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Multi-Level Marketing Gets Multi-Level Attention

Multi-level marketing has touched us all – whether it be purchasing beauty products, essential oils, or health supplements from a friend through social media, or receiving an invitation to join a team of seemingly successful people working their “side hustle.” But multi-level marketing is now getting some additional multi-level attention, both in the media and in the court room.

With interest in documentaries on the rise throughout the pandemic, Amazon recently delivered with its four-part docu-series “LuLaRich.” It follows the multi-level marketing company, LuLaRoe, which is known for its colorfully patterned clothing, messages of empowering women, and nearly $2 billion in purported sales in a single year. But the docu-series also offers a glimpse at the dividing line between a multi-level marketing platform and a pyramid scheme, with the latter running afoul of the law.

Throughout its short existence, LuLaRoe has been no stranger to litigation. Several class actions have been filed against it, including one with allegations that LuLaRoe’s leggings ripped as easily as wet toilet paper. But most notable is a recent class action that was certified just last month by a Federal Court in Alaska. See, e.g., Katie Van et al. v. LLR Inc. dba LuLaRoe et al., No. 3:18-cv-00197, in the United States District Court for the District of Alaska. The claims in Van allege that LuLaRoe charged sales tax on purchases to customers located in tax-free jurisdictions. This was, allegedly, the result of a customized point-of-sale system that did not allow sales tax to be assessed based on the location to where the “retailer” (sales person) shipped the merchandise. LuLaRoe addressed this by creating a “toggle switch” that allowed retailers to “turn off” the automatic tax charges and charge a different amount, including 0%. However, some retailers used the toggle switch to override the collection of sales taxes on taxable transactions while others did not use the toggle switch to override sales taxes on transactions that were not taxable. When LuLaRoe became aware of this, it allegedly disabled the toggle switch and asked retailers to leave the system’s sales tax box “checked,” while LuLaRoe developed a system that would compute and collect sales tax based on the address where the product was purchased and received. The outcome: consumers in jurisdictions without sales tax (or no sales tax on clothing) were improperly billed for sales tax on their purchases, based on the taxes imposed by the retailer’s location, rather than the consumer’s location. The certified class claim alleges LuLaRoe engaged in an unfair trade practice with the imposition of this non-existent sales tax. And, while attempts at similar class actions against LuLaRoe have been made in the past, this class, with more than 10,000 potential class members, has now been certified.

With so many sales happening through social media controlled by individual retailers, multi-level marketing entities must address unique challenges, including the calculation and imposition of sales tax, especially when customers are located in different states (or even different countries) than their sales person, as was the case in Van. Having the requisite resources – whether that be through staffing or usable technology and software – can be challenging when trying to keep up with the quick growth that often comes with multi-level marketing. Additionally, a multi-level marketing entity’s approach to organizational structure, recruiting, compensation, and manufacturing warrants detailed attention and familiarity with state and federal law.

LuLaRoe’s story, while colorful and seemingly worthy of a hit docu-series, highlights the need to carefully navigate legal issues when operating or becoming involved with a multi-level marketing entity. The potential for legal snags may be hidden in the seams. And it’s never worth becoming too big for your (brightly patterned) britches when it comes to the law.

Article By M. Kaylan Dunn and Ashley Lewis with Hunton Andrews Kurth.

For more class actions, visit the NLR Litigation section.

A Flurry of CFTC Actions Shock the Cryptocurrency Industry

The Commodity Futures Trading Commission (CFTC) sent shockwaves across the cryptocurrency industry when it issued a $1.25 million settlement order with Kraken, one of the industry’s largest market participants. The next day, the CFTC announced that it had charged each of 14 entities for offering cryptocurrency derivatives and margin trading without registering as a futures commission merchant (FCM). While the CFTC has issued regulatory guidance in the past and engaged in some regulatory enforcement activities, it has now established itself as a key regulator of the industry along with the US Securities and Exchange Commission (SEC), the US Department of Justice (DOJ) and the US Department of the Treasury (Treasury). Market participants should be aware that the CFTC will continue to take a more active role in regulation and enforcement of commodities and derivatives transactions moving forward.

The CFTC alleged that each of the defendants were acting as an unregistered FCM. Under Section 1a(28)(a) of the Commodity Exchange Act (the Act), 7 U.S.C. § 1(a)(28)(A), an FCM is any “individual, association, partnership, or trust that is engaged in soliciting or accepting orders for the purchase or sale of a commodity for future delivery; a security futures product; a swap . . . any commodity option authorized under section 6c of this title; or any leverage transaction authorized under section 23 of this title.” In order to be considered an FCM, that entity must also “accept[] money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom.” (See: 7 U.S.C. § 1(a)(28)(A)(II).) 7 U.S.C. § 6d(1), requires FCMs to be registered with the CFTC.

IN DEPTH

THE KRAKEN SETTLEMENT

On September 28, 2021, the CFTC issued an order, filing and settling charges against respondent Payward Ventures, Inc. d/b/a Kraken for offering margined retail commodity transactions in cryptocurrency—including Bitcoin—and failing to register as an FCM. Kraken is required to pay a $1.25 million civil monetary penalty and to cease and desist from further violations of the Act. The CFTC stated that, “This action is part of the CFTC’s broader effort to protect U.S. customers.”

The CFTC’s order finds that from approximately June 2020 to July 2021, Kraken violated Section 4(a) of the Act, 7 U.S.C. § 6(a)(2018) by offering to enter into, entering into, executing and/or confirming the execution of off-exchange retail commodity transactions with US customers who were not eligible contract participants or eligible commercial entities. The CFTC also found that Kraken operated as an unregistered FCM in violation of Section 4d(a)(1) of the Act, 7 U.S.C. § 6d(a)(1) (2018). According to the order, Kraken served as the sole margin provider and maintained physical and/or constructive custody of all assets purchased using margins for the duration of a customer’s open margined position.

Margined transactions worked as follows: The customer opened an individual account at Kraken and deposited cryptocurrency or fiat currency into the account. The customer then initiated a trade by selecting (1) the trading pair they wished to trade, (2) a purchase or sale transaction and (3) a margin option. All trades were placed on Kraken’s central limit order book and executed individually for each customer. If a customer purchased an asset using margin, Kraken supplied the cryptocurrency or national currency to pay the seller for the asset. If a customer sold an asset using margin, Kraken supplied the cryptocurrency or national currency due to the buyer. Trading on margin allowed the customer to establish a position but also created an obligation for the customer to repay Kraken at the time the margined position was closed. The customer’s position remained open until they submitted a closing trade, they repaid the margin or Kraken initiated a forced liquidation based on the occurrence of certain triggering events, including limitations on the duration of an open margin position and pre-set margin thresholds. Kraken required customers to exit their positions and repay the assets received to trade on margin within 28 days, however, customers could not transfer assets away from Kraken until satisfying their repayment obligation. If repayment was not made within 28 days, Kraken could unilaterally force the margin position to be liquidated or could also initiate a forced liquidation if the value of the collateral dipped below a certain threshold percentage of the total outstanding margin. As a result, actual delivery of the purchased assets failed to occur.

The CFTC asserted that these transactions were unlawful because they were required to take place on a designated contract market. Additionally, by soliciting and accepting orders for, and entering into, retail commodity transactions with customers and accepting money or property (or extending credit in lieu thereof) to margin these transactions, Kraken was operating as an unregistered FCM.

Coinciding with the release of the enforcement action against Kraken, CFTC Commissioner Dawn D. Sump issued a “concurring statement.” In it, she appeared to be calling upon the CFTC to adopt more specific rules governing the products that are the subject of the enforcement action. Commissioner Sump seemed to indicate that it would be helpful to cryptocurrency market participants if the CFTC clarified its position on the applicability of the Act, as well as registration requirements. The CFTC will likely issue guidance or rules to clarify its position on which cryptocurrency-related products trigger registration requirements.

CFTC CHARGES 14 CRYPTOCURRENCY ENTITIES

On September 29, 2021, the CFTC issued a press release and 14 complaints against cryptocurrency trading platforms. The CFTC is seeking a sanction “directing [the cryptocurrency platforms] to cease and desist from violating the provisions of the Act set forth herein.” Each of the platforms have 20 days to respond.

All of the complaints are somewhat similar in that the CFTC alleges that each of the cryptocurrency platforms “from at least May 2021 and through the present” have offered services to the public “including soliciting or accepting orders for binary options that are based off the value of a variety of assets including commodities such as foreign currencies and cryptocurrencies including Bitcoin, and accepting and holding customer money in connection with those purchases of binary options.”

The CFTC has taken the position that “binary options that are based on the price of an underlying commodity like forex or cryptocurrency are swaps and commodity options as used in the definition of an FCM.” (The CFTC has previously taken the position that Bitcoin and Ethereum constitute “commodities,” doing so in public statements and enforcement actions.) In a prominent enforcement action previously filed by the CFTC in the United States District Court for the Eastern District of New York, the court held that “virtual currency may be regulated by the CFTC as a commodity” and that it “falls well-within the common definition of ‘commodity’ as well as the CEA’s definition of commodities.” (See: CFTC v. McDonnell, et al., 287 F. Supp. 3d 213, 228 (E.D.N.Y. Mar. 6, 2018); CFTC v. McDonnell, et al., No. 18-cv-461, ECF No. 172 (E.D.N.Y. Aug. 23, 2018).) In the action the CFTC filed against BitMEX in October of 2020, it alleged that “digital assets, such as bitcoin, ether, and litecoin are ‘commodities’ as defined under Section 1a(9) of the Act, 7 U.S.C. § 1a(9). (See: CFTC v. HDR Global Trading Limited, et al., No. 20-cv-8132, ECF 1, ¶ 23 (S.D.N.Y. Oct. 1, 2020).)

The CFTC has previously taken the position that Bitcoin, Ethereum and Litecoin are considered commodities. However, in these recently filed complaints, the CFTC did not appear to limit the cryptocurrencies that would be considered “commodities” to just Bitcoin, Ethereum and Litecoin. Instead, the CFTC broadly referred to “commodities such as foreign currencies and cryptocurrencies including Bitcoin.” It remains to be seen which of the hundreds of cryptocurrencies on the market will be considered “commodities,” but it appears that the CFTC is not limiting its jurisdiction to just three. It is also an open question as to whether there are certain cryptocurrencies or cryptocurrency referencing financial products that the SEC and CFTC will determine are subject to the overlapping jurisdiction of both regulators, similar to mixed swaps under the derivatives rules.

The CFTC also singled out two of these cryptocurrency platforms, alleging that they issued false statements to the effect that it “is a registered FCM and RFED with the CFTC and member of the NFA.” The CFTC noted that neither of these entities were ever registered with the National Futures Association (NFA) and one of the NFA ID numbers listed “identifies an individual who was once registered with the CFTC but has been deceased since 2009.”

WHAT’S NEXT

While the SEC, Treasury and DOJ are often considered the most prominent federal regulators in the cryptocurrency space, this recent sweep by the CFTC is not the first time it has flexed its muscles. The CFTC went to trial and won in 2018, accusing an individual of operating a boiler room. In October 2020, the CFTC filed a case against popular cryptocurrency exchange BitMEX for failing to register as an FCM, among other counts. However, unlike those one-off enforcement actions, the recent actions targeting multiple market participants within two days is a big step forward for the CFTC. Cryptocurrency derivative trading has been rising in popularity over the last few years and it is unsurprising that the CFTC is taking a more active enforcement role.

It is expected that regulatory activity within the cryptocurrency space will increase from all US regulators, including the CFTC, SEC, Treasury and the Office of the Comptroller of the Currency, especially as cryptocurrency products are increasingly classified as financial products subject to regulation. While the CFTC and other regulators have issued some regulatory guidance, regulators appear to be taking a “regulatory guidance by enforcement action” strategy. Market participants will need to thoughtfully consider all relevant regulatory regimes in order to determine what compliance activities are necessary. As we describe, multiple classifications are possible.

Article by Joseph B. Evans and Alexandra C. Scheibe with McDermott Will & Emery.

For more on cryptocurrency litigation, visit the NLR Cybersecurity, Media & FCC section.

SDNY: Use of Photojournalists’ 9/11 Footage May Be Fair Use

A firefighter digging through rubble. An ambulance being lifted out of the wreckage. Photographs of these and other somber scenes from downtown Manhattan on September 11, 2001 formed the basis of photojournalist Anthony Fioranelli’s copyright infringement case against several media organizations that allegedly used these photos without permission. Recently, the S.D.N.Y. issued a mixed ruling on whether use of these harrowing-yet-iconic photos was fair.

Background

Plaintiff Fioranelli was one of four reporters allowed access to Ground Zero immediately after the September 11, 2001 terrorist attack on the World Trade Center (“9/11”). Fioranelli compiled his raw footage of Ground Zero and registered it with the Copyright Office (the “Content”). CBS licensed Fioranelli’s Content and agreed to pay Fioranelli for each use of any portion of the Content, but later created multiple newsreels and licensed them to other media organizations without Fioranelli’s permission and without compensating Fioranelli for those further uses. Fioranelli sued CBS and its purported sublicensees, including BBC, A&E Television Networks, and Paramount Pictures (among others), alleging that sixteen works—including the CBS newsreels, ten documentaries/docuseries, a docudrama, a “making of” featurette, a religious TV program, and two programs exploring/debunking conspiracy theories—infringed his copyright in the Content. The parties moved for summary judgment, with the defendants seeking a judgment from the court that their use was de minimis and fair.

De Minimis Use

While there was no dispute that the defendants actually copied Fioranelli’s Content, the parties disputed whether the amount copied was legally actionable. The defendants relied on a quantitative analysis, arguing that because they used only a small portion of Fioranelli’s total footage, their use was de minimis.

The court disagreed, holding that a defendant’s quantitatively brief display of a copyrighted work, “when conspicuously displayed, can be actionable.” Applying this standard, the court found that defendants prominently displayed the Content in fourteen of the sixteen challenged works, which contained a full-screen depiction of Fioranelli’s Content. The court noted that the Content was “not mere background footage” but was “clearly observable” and “the focus of the film when shown.” The court further found that the remaining two works—a docudrama and its “making of” featurette—used the Content as the focal point of an entire scene and were also not de minimis. Accordingly, the court denied defendants’ motion for summary judgment on de minimis use, finding that the qualitative prominence of defendants’ uses (i.e., to occupy an entire screen or as the focal point for the viewer) outweighed the quantitative brevity of such uses.

Fair Use

Regarding defendants’ motion for summary judgment on fair use, the court analyzed the four familiar fair-use factors.

Regarding the second factor (the nature of the copyrighted work), the court found that photojournalism (like Fioranelli’s Content) consists primarily of non-fictional renderings of historical events, and often precludes substantial demonstrations of creativity. As such, the nature of the Content—which was non-fictional and historical—weighed in favor of the defendants.

As for the fourth factor (the effect on the potential market for the copyrighted work), the court found that defendants’ uses were paradigmatic of the market for the Content, i.e., licensing to media organizations and “a clear substitute” for Fioranelli’s Content. The court also found that allowing CBS to sublicense the Content to other media organizations without compensating Fioranelli for those sublicensed uses would gravely impact freelance photojournalists, who seek out footage expecting to collect licensing fees for their work. Accordingly, the court found that the fourth factor weighed against the defendants.

As for the first and third factors, the court separately analyzed the alleged infringements. Regarding the first factor (the purpose and character of the use), the court found that some alleged infringements were transformative, whereas others were not, and further found that, for some alleged infringements, fair use issue could not be decided at summary judgment. While the court agreed with Fioranelli that each of the defendants’ uses were commercial in nature, which tends to weigh against fair use, it found that this was not dispositive of the various fair use determinations.

The court found that seven of the challenged works were not transformative because none incorporated Fioranelli’s Content to comment on or critique it, and because those works shared the original purpose of Fioranelli’s Content—to inform the viewer of what happened on 9/11 and its aftermath. In particular, the court held that “[t]he expressive purpose of the original use and the secondary use are the same,” and that defendants’ use of unaltered copies of Fioranelli’s Content to achieve the same purpose that Fioranelli sought to achieve, led the court to conclude that such uses were not transformative.

As for another seven of the challenged works (which included the religious TV program and programs exploring/debunking conspiracy theories), the court declined to make a fair use determination on summary judgment, based in part on defendants’ arguments that their use was transformative because it served a different purpose than Fioranelli’s purpose in creating the Content. For example, the court noted that the programs exploring/debunking conspiracy theories were intended “to educate viewers about conspiracy theories surrounding 9/11” which was not Fioranelli’s original purpose. Similarly, the court held that a reasonable juror could find that use of Fioranelli’s Content to build a political argument was a sufficiently different purpose so as to potentially render the use transformative. Accordingly, the court held that this was an issue to be determined at trial.

The court also found that a docudrama and its “making of” featurette were transformative. The docudrama was a fictionalized retelling of a story of two police officers trapped in the rubble at Ground Zero, wherein Fioranelli’s Content is superimposed on the television that a fictionalized police officer’s family is watching. The court found that the docudrama used Fioranelli’s Content creatively to construct a unique fictionalized setting, not to record or share history. As such, the docudrama’s use of Fioranelli’s Content was found transformative. As for the “making of” featurette, the court found that its purpose was to provide insight into the rationale behind the cinematic choices made in the film, rendering that transformative as well.

As for CBS’ alleged unauthorized use of the Content, the court held the first fair use factor favored Fioranelli for the additional reason that the infringement was in bad faith because CBS removed a watermark reading “NOT FOR BROADCAST” from Fioranelli’s footage before CBS used the footage in its newsreels. The court found that this decision, together with the fact that CBS’ use duplicated Fioranelli’s original purpose and was commercial in nature, led the first factor to weigh slightly in Fioranelli’s favor.

In analyzing the third factor (the amount and substantiality of use), the court referred back to its de minimis use analysis and declined to adopt the defendants’ mathematical, quantitative approach, instead considering whether “the extent of Defendants’ copying is consistent with or more than necessary to further the purpose and character of the use.” For seven works found not transformative, the court found this factor neutral, and for seven additional works the court left this determination for trial, as reasonable jurors could disagree regarding whether the defendants used more of the copyrighted material than necessary for each work’s purpose. For the two uses that the court found transformative (the docudrama film and featurette), the court found that the few seconds of copyrighted material shown on the in-scene television were “no more than necessary to ensure the viewer understood that the family was watching the events of 9/11 unfold on television.”

In sum, the court found that the seven non-transformative uses (the two newsreels and six historical, non-political documentaries) were not fair use; that the two uses that were transformative (the docudrama film and featurette) were fair use; and that for the seven remaining works, fair use could not be decided on summary judgment.

The case is Fioranelli v. CBS Broad. Inc., No. 15-CV-0952 (VSB), 2021 WL 3372695 (S.D.N.Y. July 28, 2021).

This article was written by Brooke M. Wilner and Samuel V. Eichner of Finnegan Law Firm.

For more articles relating to Intellectual Property, please click here.

Illinois Appellate Panel Splits the Difference for BIPA Statute of Limitations in Closely Watched Decision

Currently pending before the Seventh Circuit Court of Appeals is the important question of when a claim under the Illinois Biometric Information Privacy Act (“BIPA”) accrues. Cothron v. White Castle, No. 20-3202 (7th Cir.) In another litigation CPW previously identified, a panel for the Illinois Court of Appeals recently addressed whether BIPA claims are potentially subject to a one-, two-, or five-year statute of limitations. Tims v. Black Horse Carriers, Inc., 2021 IL App (1st) 200563 (Sep. 17, 2021). The answer is apparently “it depends,” based on the particular claims a plaintiff asserts under the statute.

The underlying facts of the case, as with many BIPA litigations, arose in the employer-employee context. Plaintiff filed a putative class action Complaint in March 2019. Plaintiff alleged that he worked for Defendant from June 2017 until January 2018. Plaintiff alleged that Defendant “scanned and was still scanning the fingerprints of all employees, including Plaintiff, and was using and had used fingerprint scanning in its employee timekeeping,” in violation of BIPA.

Count I of the Complaint alleged that Defendant violated Section 15(a) of BIPA by failing to institute, maintain, and adhere to a retention schedule for biometric data. Count II of the alleged that Defendant violated BIPA Section 15(b) by failing to obtain an informed written consent and release before obtaining biometric data. Finally, Count III of the Complaint alleged that Defendant violated BIPA Section 15(d) by disclosing or disseminating biometric data without first obtaining consent.

Defendant subsequently moved to dismiss the Complaint in its entirety, asserting that Plaintiff’s Complaint was filed outside BIPA’s limitation period. The motion noted that BIPA itself has no limitation provision and argued that the one-year limitation period for privacy actions under Illinois Code Section 13-201 applies to causes of action under the BIPA.

Plaintiff opposed, arguing that: (1) BIPA’s purpose is (in part) to prevent or deter security breaches regarding biometric data and therefore (2) in the absence of a limitation period expressly contained in BIPA itself, the five-year period in Illinois Code Section 13-205 for all civil actions not otherwise provided for should apply. Plaintiff also argued that the one-year limitations period applied to actions only involving publication of information—which was not implicated for all claims under BIPA

The statute of limitations issue was eventually certified to a panel of the Illinois Court of Appeals. The Court noted at the onset that Section 15 of BIPA “imposes various duties upon which an aggrieved person may bring an action” and “[t]hough all relate to protecting biometric data, each duty is separate and distinct.”

The Court ultimately found the publication-based distinction raised in the parties’ briefing a useful construct for categorizing claims under BIPA: “[a] plaintiff could therefore bring an action under the Act alleging violations of section 15(a), (b), and/or (e) without having to allege or prove that the defendant private entity published or disclosed any biometric data to any person or entity beyond or outside itself. Stated another way, an action under section 15(a), (b), or (e) of the Act is not an action ‘for publication of matter violating the right of privacy.’” (quotation omitted).

The end result reached was that the Court held Section 13-201 (the one-year limitations period) governs BIPA actions under Section 15(c) and (d) while Section 13-205 (the five-year limitations period) governs BIPA actions under Sections 15(a), (b), and (e).

Although the shorter limitations period adopted for BIPA claims under Section 15(c) and 15(d) is a welcome ruling for defendants named in BIPA class actions, this ruling will have a limited impact on pending and future-filed BIPA cases. This is because with the statute’s generous liquidated damages, class actions (even if defined depending on the claim asserted to include only a 1-year period) will still potentially bring a significant payoff for determined class counsel. The bigger question—pending before the Seventh Circuit—is when BIPA claims accrue in the first place. For more on this, stay tuned. CPW will be there to keep you in the loop.

Article By Kristin L. Bryan of Squire Patton Boggs (US) LLP

For more on BIPA, visit the NLR Communications, Media & Internet section.

For Cannabis Dispensaries, Ounce of Prevention Worth More than Pound of Cure

Imagine facing the prospect of a crippling class action lawsuit and having to engage in costly discovery to disprove the claims, even where clear evidence of innocence is presented at the pleading stage. For one cannabis dispensary, this wasn’t merely a thought exercise, it was reality. In Montanez v. Future Vision Brain Bank, LLC, 2021 WL 1697928 (D.Colo. 2021) plaintiff filed a putative class action against Future Vision Brain Bank (“Future Vision”) alleging that the company had violated the Telephone Consumer Protection Act (TCPA) by sending numerous telemarketing text messages to plaintiff’s cellphone using an Automatic Telephone Dialing System (ATDS).

Future Vision moved to dismiss, contending that plaintiff lacked standing to bring the suit and that the complaint failed to state a claim, in any event. As to its first defense, Future Vision asserted that plaintiff failed to allege an injury-in-fact because she had provided prior consent to receive text messages and she had not adequately plead the existence of an ATDS. Second, defendant argued that even if plaintiff had standing, the failure to plausibly allege the use of an ATDS warranted dismissal of the claims.

To establish its first defense, Future Vision submitted an affidavit from its digital systems engineer, which included screenshots showing that plaintiff had enrolled in defendant’s customer loyalty program and that when she did so, she provided her phone number and authorized communication through text message. The parties marshaled competing authorities from the Third, Eighth, and Ninth circuits on the question whether consent is properly an issue of the merits or jurisdiction. Citing Tenth Circuit precedent, however, the court reasoned that because resolution of the jurisdictional question (standing) requires resolution of an aspect of the substantive claim (consent), the issue should be resolved under Rule 12(b)(6). And because defendant moved only to dismiss the issue under Rule 12(b)(1), the court denied the motion to dismiss on the issue of standing as to consent.

The court reached a similar conclusion with respect to defendant’s ATDS defense, even though it was asserted under both Rule 12(b)(1) and Rule 12(b)(6). An ATDS is defined by the TCPA as “equipment which has the capacity (a) to store or produce telephone numbers to be called, using a random or sequential number generator; and (b) to dial such numbers.” 47 U.S.C. § 227(a)(1). As we have previously discussed, the Supreme Court’s recent decision in Facebook v. Duguid clarified that unless the dialing equipment uses a random or sequential number generator, businesses will not be required to obtain prior written consent from the consumer before contacting them. 141 S.Ct. 1163 (2021). Under the Supreme Court’s recent interpretation, equipment that merely dials from a list, and does not incorporate the use of a random or sequential telephone number generator is not bound by the TCPA’s requirements to obtain prior express consent before making calls or sending text messages using an ATDS.

Under the Supreme Court’s recent interpretation, equipment that merely dials from a list, and does not incorporate the use of a random or sequential telephone number generator is not bound by the TCPA’s requirements to obtain prior express consent before making calls or sending text messages using an ATDS.

Despite the clarity of this precedent, the court determined that it was not dispositive at the pleading stage. “While the Supreme Court’s decision elucidates the definition of an ATDS,” the court stated, “that holding will prove far more relevant on a future motion for summary judgment than it does now. At this stage, the Court must take all well-pleaded facts as true and cannot consider outside evidence without converting the Motion into a motion for summary judgment.” The court then went on to find that plaintiff had plausibly alleged the use of an ATDS. Specifically, plaintiff alleged that defendant utilized a messaging platform that allowed the transmission of thousands of text messages without human involvement. And defendant relied on the platform’s ability to store telephone numbers, generate sequential numbers, dial numbers in a sequential order, and dial numbers without human intervention.

This case demonstrates that although many may have viewed Facebook as a decisive victory for cannabis companies that use automated equipment to make calls or send text messages, the district court’s decision here indicates that Facebook may not always be sufficient to protect defendants at the pleading stage. This is because where a TCPA class action is filed is as important as what is alleged. Had this case been brought within the Third or Eighth Circuits, where courts have found consent relevant to the standing inquiry, the outcome likely would have been different. Unless and until the Supreme Court resolves the growing circuit split on this issue, cannabis companies that use any type of automated dialing system should consult with competent legal counsel to design and implement mitigation strategies, including (i) help identifying known litigators and serial plaintiffs, (ii) scrubbing numbers against the Do Not Call registry, (iii) checking for reassigned numbers, (iv) drafting arbitration provisions and class action waivers; (v) crafting strategic forum selection and choice of law clauses; and (vi) developing compliance programs to minimize risk to the company.

Article By Dwayne D. Sam of Womble Bond Dickinson (US) LLP

For more articles on cannabis, visit the NLR Biotech, Food, & Drug section.

Texas Hammer Nails Trademark Infringement Appeal

The US Court of Appeals for the Fifth Circuit reversed a district court’s dismissal of an initial confusion trademark complaint, finding that the plaintiff alleged a plausible claim of trademark infringement under the Lanham Act. Adler v. McNeil Consultants, LLC, Case No. 20-10936 (6th Cir. Aug. 10, 2021) (Southwick, J.)

Jim Adler is a personal injury lawyer who trademarked and used several terms, including JIM ADLER, THE HAMMER and TEXAS HAMMER, to market his business, including via keyword advertisements. McNeil Consultants, a personal injury lawyer referral service, purchased keyword ads using Adler’s trademarked terms, which allowed McNeil’s advertisements to appear at the top of any Google search of Adler’s trademarked terms. McNeil’s advertisements used generic personal injury terms, did not identify any particular law firm and clicking on the ads placed a phone call to McNeil’s call center rather than directing the user to a website. The call center used a generic greeting so consumers did not realize with whom they were speaking.

Adler filed suit against McNeil, asserting Texas state law claims as well as trademark infringement under the Lanham Act. McNeil moved to dismiss, arguing that its keyword ads did not create a likelihood of confusion. The district court agreed and dismissed Adler’s complaint. Adler appealed.

To successfully plead a trademark infringement claim under Fifth Circuit law, the holder of a protectable trademark must establish that the alleged infringing use “creates a likelihood of confusion as to source, affiliation, or sponsorship.” To determine whether a likelihood of confusion exists, the Court weighs a non-exhaustive list of several confusion factors, including the similarity of the marks, the similarity of the products, the defendant’s intent and the care exercised by potential consumers.

The Fifth Circuit explained that Adler alleged initial interest confusion, which exists where the confusion creates consumer interest in the infringing party’s services even where no sale is completed because of the confusion. The Court noted that this case presented the first opportunity for the Fifth Circuit to consider initial interest confusion as it pertains to search engine keyword advertising. Relying on Ninth Circuit precedent and parallel reasoning to its own opinions on initial interest confusion in the context of metatag usage, the Court concluded that Adler’s complaint alleged a plausible claim of trademark infringement under the Lanham Act.

The Fifth Circuit noted that initial interest confusion alone is not enough to raise a Lanham Act claim. The Court explained that if a consumer searches TOYOTA and is directed to search results containing a purchased ad clearly labeled as selling VOLKSWAGEN products, a consumer who clicks on the VOLKSWAGEN ad has been distracted, not confused or misled into purchasing the wrong product. Distraction does not violate the Lanham Act. However, the Court explained that where the use of keyword ads creates confusion as to the source of the advertisement—not mere distraction—an infringement may have occurred. Because McNeil’s advertisements were admittedly generic and could have been associated with any personal injury law firm, the Court found that the keyword ads raised a possibility of consumer confusion rather than distraction.

The Fifth Circuit also disagreed with the district court’s finding that Adler’s claims were conclusory. The Court found that Adler submitted factual allegations sufficient to support a claim that McNeil’s generic ads—combined with their misleading call-center greetings—caused consumer confusion as to who had placed the advertisements.

The Fifth Circuit also rejected McNeil’s argument that its ads were generic and therefore unprotected under the Lanham Act. The Court explained that although the Lanham Act does not protect generic terms, it does protect against generically worded advertisements integrating trademarks admittedly owned by another. The Court found that McNeil’s use of generic language was actually a factor to be weighed against McNeil because it increased the likelihood that consumers would be confused as to the source.

Finally, the Fifth Circuit rejected the district court’s conclusion that Adler’s claims failed as a matter of law because consumers cannot see the terms purchased in a keyword search. The district court essentially ruled that if the mark is not visible to the consumer, then no confusion can be created. The Court disagreed, finding the district court’s ruling unsupported by precedent and contrary to its rule of law that no single factor be dispositive.

Article By Joshua Revilla of McDermott Will & Emery

For more articles on copyright, visit the NLR Intellectual Property section.

The Hot Coffee Case Revisited: Has Proximate Cause Changed in the 25 Years Since Liebeck v. McDonald’s Restaurants?

Two cases decided 25 years apart, but there were some facts in common: a hot drink, a consumer alleging that she was burned by the drink, and a lawsuit. These are the facts of the 1994 case Liebeck v. McDonald’s Restaurants that resulted in an award of millions to the consumer, but also the facts from Shih v. Starbucks, a case decided last year. In Shih, however, the court found in favor of the product supplier. What’s different about these cases? The answer: how the courts interpreted proximate cause.

In 1994, Liebeck v. McDonald’s Restaurants sparked a nationwide tort reform debate after a jury found McDonald’s liable for a consumer’s injuries after she spilled McDonald’s coffee on herself. At the time, many commentators predicted a wave of frivolous lawsuits and large judgments against businesses. But 25 years later, those predictions have not materialized. While consumers continue to sue, the doctrine of proximate cause limits the liability that businesses face from claims for injuries related to hot drinks.

Liebeck v. McDonald’s Restaurants

In 1992, Stella Liebeck bought a cup of hot coffee from a McDonald’s drive-through in New Mexico. While parked, she placed the cup of coffee between her legs and attempted to peel the cap off. The coffee spilled and Ms. Liebeck sustained second- and third-degree burns.

Liebeck sued McDonald’s, alleging that the hot coffee was defectively manufactured, that it violated the implied warranties of merchantability and fitness for a particular purpose, and that the defect caused her injuries. At trial, Liebeck’s attorneys offered evidence that McDonald’s asked franchisees to brew coffee at 180-190 degrees Fahrenheit. Additionally, the attorneys offered evidence that McDonald’s had received more than 700 reports of burns resulting from coffee spills out of billions of hot coffees sold during the time period.

The jury ruled in favor of Liebeck and awarded her compensatory damages of $200,000 and punitive damages of $2.7 million. But the jury determined that Liebeck was 20 percent at fault for her own injuries, and the court reduced the punitive award significantly, resulting in compensatory damages of $160,000 and punitive damages of $480,000.

Shih v. Starbucks

Shih v. Starbucks presents a similar set of facts, but with a different outcome. In June 2016, Tina Shih went to Starbucks with a friend, and each ordered a hot tea. Each tea was given to Shih in a double-cup – one full cup placed within an empty cup. Neither cup had a sleeve. Shih carried both teas to her table and sat down.

Shih claimed that because the cup of tea was filled to the top and was very hot, she did not want to lift it. Instead, she pulled the lid off the cup and moved her chair back to sip from the cup while it was on the table. Shih pushed her chair back to lean over the cup, lost her balance, and put her hand on the table to steady herself – causing the hot tea to spill in her lap. Shih sustained second-degree burns from the incident.

Shih sued Starbucks. She alleged that the double-cup without a sleeve was a manufacturing defect, which – combined with the cup being filled to the brim with hot tea – caused her injuries. Starbucks moved for summary judgment on Shih’s claims, arguing that Shih could not prove the alleged manufacturing defect proximately caused her injuries. The court agreed, granted Starbucks’s motion, and entered judgment in favor of Starbucks. In 2020, the appeals court affirmed.

Proximate Cause is Key the Difference

The differences between Liebeck and Shih are the litigants’ defect claims and their respective theories of proximate causation. The proximate cause inquiry examines the relationship between the defendant’s alleged conduct and the plaintiff’s injury: if the defendant’s conduct is too attenuated from the consumer’s injuries, the defendant cannot be held liable for those injuries. Proximate cause exists when the defect in question increased the risk of harm to the consumer, and the consumer sustained injuries resulting from the increased risk. Courts generally test proximate cause by looking at whether the harm was a foreseeable result of the defect – meaning the business could reasonably have predicted the harm.

Liebeck’s attorneys successfully argued that the coffee was defective because it was served too hot and that the excessively hot temperature put Liebeck at an increased risk of burns. Liebeck established proximate cause by showing that her burn injuries were a foreseeable result of the alleged defect – the coffee being served very hot.

Shih could not establish proximate cause because the court held that the alleged defect was too attenuated from her injuries. Shih’s attorneys argued that the lack of a cup sleeve and the fact that the hot tea was full made it defective. Specifically, Shih would not have removed the tea lid, leaned forward, moved her chair, lost her balance and grabbed the table – causing it to wobble and spill the tea on her – if Starbucks had given her a cup sleeve or not filled the cup to the brim.

The court held that the alleged defect did not increase the risk of Shih being burned or otherwise injured by the hot tea; therefore, the defect was not the proximate cause of her injuries. The lack of a sleeve and the fullness of the tea did not increase Shih’s risk of losing her balance “while attempting to execute [this] kind of unorthodox drinking maneuver,” and spilling the tea on herself. The court’s use of “unorthodox” illustrates that, in the court’s view, Shih’s injuries were not a foreseeable result of the alleged defect. The court noted that while it is foreseeable that consumers could lose their balance and spill their drinks, losing one’s balance is not “within the scope of the risk” created by Starbucks’ decision to use a double cup and to fill the cup to the brim. Thus, Shih could not prove Starbucks’ actions proximately caused her injuries.

Twenty-five years after Liebeck sparked a national conversation about hot coffee and corporate liability, Shih demonstrates that courts continue to follow public policy limitations like proximate cause to protect businesses from unforeseeable consumer injuries.

Article by Emilie McGuire and Jeffrey Skinner with Schiff Hardin LLP.

For more articles on class action lawsuits, visit the NLR Litigation section.

O Say Can You See? Federal Courts Say Military Members Entitled to Paid Leave

This week, the federal appellate court in Pennsylvania ruled that workers who take leave to serve in the military must be paid for that time if their employers offer other forms of comparable short-term paid leave. The Third Circuit Court of Appeals held that paid leave is a “right and benefit” under the Uniformed Services Employment and Reemployment Rights Act (USERRA). That is, if an employer provides paid leave for some reasons (such as jury duty, bereavement, and illness), then it must also pay servicemembers who are on military leave.

The decision was issued in a case brought by a Navy reservist who sued his employer seeking regular wages for the time he spent on military leave. He claimed that his employer violated USERRA—the federal law granting job protections to those who serve in the military—by providing paid leave to employees for various reasons but not for military leave. The Court sided with the reservist, concluding that USERRA “does not allow employers to treat servicemembers differently by paying employees for some kinds of leave while exempting military service.”

The decision in the Third Circuit case is similar to a Seventh Circuit case from February in which a United Airlines pilot who served on reserve duty for the U.S. Air Force brought a class action lawsuit on behalf of himself and other pilots who took periodic unpaid leaves of absence to attend military training.

These decisions are only legally binding in Pennsylvania, New Jersey, Delaware, Illinois, Indiana, and Wisconsin. However, with consistent decisions by these two influential federal appellate courts, it is likely that courts nationwide will rule similarly in the inevitable future cases.

We are recommending that all employers begin reviewing their military leave policies and assess the benefits being provided to employees. That is, if you pay employees for some kinds of absences, you’ll likely need to pay for military leave as well.

Article By Monica L. Frantz of Roetzel & Andress LPA

For more articles on paid leave, visit the NLR Labor & Employment section.

A Simple Guide to Legal Website Hosting

There has been a surge in the number of potential clients searching for legal services online. 74% of all potential clients visit a law firm’s website to take action. Any law firm that wants more incoming clients needs to be online. Every firm without a high-quality website is losing leads because relying on word of mouth lead generation is no longer an option. Legal website hosting basics are essential for every firm to know – from choosing a hosting platform to search engine optimization.

What is website hosting?

Website hosting is renting or purchasing space on a server to host a website. All of the images, content, and code that make a website is stored in this space– which is then accessible through the World Wide Web. To better understand it, think of website hosting like online real estate. People rent or buy a home to live in and that home is attached to an address so it can be found.

But with web hosting, a website’s address is called a domain name or URL (uniform resource locator). Then that URL is connected to the server space, using DNS (domain name system). Once it’s all connected, search engines index the site, then it’s accessible on the internet.

Fortunately, setting up hosting doesn’t have to be as complicated as it sounds. Many hosting platforms simplify the process or even set it up for the site owner.

Choosing a legal website hosting platform

When it comes to hosting platforms, there are many options to consider. Each platform offers multiple plans with varying features. Deciding which is the right one should be based on a few different factors.

Purpose and planning

Every hosting service has different capabilities, features, and services. That’s why deciding the purpose of the site is an essential first step.

So, consider what the site will need to do before looking into hosting services. Will it need to host multiple email inboxes for lawyers? How many pages does it need to host?

Another thing to think about is the goal when a prospect lands on the page. This should help answer some of the questions above. Knowing this information will also help when choosing a hosting plan.

Build or buy a site

One of the next things to consider is who will build and maintain the site. For do-it-yourselfers, ease of use should be a priority. Most hosts provide some sort of website builder in the hosting plan. However, these site builders all vary immensely in how easy they are to use. Some simplify the process so anyone can quickly build an aesthetically pleasing site. Others cater to the technically inclined and require coding in HTML.

There are even some drag-and-drop site builders available. Some products, like WordPress, utilize plug-ins that can change the building interface. Services like that make the process more user-friendly for novices.

Depending on what the site needs to do, the possibilities are limitless.

How to set up hosting

The next issue is deciding how to set up the hosting. Just like with building the website, hosting set up varies by platform.

Most domain name sellers like GoDaddy and NameCheap also offer hosting. Although the platform is typically more limited, the DNS and domain are connected as part of the purchase. As such, the simplest way to set up hosting is to purchase it when buying a domain name. This option is ideal for do-it-yourselfers because of the ease and convenience. All the complicated setup is completed, leaving only the page build to handle.

The other option is using an independent hosting service such as BlueHost or HostGator. This option leaves the site owner to attach the hosting space and domain. It isn’t extremely complicated to do, but it is a more hands-on setup than GoDaddy or NameCheap. YouTube has countless tutorials and walkthroughs that simplify the process.

This host setup is primarily ideal for people with time, skill, or tech interests. The main upside to hosting companies like this is storage and features. These companies offer more features, optimizations, site security, and storage than other domain sellers do.

Plans and cost

No matter which hosting option you choose, they all offer a wide selection of prices. Your firm should base this decision on your needs, features, and overall budget. Website hosting prices can vary drastically for standard service and the more advanced types, like dedicated hosting, can be very costly. Fortunately, most platforms offer lower rates to first-time customers.

However, cost should never be the deciding factor when selecting a plan or type of hosting. It all comes down to what best suits your firm’s needs.

Plan options

There are different hosting plans intended to cater to different needs. This is why knowing the purpose and needs of the site is essential. Most hosting plans include a set amount of storage on the server, but that storage is shared by the site’s pages, photos, and content. Then storage is further used up by email inboxes for people in the organization. So, the larger an organization is, the larger the required storage.

Depending on the hosting service provider, there are many optimizations available. Some providers may include some optimizations in the hosting package. Others offer them as addons for an additional fee.

Search engine optimization

Search engine optimization (SEO) improves a website’s location in search query results. By improving it, a website climbs closer to the top of the search results. The higher on the list a site is, the more traffic it receives.

Good SEO ranking is crucial in lead attraction, but when it comes to SEO, not all hosting services are created equal. Some even limit a website’s ranking, making SEO an important consideration when choosing a hosting platform.

Legal website hosting doesn’t have to be complicated

There is a lot to consider when choosing a legal website hosting service. No two platforms are built the same, so it’s important to identify what your law firm’s specific needs are in a website and use that to guide your decision. You’ll also need to consider skill level and the amount of time you have for setup.

With this guide and a clear plan of your firm’s needs, you’ll be on your way to holding a domain in the digital space.

Article By PracticePanther

For more articles on the legal industry, visit the NLR Law Office Management section.

EPA agreement with Kennedy Center protects water quality of Potomac River, Chesapeake Bay

PHILADELPHIA – The John F. Kennedy Center for the Performing Arts in Washington, D.C. has settled alleged Clean Water Act violations at its facility in Washington, D.C., the U.S. Environmental Protection Agency announced today.

The Kennedy Center, located at 2700 F St NW, has a Clean Water Act permit regulating its discharges of condenser cooling water from the facility’s air conditioning system into the Potomac River, which is part of the Chesapeake Bay watershed.

This settlement addresses alleged violations of temperature and pH discharge permit limits required under the Kennedy Center’s Clean Water Act permit. EPA also cited the Kennedy Center for failing to timely submit monitoring reports and failing to submit pH influent data. Additionally, the agreement addresses alleged violations identified by the District of Columbia’s Department of Energy and Environment during a prior inspection of the facility.

As part of the settlement, the Kennedy Center is required to submit a compliance implementation plan. The Kennedy Center has certified that it is now in compliance with permit requirements.

This agreement is part of EPA’s National Compliance Initiative: Reducing Significant Non-Compliance with National Pollutant Discharge Elimination System (NPDES) Permits. For more information about the Clean Water Act permit program, visit www.epa.gov/npdes.

Read this article in its original. form here.

Article by the EPA

Read more about the Clean Water Act in the NLR section Energy, Climate, and Environmental Law News.

Category: Litigation

Multi-Level Marketing Gets Multi-Level Attention

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