10th Circuit endorses presumption of Lanham Act false advertising injury in mostly two-player market

Vitamins Online, Inc. v. Heartwise, Inc., --- F.4th ----, 2023 WL 4189604, Nos. 20-4126, 21-4152 (10th Cir. Jun. 27, 2023)

Proceedings below most recently blogged here.

Vitamins Online sued Heartwise under the Lanham Act and Utah’s Unfair Competition Law for false advertising about the ingredients of its competitive nutritional supplements and manipulating those products’ Amazon reviews. The district court ruled for Vitamins Online at a bench trial and ordered disgorgement of NatureWise’s profits for 2012 and 2013. The court also awarded Vitamins Online attorneys fees and costs.

Both parties appealed and the Tenth Circuit favored Vitamins Online, remanding for further consideration of punitive damages and an injunction—and, more broadly, approving a presumption of injury in these specific circumstances, with discussion of using antitrust principles (ugh) to determine whether a presumption is appropriate.

The supplements here involve garcinia cambogia and green coffee extract, which both purportedly help with weight loss.

Vitamins Online purportedly offered unique (at least during relevant time periods) ingredients that were clinically proven “to help support/assist with weight loss” unlike other versions of the same ingredients. For example, by the middle of 2013, Vitamins Online was the only seller of garcinia cambogia with “SuperCitrimax” on Amazon, and Dr. Oz’s 2013 show on garcinia cambogia featured the chief researcher for SuperCitrimax, leading Dr. Oz to urge his viewers to buy only that type. After this show, Vitamins Online’s sales increased substantially. Dr. Oz had similar effects on Vitamins Online’s green coffee.

NatureWise’s products advertised that they met the same Dr. Oz-endorsed requirements. To cut a long story short, they often didn’t. E.g.: “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.”

Both parties relied on Amazon for sales.

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.

NatureWise’s entry into the market knocked Vitamins Online from its #1 seller spot, which has competitive advantages. During 2012-2013, Naturewise made over $9.5 million in profit from the accused products, which the trial court ordered disgorged. That court also awarded fees for various discovery improprieties, which the court of appeals upheld.

Falsity: A fact question reviewed for clear error; there was none, either on the ingredient claims or the Amazon reviewbombing claims.

Of most interest: The district court didn’t clearly err in finding that block voting on the helpfulness of reviews and the offering of free products in exchange for reviews were misrepresentations. Block voting: the district court found that the number of “helpful” votes was artificially inflated and therefore literally false. NatureWise argued that nothing in the reviews themselves was false. “[T]he issue is not the falsity of the reviews themselves but rather the misleading impression ‘that many unbiased consumers find positive reviews to be helpful and negative reviews to be unhelpful.’” An expert explained that reviews “have a very significant impact on the purchase decision process” when consumers believe that the reviews are “objective and genuine.” Thus, it was not clearly erroneous for the district court to find that NatureWise’s block voting misled customers, “given that customers were likely under the misimpression that it was unbiased consumers—rather than NatureWise’s employees—who found good reviews of NatureWise products to be helpful and bad reviews unhelpful.” The court also noted the district court’s additional finding that NatureWise’s management was worried that customers would find out about the block voting. “This fact indicates that NatureWise believed customers were being misled about the helpfulness ratings.”

Free products: The district court found that NatureWise made literally false representations because it represented that it did not offer free products in exchange for reviews—even though it did. But, NatureWise responded, the free products were not contingent on the content of the reviews, and that the act of giving a free product did not render the reviews themselves false. Again, “NatureWise’s actions misled consumers about the number of reviews from unbiased customers and the true ratio of putative unbiased positive to negative reviews.” Vitamins Online’s expert concluded that the act of offering a product in exchange for a review is likely to skew the positive results of the review.

The district court gave Vitamins Online 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.” This was correct.

A presumption of injury began in the Second Circuit for comparative advertising. Even without a direct comparative statement, if the ad targets an “obvious competitor,” that can also qualify for a presumption, and when there’s an essentially two-party market, the ad will always target an obvious competitor. A “strict two-player market is no longer inflexibility required. Rather, the market simply must be ‘sparsely populated.’”

Thus, the rule: “once a plaintiff has proven that the defendant has falsely and materially inflated the value of its product (or deflated the value of the plaintiff’s product), and that the plaintiff and defendant are the only two significant participants in a market or submarket, courts may presume that the defendant has caused the plaintiff to suffer an injury.” The presence of “a few other insignificant market participants” doesn’t change anything “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.”

Caveats: even in essentially a two-player market, the presumption is a presumption that injury occurred, not about its degree. “The sparse competitor market can support a finding of causation, but damages, if sought, will typically require some further evidence or analysis.” The sparse competitor market can support a finding of causation, but damages, if sought, will typically require some further evidence or analysis. And the presumption is rebuttable.

Back to the presumption: “Whether the presumption of injury is applicable therefore turns primarily on the scope and occupancy of the market. To make these determinations, our antitrust caselaw is instructive.” [Cue antitrust lawyers talking about the difficulties of market definition in antitrust! FWIW, I’m giving you essentially all of the market definition done by the court; you can contrast that to what a market definition analysis by an antitrust economic expert looks like and consider how “instructive” that really is.] Product market boundaries are defined by cross-elasticity of demand; high cross-elasticity means products are substitutes and low means they aren’t. Submarkets “may be determined by examining such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.”

Market definition is a question of fact, and it was not clearly erroneous to find the market sparsely populated. There was evidence “that the parties were operating in a two-player market and that the existence of other competitors were de minimis. That is enough to render the presumption of injury applicable.” But … what about alternatives? Is the market all green coffee, all green coffee sold on Amazon, all weight loss supplements, something else? In a footnote: “We are not adopting our entire antitrust corpus as the relevant standard to use in defining the market. … But the antitrust analogue is a roughly useful template from which to start the analysis.”

NatureWise failed to rebut the presumption. It argued that there could be no causation without correlation, but the record showed that Vitamins Online’s sales dropped at roughly the same rate as NatureWise’s sales rose for at least specific quarters, which was enough. Nor was Vitamins Online required to prove a nexus between the false advertising and the lost sales. “Once Vitamins Online made the requisite showing that the markets in question were composed of just two significant market players, then the district court was entitled to presume that NatureWise caused an injury.” [I assume materiality is in there somewhere.]

NatureWise also argued that there were intervening factors causing Vitamins Online to lose sales, but they didn’t show clear error. (1) Dr Oz’s shows allegedly caused a flood of competitors to enter the market—but that was answered by the trial court’s “essentially two-party market” finding.  Further, “this alleged flood of competitors would presumably have resulted in sales losses for NatureWise as well—but NatureWise’s sales increased when Vitamins Online’s sales decreased.” (2) Vitamins Online’s products were “far more expensive” than competitors’. But expert evidence contradicted this. (3) Vitamins Online’s products had an average rating of 2.9 out of five stars, which would cause poor sales. “But most of Vitamins Online’s products had a similar average rating both when its sales rose before NatureWise entered the markets and when they fell after NatureWise entered the market and employed in deceptive sales practices.”

Disgorgement was not an abuse of discretion, given the facts above. But the district court was not required to award disgorgement for 2014 and after. It’s not error to limit profits to a period in which the plaintiff can show actual damages, considering that as part of the equitable balancing. The court rejected Vitamins Online’s argument that, under the statute, it had only to “prove defendant’s sales,” and the burden was on NatureWise to prove which portion of the sales are not attributable to the false advertising. But § 1117(a) still requires a plaintiff to “show some connection between the identified ‘sales’ and the alleged infringement.” “Section 1117(a) does not presumptively entitle Vitamins Online to all NatureWise’s sales proceeds no matter how temporally disconnected from the false advertising injury.”

The district court denied an injunction on the basis that Vitamins Online was adequately compensated by a disgorgement of profits, and because it found that it would be against the public interest to force NatureWise to remove all its product reviews from Amazon. But it should have considered enjoining future review manipulation, including block voting and free products.

The district court also needed to consider punitive damages under the UCL. Enhanced damages aren’t ok under the Lanham Act when the plaintiff was already “adequately compensated,” but under Utah law, only one of the seven relevant factors for punitive damages considers the actual damages award.