Inc. v. Quaker State Corp., 977 F.2d 57, 62 (2d Cir. 1992) (a comparative advertisement is one “which mentions plaintiff's product by name”). False comparative advertising deprives a plaintiff “of a legitimate competitive advantage and reduced consumers' incentive to select” the plaintiff's product. Id.

This presumption of injury also may apply for an “obvious competitor” even without a direct comparison. See Time Warner Cable, Inc. v. DIRECTV, Inc., 497 F.3d 144, 162 (2d Cir. 2007) (finding a presumption of injury from DIRECTV's advertisements—which did not mention Time Warner Cable by name—because the “nearly binary structure of the television services market” rendered it “obvious to consumers that DIRECTV's claims of superiority are aimed at diminishing the value of cable”).

Thus, courts may apply a presumption of injury when “a plaintiff has met its burden of proving deliberate deception in the context of a two-player market[.]” Merck Eprova AG v. Gnosis S.p.A., 760 F.3d 247, 260–61 (2d Cir. 2014). This also may apply where the market is “sparsely populated.” Church & Dwight Co. v. SPD Swiss Precision Diagnostics, GmBH, 843 F.3d 48, 72 n.12 (2d Cir. 2016) (quoting Merck Eprova AG v. Gnosis S.p.A., 760 F.3d 247, 259 (2d Cir. 2014)).

Adopting this formulation of the presumption of injury, the Tenth Circuit noted:

This presumption follows from basic logic: if A and B are the only two products occupying a market or submarket, and if the producer of product B fraudulently represents its product as better than A, then it can be presumed that at least some consumers will choose product B over A in reliance on that false advertising, thereby depriving the producer of A of some sales. See Time Warner Cable, 497 F.3d at 162; see also Coca-Cola, 690 F.2d at 317 (“If Tropicana's advertisement misleads consumers into believing that Premium Pack is a more desirable product because it contains only fresh-squeezed, unprocessed juice, then it is likely that Coke will lose a portion of the chilled juice market[.]”). This is still true even if there are a few other insignificant market participants, so long as the plaintiff and defendant are the only significant actors in the market, since the defendant will still presumably receive most of the diverted sales. See Church & Dwight Co., 843 F.3d at 72 n.12 (recognizing that the presumption is applicable if the market is “sparsely populated”).

The Tenth Circuit further noted in footnote 6 that, by limiting this doctrine to those cases where there are just two significant market players, the concerns raised by the Eighth Circuit in Porous Media Corp. v. Pall Corp., 110 F.3d 1329, 1335 (8th Cir. 1997), about causation are avoided.

There are, however, two important caveats to this presumption. First, a defendant must be given the chance to rebut the presumption once it is found to be applicable. Second, the degree of injury may have to be considered as a separate issue to be later determined when remedies are addressed.

Disgorgement of Profits

As for the remedy of disgorgement of profits, while a showing of actual damages is not necessary, actual damages remain “an important factor in determining whether an award of profits is appropriate.” Bishop v. Equinox Int'l Corp., 154 F.3d 1220, 1223 (10th Cir. 1998). In addition, equitable factors must also be considered when determining whether an award of profits is appropriate, like a defendant's willfulness or bad faith. Id. So, the district court was permitted to take Vitamins Online's actual injury into account when considering whether profits are appropriate and when considering how much to disgorge.

Thomas P. Howard, LLC is experienced in trademarks nationwide including in Colorado.

About the Author

James Juo

James Juo is an experienced intellectual property attorney. He has successfully litigated various intellectual property disputes involving patents, trademarks, copyrights, and trade secrets. He also has counseled clients on the scope and validity of patent and trademark rights.


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