51 Search Results

May 28, 2020 |
Navigating TM Profits Remedy After High Court Decision

Washington, D.C. partner Howard Hogan, Los Angeles partner Ilissa Samplin and Washington, D.C. associate Megan McGlynn are the authors of "Navigating TM Profits Remedy After High Court Decision," [PDF] published by Law360 on May 27, 2020.

June 24, 2019 |
Supreme Court Holds That A Federal Ban on “Immoral or Scandalous” Trademarks Violates the First Amendment

Click for PDF Decided June 24, 2019 Iancu v. Brunetti, No. 18-302 Today, the Supreme Court held 6-3 that the Lanham Act’s prohibition on the registration of “Immoral or Scandalous” trademarks infringes the First Amendment.

Background: Two terms ago, in Matal v. Tam, 582 U.S. __ (2017), the Supreme Court declared unconstitutional the Lanham Act’s ban on registering trademarks that “disparage” any “person[], living or dead.”  15 U.S.C. § 1052(a).  The Court held that a viewpoint based ban on trademark registration is unconstitutional, and that the Lanham Act’s disparagement bar was viewpoint based (permitting registration of marks when their messages celebrate persons, but not when their messages are alleged to disparage).  Against that backdrop, Erik Brunetti, the owner of a streetwear brand whose name sounds like a form of the F-word, sought federal registration of the trademark FUCT.  The U.S. Patent and Trademark Office denied Brunetti’s application under a provision of the Lanham Act that prohibits registration of trademarks that “[c]onsist[] of or compromise[] immoral[] or scandalous matter.”  15 U.S.C. § 1052(a).  On Brunetti’s First Amendment challenge, the Federal Circuit invalidated this “Immoral or Scandalous” provision of the Lanham Act, on the basis that it impermissibly discriminated on the basis of viewpoint.

Issue:  Does the Lanham Act’s prohibition on the federal registration of “Immoral or Scandalous” trademarks infringe the First Amendment right to freedom of speech?

Court’s Holding:  Yes.  In an opinion authored by Justice Kagan on June 24, 2019, the Supreme Court held that the Lanham Act, which bans registration of “immoral … or scandalous matter,” violates the free speech rights guaranteed by the First Amendment because it discriminates on the basis of viewpoint.

“If the ‘immoral or scandalous’ bar similarly discriminates on the basis of viewpoint, it must also collide with our First Amendment doctrine.

Justice Kagan, writing for the majority

What It Means:
  • The argument that the government advanced in this case—that speech is not restricted when you can call your brand or product anything you want even if you cannot get the benefit of federal trademark protection—will not save statutory bans on trademark registration that are viewpoint based.
  • The Court made clear that its decision was based on the broad reach of the Lanham Act’s ban:  “[T]he ‘immoral or scandalous’ bar is substantially overbroad.  There are a great many immoral and scandalous ideas in the world (even more than there are swearwords), and the Lanham Act covers them all.”  In his concurring opinion, Justice Alito emphasized that the Court’s decision “does not prevent Congress from adopting a more carefully focused statute that precludes the registration of marks containing vulgar terms that play no real part in the expression of ideas,” thus leaving room for legislators to develop a more narrowly tailored alternative.
  • Unless and until a new law is proposed and passed, however, the U.S. Patent and Trademark Office will have no statutory basis to refuse federal registration of potentially vulgar, profane, offensive, disreputable, or obscene words and images.

As always, Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com

Related Practice: Intellectual Property

Wayne Barsky +1 310.552.8500 wbarsky@gibsondunn.com Josh Krevitt +1 212.351.4000 jkrevitt@gibsondunn.com Mark Reiter +1 214.698.3100 mreiter@gibsondunn.com

Related Practice: Fashion, Retail and Consumer Products

Howard S. Hogan +1 202.887.3640 hhogan@gibsondunn.com
© 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 25, 2019 |
Gibson Dunn Earns 79 Top-Tier Rankings in Chambers USA 2019

In its 2019 edition, Chambers USA: America’s Leading Lawyers for Business awarded Gibson Dunn 79 first-tier rankings, of which 27 were firm practice group rankings and 52 were individual lawyer rankings. Overall, the firm earned 276 rankings – 80 firm practice group rankings and 196 individual lawyer rankings. Gibson Dunn earned top-tier rankings in the following practice group categories: National – Antitrust National – Antitrust: Cartel National – Appellate Law National – Corporate Crime & Investigations National – FCPA National – Outsourcing National – Real Estate National – Retail National – Securities: Regulation CA – Antitrust CA – Environment CA – IT & Outsourcing CA – Litigation: Appellate CA – Litigation: General Commercial CA – Litigation: Securities CA – Litigation: White-Collar Crime & Government Investigations CA – Real Estate: Southern California CO – Litigation: White-Collar Crime & Government Investigations CO – Natural Resources & Energy DC – Corporate/M&A & Private Equity DC – Labor & Employment DC – Litigation: General Commercial DC – Litigation: White-Collar Crime & Government Investigations NY – Litigation: General Commercial: The Elite NY – Media & Entertainment: Litigation NY – Technology & Outsourcing TX – Antitrust This year, 155 Gibson Dunn attorneys were identified as leading lawyers in their respective practice areas, with some ranked in more than one category. The following lawyers achieved top-tier rankings:  D. Jarrett Arp, Theodore Boutrous, Jessica Brown, Jeffrey Chapman, Linda Curtis, Michael Darden, William Dawson, Patrick Dennis, Mark Director, Scott Edelman, Miguel Estrada, Stephen Fackler, Sean Feller, Eric Feuerstein, Amy Forbes, Stephen Glover, Richard Grime, Daniel Kolkey, Brian Lane, Jonathan Layne, Karen Manos, Randy Mastro, Cromwell Montgomery, Daniel Mummery, Stephen Nordahl, Theodore Olson, Richard Parker, William Peters, Tomer Pinkusiewicz, Sean Royall, Eugene Scalia, Jesse Sharf, Orin Snyder, George Stamas, Beau Stark, Charles Stevens, Daniel Swanson, Steven Talley, Helgi Walker, Robert Walters, F. Joseph Warin and Debra Wong Yang.

October 17, 2018 |
SEC Warns Public Companies on Cyber-Fraud Controls

Click for PDF On October 16, 2018, the Securities and Exchange Commission issued a report warning public companies about the importance of internal controls to prevent cyber fraud.  The report described the SEC Division of Enforcement's investigation of multiple public companies which had collectively lost nearly $100 million in a range of cyber-scams typically involving phony emails requesting payments to vendors or corporate executives.[1] Although these types of cyber-crimes are common, the Enforcement Division notably investigated whether the failure of the companies' internal accounting controls to prevent unauthorized payments violated the federal securities laws.  The SEC ultimately declined to pursue enforcement actions, but nonetheless issued a report cautioning public companies about the importance of devising and maintaining a system of internal accounting controls sufficient to protect company assets. While the SEC has previously addressed the need for public companies to promptly disclose cybersecurity incidents, the new report sees the agency wading into corporate controls designed to mitigate such risks.  The report encourages companies to calibrate existing internal controls, and related personnel training, to ensure they are responsive to emerging cyber threats.  The report (issued to coincide with National Cybersecurity Awareness Month) clearly intends to warn public companies that future investigations may result in enforcement action. The Report of Investigation Section 21(a) of the Securities Exchange Act of 1934 empowers the SEC to issue a public Report of Investigation where deemed appropriate.  While SEC investigations are confidential unless and until the SEC files an enforcement action alleging that an individual or entity has violated the federal securities laws, Section 21(a) reports provide a vehicle to publicize investigative findings even where no enforcement action is pursued.  Such reports are used sparingly, perhaps every few years, typically to address emerging issues where the interpretation of the federal securities laws may be uncertain.  (For instance, recent Section 21(a) reports have addressed the treatment of digital tokens as securities and the use of social media to disseminate material corporate information.) The October 16 report details the Enforcement Division's investigations into the internal accounting controls of nine issuers, across multiple industries, that were victims of cyber-scams. The Division identified two specific types of cyber-fraud – typically referred to as business email compromises or "BECs" – that had been perpetrated.  The first involved emails from persons claiming to be unaffiliated corporate executives, typically sent to finance personnel directing them to wire large sums of money to a foreign bank account for time-sensitive deals. These were often unsophisticated operations, textbook fakes that included urgent, secret requests, unusual foreign transactions, and spelling and grammatical errors. The second type of business email compromises were harder to detect. Perpetrators hacked real vendors' accounts and sent invoices and requests for payments that appeared to be for otherwise legitimate transactions. As a result, issuers made payments on outstanding invoices to foreign accounts controlled by impersonators rather than their real vendors, often learning of the scam only when the legitimate vendor inquired into delinquent bills. According to the SEC, both types of frauds often succeeded, at least in part, because responsible personnel failed to understand their company's existing cybersecurity controls or to appropriately question the veracity of the emails.  The SEC explained that the frauds themselves were not sophisticated in design or in their use of technology; rather, they relied on "weaknesses in policies and procedures and human vulnerabilities that rendered the control environment ineffective." SEC Cyber-Fraud Guidance Cybersecurity has been a high priority for the SEC dating back several years. The SEC has pursued a number of enforcement actions against registered securities firms arising out of data breaches or deficient controls.  For example, just last month the SEC brought a settled action against a broker-dealer/investment-adviser which suffered a cyber-intrusion that had allegedly compromised the personal information of thousands of customers.  The SEC alleged that the firm had failed to comply with securities regulations governing the safeguarding of customer information, including the Identity Theft Red Flags Rule.[2] The SEC has been less aggressive in pursuing cybersecurity-related actions against public companies.  However, earlier this year, the SEC brought its first enforcement action against a public company for alleged delays in its disclosure of a large-scale data breach.[3] But such enforcement actions put the SEC in the difficult position of weighing charges against companies which are themselves victims of a crime.  The SEC has thus tried to be measured in its approach to such actions, turning to speeches and public guidance rather than a large number of enforcement actions.  (Indeed, the SEC has had to make the embarrassing disclosure that its own EDGAR online filing system had been hacked and sensitive information compromised.[4]) Hence, in February 2018, the SEC issued interpretive guidance for public companies regarding the disclosure of cybersecurity risks and incidents.[5]  Among other things, the guidance counseled the timely public disclosure of material data breaches, recognizing that such disclosures need not compromise the company's cybersecurity efforts.  The guidance further discussed the need to maintain effective disclosure controls and procedures.  However, the February guidance did not address specific controls to prevent cyber incidents in the first place. The new Report of Investigation takes the additional step of addressing not just corporate disclosures of cyber incidents, but the procedures companies are expected to maintain in order to prevent these breaches from occurring.  The SEC noted that the internal controls provisions of the federal securities laws are not new, and based its report largely on the controls set forth in Section 13(b)(2)(B) of the Exchange Act.  But the SEC emphasized that such controls must be "attuned to this kind of cyber-related fraud, as well as the critical role training plays in implementing controls that serve their purpose and protect assets in compliance with the federal securities laws."  The report noted that the issuers under investigation had procedures in place to authorize and process payment requests, yet were still victimized, at least in part "because the responsible personnel did not sufficiently understand the company's existing controls or did not recognize indications in the emailed instructions that those communications lacked reliability." The SEC concluded that public companies' "internal accounting controls may need to be reassessed in light of emerging risks, including risks arising from cyber-related frauds" and "must calibrate their internal accounting controls to the current risk environment." Unfortunately, the vagueness of such guidance leaves the burden on companies to determine how best to address emerging risks.  Whether a company's controls are adequate may be judged in hindsight by the Enforcement Division; not surprisingly, companies and individuals under investigation often find the staff asserting that, if the controls did not prevent the misconduct, they were by definition inadequate.  Here, the SEC took a cautious approach in issuing a Section 21(a) report highlighting the risk rather than publicly identifying and penalizing the companies which had already been victimized by these scams. However, companies and their advisors should assume that, with this warning shot across the bow, the next investigation of a similar incident may result in more serious action.  Persons responsible for designing and maintaining the company's internal controls should consider whether improvements (such as enhanced trainings) are warranted; having now spoken on the issue, the Enforcement Division is likely to view corporate inaction as a factor in how it assesses the company's liability for future data breaches and cyber-frauds.


   [1]   SEC Press Release (Oct. 16, 2018), available at www.sec.gov/news/press-release/2018-236; the underlying report may be found at www.sec.gov/litigation/investreport/34-84429.pdf.
   [2]   SEC Press Release (Sept. 16, 2018), available at www.sec.gov/news/press-release/2018-213.  This enforcement action was particularly notable as the first occasion the SEC relied upon the rules requiring financial advisory firms to maintain a robust program for preventing identify theft, thus emphasizing the significance of those rules.
   [3]   SEC Press Release (Apr. 24, 2018), available at www.sec.gov/news/press-release/2018-71.
   [4]   SEC Press Release (Oct. 2, 2017), available at www.sec.gov/news/press-release/2017-186.
   [5]   SEC Press Release (Feb. 21, 2018), available at www.sec.gov/news/press-release/2018-22; the guidance itself can be found at www.sec.gov/rules/interp/2018/33-10459.pdf.  The SEC provided in-depth guidance in this release on disclosure processes and considerations related to cybersecurity risks and incidents, and complements some of the points highlighted in the Section 21A report.

Gibson Dunn's lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work in the firm's Securities Enforcement or Privacy, Cybersecurity and Consumer Protection practice groups, or the following authors:

Marc J. Fagel - San Francisco (+1 415-393-8332, mfagel@gibsondunn.com) Alexander H. Southwell - New York (+1 212-351-3981, asouthwell@gibsondunn.com)

Please also feel free to contact the following practice leaders and members:

Securities Enforcement Group:

New York Barry R. Goldsmith - Co-Chair (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark K. Schonfeld - Co-Chair (+1 212-351-2433, mschonfeld@gibsondunn.com) Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Laura Kathryn O'Boyle (+1 212-351-2304, ) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Avi Weitzman (+1 212-351-2465, aweitzman@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Washington, D.C. Richard W. Grime - Co-Chair (+1 202-955-8219, rgrime@gibsondunn.com) Stephanie L. Brooker  (+1 202-887-3502, sbrooker@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) San Francisco Marc J. Fagel - Co-Chair (+1 415-393-8332, mfagel@gibsondunn.com) Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) Thad A. Davis (+1 415-393-8251, tdavis@gibsondunn.com) Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8234, mwong@gibsondunn.com) Palo Alto Paul J. Collins (+1 650-849-5309, pcollins@gibsondunn.com) Benjamin B. Wagner (+1 650-849-5395, bwagner@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) Los Angeles Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas M. Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com) Privacy, Cybersecurity and Consumer Protection Group: Alexander H. Southwell - Co-Chair, New York (+1 212-351-3981, asouthwell@gibsondunn.com) M. Sean Royall - Dallas (+1 214-698-3256, sroyall@gibsondunn.com) Debra Wong Yang - Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com) Christopher Chorba - Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Richard H. Cunningham - Denver (+1 303-298-5752, rhcunningham@gibsondunn.com) Howard S. Hogan - Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Joshua A. Jessen - Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com) Kristin A. Linsley - San Francisco (+1 415-393-8395, ) H. Mark Lyon - Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com) Shaalu Mehra - Palo Alto (+1 650-849-5282, smehra@gibsondunn.com) Karl G. Nelson - Dallas (+1 214-698-3203, knelson@gibsondunn.com) Eric D. Vandevelde - Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com) Benjamin B. Wagner - Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com) Michael Li-Ming Wong - San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com) Ryan T. Bergsieker - Denver (+1 303-298-5774, rbergsieker@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 5, 2018 |
Supreme Court Finds Failure to Prove a Sherman Act Section 1 Violation in Credit Card Market

Click for PDF

On June 25, 2018, the Supreme Court of the United States assuaged the concerns of many that antitrust enforcement would hobble new and creative ways of conducting business, particularly businesses that have relied on technology to bring consumers and sellers together by offering a "platform" that creates a highly convenient way for them to interact and consummate sales. In Ohio v. American Express, the Court held that plaintiffs failed to prove a Sherman Act Section 1 violation in the credit card market because they presented evidence of alleged anticompetitive effects only on the merchant side of the relevant market. Without evidence of the impact of the challenged practices on the cardholder side of the market, the Court concluded that plaintiffs failed to carry their burden to prove anticompetitive effects.

The Court's opinion has several important elements beyond its holding that certain two-sided platform markets must be evaluated as a single relevant market:
  • Significantly, the Supreme Court discussed a framework for analyzing alleged restraints under the rule of reason for the first time.  Both the majority and dissent adopted the parties' agreed-upon, three-step framework for analyzing restraints under the rule of reason.  Under this framework, the plaintiff bears the initial burden of proving anticompetitive effects, which shifts the burden to the defendant to show a procompetitive justification.  If the defendant meets its burden of proving procompetitive efficiencies, then the burden shifts back to the plaintiff to show that those efficiencies could have been achieved through less restrictive means.  Notably, the Court did not mention any balancing of anticompetitive effects against procompetitive justifications.
  • The third step in the above rule of reason framework may be the focus of scrutiny as plaintiffs look to find "less restrictive alternatives" to overcome defendants' evidence of a procompetitive rationale for a challenged practice.  DOJ-FTC Competitor Collaboration Guidelines provide, however, that the agencies "do not search for a theoretically less restrictive alternative that is not realistic given business realities."  Section 3.36(b).
  • The Court also found that evidence that output of transactions in the relevant market had increased during the relevant period undercut plaintiffs' reliance solely on evidence of price increases by Amex.  The Court's reliance on the failure to prove output restriction reinforces the continued vitality of the Court's prior decision in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993).
  • The Court rejected the argument that market definition could be dispensed with based on evidence of purported actual anticompetitive effects in the form of merchant fee increases by Amex.  The Court in this regard distinguished horizontal restraints, which in some cases may be analyzed without "precisely defin[ing] the relevant market," and vertical restraints, stating that vertical restraints frequently do not pose any threat to competition absent the defendant possessing market power. Therefore, it is critical to precisely define the relevant market when evaluating vertical restraints.
The case arose out of a decades-old practice.  For more than fifty years, American Express Company and American Express Travel Services Company (together, "Amex") have included "anti-steering" provisions in contracts with merchants who agree to accept American Express cards as a means of payment. These provisions prohibited merchants from trying to persuade customers to use cards other than American Express cards or imposing special conditions on customers using American Express cards. Absent the challenged provisions, merchants had a strong incentive to encourage customers to use other credit cards because other credit card providers charged merchants lower fees than Amex.  Amex uses the money received from its higher merchant fees to fund investments in its customer rewards program, which offers cardholders better rewards than those offered by rival credit card companies. The United States and several States ("plaintiffs") sued Amex in October 2010, alleging that the anti-steering provisions violated Section 1 of the Sherman Act. The United States District Court for the Southern District of New York entered judgment for plaintiffs, finding that the provisions violated Section 1 because they caused merchants to pay higher fees by precluding merchants from encouraging cardholders to use an alternative card with a lower fee at the point of sale. The district court sided with plaintiffs in finding that the credit card market was really two separate markets: a merchant market and a cardholder market. The United States Court of Appeals for the Second Circuit reversed, holding that the district court erroneously considered only the dealings between Amex and merchants.  As a result, it failed to recognize that the credit card market was a single, "two-sided" market, not two separate markets.  Therefore, the impact of the anti-steering provisions on the cardholder side of the market had to be analyzed in order to determine if those provisions had a substantial anticompetitive effect in the relevant market.  The Supreme Court affirmed in a 5-4 decision. The majority, in an opinion authored by Justice Thomas, agreed with the Second Circuit that the credit card market should be considered as a single market because credit card providers compete to provide credit card transactions, but can create and sell those services only if both the cardholder and the merchant simultaneously choose to use the credit card network as a means of payment. The market is "two-sided" in that it involves the simultaneous provision of services to both cardholders and merchants; in any transaction, a credit card network cannot sell its payment services individually to only the cardholder or only the merchant. The majority observed that the credit card market exhibited strong "indirect" network effects because prices to cardholders affected demand by merchants and prices to merchants affected demand by cardholders.  Higher prices to cardholders would tend to decrease the number of cardholders, which would decrease the attractiveness of that card to merchants, which in turn would decrease the attractiveness of the card to cardholders.  Conversely, higher prices to merchants would decrease the number of merchants accepting the card, which would decrease the utility of the card to cardholders, decreasing the number of cardholders. In either case, the provider increasing prices faced the risk of "a feedback loop of declining demand."  Providers therefore had to strike a balance between the prices charged on one side of the platform and the prices charged on the other side. In the credit card market, different cardholders might attribute different value to broad acceptance of their card by numerous merchants or to generosity of "cash back" or other loyalty or usage rewards. Similarly, merchants might assign different values to the level of fees by a credit card provider versus the card's ability to present the merchant with a higher proportion of "big spenders." Significantly for future cases, the majority observed that not every "platform" business bringing together buyers and sellers should be considered to be a single market. The majority focused on the strength of the indirect network effects—that is, the potential for increased prices on one side to reduce demand on the other side, prompting a feedback loop of declining demand.  The majority discussed a newspaper selling advertisements to advertisers as an example of a "platform" that should not be considered a single market. According to the majority, the indirect network effects operated only in one direction. Advertisers might well care if high subscription prices reduced the number of readers. But because readers are largely indifferent to the amount of advertising in a newspaper, a reduction in advertisements caused by higher advertising rates would not lead to a reduced number of readers. The Court emphasized the importance of market definition in analyzing alleged anticompetitive effects caused by vertical restraints. Unlike horizontal restraints among competitors, the majority wrote, "[v]ertical restraints often pose no risk to competition unless the entity imposing them has market power, which cannot be evaluated unless the Court first defines the relevant market." Thus, the Court disagreed with plaintiffs' assertion that under FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986), evidence of actual adverse effects in the form of increased merchant fees was sufficient proof.  The Court distinguished Indiana Federation of Dentists by noting that it involved a horizontal restraint, and therefore the Court concluded it did not need to precisely define the relevant market to evaluate the restraint's competitive impact. The dissent, authored by Justice Breyer, accused the majority of "abandoning traditional market-definition approaches" by declining to define the relevant market by assessing the substitutability of other products or services for the product or service at issue. As the dissent noted, because consumers' ability to shift to substitutes constrains the ability of a seller to raise prices, it is necessary to include reasonable substitutes within the relevant market. The dissent argued that the card providers' services to merchants and services to cardholders were complements, not substitutes, in the sense that, like gasoline and tires for a car, both must be purchased to have value. But this analogy is inapt in at least two respects. First, there is no need for simultaneity in the purchase of gasoline and tires. Few, if any, consumers buy new tires each time they purchase gasoline. Second, the two complementary products are both purchased by the owner or operator of the vehicle. The seller of gasoline and tires does not have to purchase a service from anyone in order to sell the gasoline or tires (unless the buyer wishes to use a credit card, in which case both the buyer and the merchant must simultaneously choose to use the payment services offered by the credit card provider). This is unlike the credit card context where both the cardholder and the merchant must simultaneously choose to use the payment services offered by the credit card provider. The Court's acceptance that some businesses operate in a single, two-sided market has implications for antitrust cases involving technology-based "platform" businesses, such as ride-sharing and short-term home rentals, that have become a substantial and growing component of the economy. The outcomes in future cases are likely to turn on the strength of the evidence showing that network effects constrain pricing decisions. Makan Delrahim, the head of the DOJ's Antitrust Division, said this past week that he had feared the Supreme Court would cause "harm to our economy" by creating a rule for evaluating two-sided markets that would harm new "platform" business models like Uber, AirBnB and eBay. He described DOJ's philosophy with respect to the case as "it's one interrelated market, it's a new business model, and you can't stick your head in the sand and say, 'If you're raising the prices – whether on the consumer or driver – it can't have an effect.' And it could be a positive effect, because a Lyft can do the same thing and now be able to compete better with an Uber or whatever the next one would be."  While Mr. Delrahim acknowledged that the Amex ruling likely would apply to companies like Uber and AirBnB, he does not believe Google will benefit from it, noting that consumers do not use Google Search just to see advertisements. Although the Amex decision is notable for its focus on commercial realities and acceptance of the existence of two-sided markets, there are other significant aspects of the decision.  Most notably, the Court discussed a three-step, burden-shifting framework for analyzing restraints under the rule of reason. This provides welcome guidance, as the Court had not previously discussed any framework or methodology for evaluating claims under the rule of reason.  While the framework was agreed-upon among the parties below, its adoption by the majority (and acceptance by the dissent) nevertheless provides important instruction regarding the steps to be conducted by courts in weighing rule of reason claims under either Section 1 or Section 2.  In the first step of the decision's framework, the plaintiff bears the burden to prove anticompetitive effects in the relevant market. If the plaintiff carries that burden, in the second step the burden shifts to the defendant to demonstrate a procompetitive rationale for the challenged restraint. If the defendant makes that showing, then in the third step the burden shifts back to the plaintiff to "demonstrate that the procompetitive efficiencies could reasonably be achieved through less restrictive means." The Court held that plaintiffs had not satisfied the first step of the rule of reason framework. As with many cases, the Court's definition of the relevant market determined the outcome. To prove anticompetitive effects, plaintiffs relied solely on direct evidence of Amex's increases in merchant fees during 2005-2010. However, the Court concluded that because the market was two-sided, such evidence was incomplete and did not demonstrate anticompetitive effects in the form of either higher prices for credit card transactions or a reduction in the number of such transactions. Indeed, the Court found that certain evidence in the record cut against plaintiffs' claim that the anti-steering provisions were the cause of any increases in merchant fees by Amex—for example, rival card companies had also increased merchant fees. The Court also noted that credit card transaction output had increased substantially during the relevant period, further undermining any claim of anticompetitive effects. Quoting from Brooke Group, 509 U.S. at 237, the majority wrote that it will "not infer competitive injury from price and output data absent some evidence that tends to prove that output was restricted or prices were above a competitive level."  The Court's focus on output restriction under Brooke Group demonstrates that the Court's continued insistence on the application of sound economic principles in evaluating antitrust claims.

While it noted Amex's rationale for the anti-steering provisions, the Court did not address the second or third step of the rule of reason framework given its finding that the plaintiffs had failed to satisfy the first step. The Court's recognition in the third step that proven procompetitive efficiencies may be overcome by a showing of less restrictive means of achieving those efficiencies will likely cause private plaintiffs and enforcement agencies to increase their focus on potential alternatives.


Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these developments. Please feel free to contact any member of the firm's Antitrust and Competition practice group or the following authors: Trey Nicoud - San Francisco (+1 415-393-8308, tnicoud@gibsondunn.com) Rod J. Stone - Los Angeles (+1 213-229-7256, rstone@gibsondunn.com) Daniel G. Swanson - Los Angeles (+1 213-229-7430, dswanson@gibsondunn.com) Richard G. Parker - Washington, D.C. (+1 202-955-8503, rparker@gibsondunn.com) M. Sean Royall - Dallas (+1 214-698-3256, sroyall@gibsondunn.com) Chelsea G. Glover - Dallas (+1 214-698-3357, cglover@gibsondunn.com)

January 1, 2018 |
WTR1000 Recognizes Gibson Dunn’s Trademark Work

The 2018 edition of the World Trademark Review 1000 recognized Gibson Dunn’s work in the area of trademarks, noting that the firm “deftly serves global brand leaders and makes light work of even the most complicated suits.”  Washington, D.C. partner Howard Hogan is also recognized as “a leader in helping to shape policy initiatives that benefit trademark practice in the United States and elsewhere.”  The WTR 1000, published January 2018, recommends individual practitioners and their firms exclusively in the trademark field, and identifies the leading players in 70 key jurisdictions globally.

December 18, 2017 |
The Beginning of the End, or the End of the Beginning? The General Court’s Ruling in the Coty Case

On 6 December 2017, the European Court of Justice (the "ECJ"), delivered a landmark Judgment in the Coty Case,[1] issuing a Preliminary Ruling in response to a series of questions posed by the Higher Regional Court of Frankfurt am Main in Germany.[2] In its Ruling, the ECJ confirmed that the manufacturer of 'luxury' goods was permitted to require distributors of its products that formed part of a so-called "selective distribution network" to refrain from selling its luxury goods on certain online marketplaces such as Amazon and eBay, at least insofar as such a requirement was directed towards the support of the luxury nature of its product. While the ECJ Ruling undoubtedly constitutes a major victory for the luxury goods industry, there continue to remain a number of open issues as to enforcement policy which suggest that the precedent leaves as many implementation questions open as it closes doctrinal disputes.

The Facts

The case arose from a dispute between the German operations of luxury perfume producer Coty and one of the distributors in its selective distribution network, Parfümerie Akzente. Coty sought to prevent Parfümerie Akzente from selling the contract luxury goods over the online platform 'Amazon.de'. In doing so, Coty did not go so far as to prohibit the sale of such products over the Internet via the retailer's own online store ('electronic shop window'), nor did it impose any additional problematic constraints on its ability to sell via the more traditional "bricks and mortar" distribution chain. However, Coty did seek to prohibit sales via third party websites, given its concern that such third party online sales diminished the premium quality otherwise associated with its products and brand by consumers.

Issues Before the National Courts

When Parfümerie Akzente did not accept the imposition of such a restriction by Coty, it brought a case against the reseller, which it lost at first instance. On appeal, the Frankfurt Higher Regional Court was unsure whether the contractual prohibition was compatible with Article 101(1) of the Treaty of the Functioning of the European Union ('TFEU')[3] and the so-called Vertical Block Exemption Regulation ('VBER').[4] Article 101(1) TFEU inter alia prohibits horizontal and vertical anti-competitive agreements and concerted practices. While the VBER exempts from the prohibition of Article 101(1) TFEU those vertical agreements between a supplier and its selected resellers where the market shares of those parties fall below 30%, such an exemption does not extend to an agreement which contains a so-called 'hardcore' restriction of competition.[5] In hearing the appeal, the Frankfurt Court sought guidance from the ECJ in relation to a number of legal questions which related to the interpretation of EU competition law, including whether:
  1. a selective distribution system (such as that operated by Coty) is compatible with Article 101(1) TFEU if its main purpose is to preserve the 'luxury image' of high-end goods;
  2. an outright platform ban is compatible with Article 101(1) TFEU, irrespective of whether the quality standards of the supplier would be impaired in each particular instance; and
  3. a platform ban constitutes a 'hardcore' restriction, as defined in the VBER.

The ECJ's Judgment

In its Judgment, the ECJ largely followed the Opinion of Advocate General Wahl, who delivered his Opinion in the Case in July 2017.[6] As regards the first question, the ECJ reiterated the principle that a vertical distribution agreement did not violate Article 101(1) TFEU as long as the so-called 'Metro criteria' were fulfilled.[7] The satisfaction of these criteria requires that: resellers be entitled to distribute the goods on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and applied in a non-discriminatory fashion; the characteristics of the product in question necessitate the use of such a network in order to preserve their quality; and, finally, the criteria laid down do not go beyond what is necessary.[8] The ECJ confirmed that the quality of luxury goods was to be determined 'by the allure and prestigious image which bestow on them an aura of luxury' and that the creation and maintenance of this aura was essential insofar as it allowed consumers to distinguish them from similar goods. An impairment of that aura of luxury was also likely to affect the actual quality of the goods in the eyes of the consumer.[9] Establishing a distribution system that ensured that the products were presented in a way that is reflective of their value was thus also considered to contribute to their special aura.[10] Based on this logic, the ECJ concluded that a selective distribution system might be necessary to preserve the contract product's luxury image, and was hence compatible with Article 101(1) TFEU.[11] Importantly, the ECJ dismissed the argument that the Pierre Fabre Case suggested a different approach. In Pierre Fabre, the Court took the view that a specific clause banning online sales was incompatible with competition law rules, given that it imposed an outright ban on all sales of the manufacturer's product over the Internet.[12] The situation in Coty was different, as it concerned the fundamental legality of a selective distribution system with regard to luxury products. Moreover, Pierre Fabre concerned cosmetic and body hygiene products, namely, non-luxury products that might not be associated with luxury in the consumer's mind. The need to preserve the goods' prestigious image was therefore found to not constitute a legitimate requirement for the purpose of justifying a comprehensive prohibition on sales via the Internet.[13] As regards the second question, the Court held that the clause banning sales over third party platforms had to be measured against the 'Metro criteria'. The question at issue was whether such a ban was appropriate to preserve the luxury image of the goods in question and whether it went beyond what was necessary in the circumstances to achieve this objective.[14] As regards the appropriateness criterion, the ECJ stated that an obligation to sell only through the retailers' own online shops provided the supplier with a guarantee that the sold goods would only be associated with the authorized retailer, which would in turn help to preserve the quality and luxury image of those goods.[15] This was true also in light of the fact that, on online market platforms, all kinds of goods were sold.[16] Moreover, only the direct contractual relationship with the retailer enabled the supplier to enforce quality conditions; if goods were to be distributed over third party platforms, there would be no such relationship.[17] Given that distributors were generally still allowed to sell online through their own webshops (which still constituted the main online distribution channel and were operated by over 90% of distributors), the prohibition was also found to be proportional, in that it did not go beyond what was necessary to achieve the object of preserving their luxury image.[18] Accordingly, the ECJ responded to the second question by concluding that the outright platform ban did not violate Article 101(1) TFEU in the circumstances, given the widespread availability of luxury goods through online means. Finally, the ECJ ruled that, with regard to the third question, the ban on sales over a particular platform did not constitute a hardcore restriction.[19]  In this regard, the ECJ Ruling runs counter the 2015 Decision of the German Cartel Office (Bundeskartellamt) in the Asics Case, in which it was found (as later confirmed by the Higher Regional Court of Düsseldorf) that a ban on third party platforms, even if required in the context of a selective distribution network, violated both the terms of Article 101 TFEU and the relevant VBER provisions.[20]

Conclusions

The ECJ Ruling, which now forms part of the corpus of German law, at first glance appears to sit uncomfortably against the decision-making of the Bundeskartellamt and the Regional Court's Judgment in Asics. However, the positions can be reconciled because the ratio decidendi of the Coty Case is limited only to 'luxury products'. It was the particular nature of these products which led the ECJ to rule that a platform ban was justified, given that the 'luxury aura' of these products might be otherwise compromised. By comparison, the running shoes in the Asics Case were merely considered to connote a particular level of quality. Thus, it would appear that the Rulings of the ECJ and the German authorities may be reconciled by reference to the distinction drawn between luxury goods and other goods.[21] However, the Advocate General had explicitly held that both luxury and quality products could, subject to the satisfaction of the "Metro criteria", justify the use of a distribution system which is compatible with Article 101(1) TFEU. The ECJ took a narrower approach, having focused solely on the 'luxury' character of Coty's products as the only determinant of whether the online platform restriction was legal. It hence remains unclear whether the Ruling can also be applied merely to higher 'quality' products that fall short of more widely understood notions of 'luxury'. It seems the ECJ has missed  the opportunity to draw a more explicit line between those products which can benefit from a selective distribution system and those that cannot. One can hardly argue that luxury products, which usually require heavy investments in marketing, skilled staff, breadth of selection of product ranges and décor, do not justify favourable treatment under EU competition rules.[22] Having said that, where does one draw the line between Coty's luxury cosmetics products and the supposedly unluxurious beauty creams considered in the Pierre Fabre Case (especially given that beauty is supposed to be in the eye of the beholder)? Why not include 'quality' products, too, where manufacturers try no less to preserve the reputation and uniform brand image of their products? Is the narrow exception of 'luxury' – which is favourable to manufacturers of luxury products but which is opposed by the online platforms that sell a wide range of goods – prone to generating arbitrary distinctions being drawn by national court judges faced with resolving competitive law disputes in the context of selective distribution? Surely, having provided the rationale for why the contract in Coty was not anti-competitive, the question needs to be asked why the category of exemption could not be wide enough to embrace all goods with serious connotation of 'quality', which can often be established by reference to a higher price. In a world where increasing market penetration is based on the uniqueness of a product, one would think that the 'quality' dimension should in principle justify the same treatment as that of 'luxury'.[23] By not following the Advocate General's more expansive view, the ECJ may have succeeded in narrowing the exception to the general rule against sales prohibitions, but may have inadvertently opened up a hornet's nest of fine distinctions needing to be made by national judges across the EU. Perhaps it is the case that the Judgment, which is notable for its brevity, may be more helpful in theory than in practice for those operating selective distribution systems in the EU.
   [1]   C-230/16 Coty Germany [2017] EU:C:2017:603. See here: http://curia.europa.eu/juris/document/document.jsf?text=&docid=197487&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=954093. For the press release, see here: https://curia.europa.eu/jcms/upload/docs/application/pdf/2017-12/cp170132en.pdf.    [2]   According to Article 267 TFEU, national courts can refer abstract questions of European Union law to the European court, which then provides a response. It is then up to the referring national court to interpret and apply to the facts of the particular case the statements of legal principle set forth by the ECJ in its Ruling.    [3]   For the relevant provision, see here: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12008E101:EN:HTML.    [4]   Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices. See here: http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32010R0330&from=EN.    [5]   "Hardcore" restrictions include provisions such as absolute sales ban based on territory or customer identity, Resale Price Maintenance, and so forth, whose anti-competitive effects are so significant that it would be unlikely for the restrictions to be justified by reference to the exemption criteria listed in Article 101(3) TFEU.    [6]   See Opinion of July 26, 2017, available at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=193231&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=654963.    [7]   Case C-230/16, supra at para. 24.    [8]   See Case C‑26/76 Metro SB-Großmärkte [1977] EU:C:1977:167, especially at para. 20.    [9]   Case C-230/16, supra at para. 25.   [10]   Case C-230/16, supra at para. 27.   [11]   Case C-230/16, supra at para. 29.   [12]   See Case C‑439/09 Pierre Fabre [2011] EU:C:2011:649.   [13]   Case C-230/16, supra at paras. 32 and 34.   [14]   Case C-230/16, supra at para 43.   [15]   Case C-230/16, supra at paras 44 and 46.   [16]   Case C-230/16, supra at para 50.   [17]   Case C-230/16, supra at para 48.   [18]   Case C-230/16, supra at paras 52-54.   [19]   Case C-230/16, supra at para 68.   [20]   Decision B2-98/11 Bundeskartellamt v ASICS Deutschland GmbH, Neuss et al. of August 26, 2015. An English language summary can be found here: http://www.bundeskartellamt.de/SharedDocs/Entscheidung/DE/Fallberichte/Kartellverbot/2016/B2-98-11.pdf?__blob=publicationFile&v=2. The full decision can be found in the German language at: http://www.bundeskartellamt.de/SharedDocs/Entscheidung/DE/Entscheidungen/Kartellverbot/2015/B2-98-11.pdf?__blob=publicationFile&v=3. The Judgment of the Higher Regional Court (Case VI-Kart 13/15 (V)) of April 5, 2017 can be found in the German language at: https://www.justiz.nrw.de/nrwe/olgs/duesseldorf/j2017/VI_Kart_13_15_V_Beschluss_20170405.html.   [21]   Notably, the Bundeskartellamt's Chief, Andreas Mundt, has commented that he expects the ECJ's Ruling to have only a limited effect on the policy of his Office, as its Decisions have thus far involved brand manufacturers outside the luxury industries. See at http://www.wiwo.de/unternehmen/handel/eugh-urteil-zum-online-handel-luxus-muss-nicht-in-die-schmuddelecke/20677432.html. [22]   In this regard, refer to the Study prepared for the European Commission in 2007, which explains how competition for the supply of luxury cosmetics depends critically on non-price elements which add to the aura of the brand: Global Insight, Study of the European Cosmetics Industry, October 2007. Indeed, the possibility that selective distribution networks are more likely to promote non-price elements of competition explains why they are also less likely to produce price volatility; in this regard see Case 107/82 AEG Telefunken v. Commission [1983] ECR 3151 at paras. 33 ff, and Case T-67/01, JCB v. Commission EU.T.2004.3 at paras. 131-133. [23]   Selective distribution networks are also understood to be appropriate for the distribution of highly technical or industrial quality goods, although the rationale for preventing online sales for such products seems more problematic, given the technical knowledge possessed by the average purchaser of such products, e.g., bath fittings. At the other extreme, the view has been expressed by P. Ibanez Colomo that the exception identified in Coty should extend to all products distributed in such networks. See, e.g., blogpost of 6 December 2017 on Coty Case at: https://chillingcompetition.com/.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm's Antitrust and Competition Practice Group, or the authors in the firm's Brussels office: Peter Alexiadis (+32 2 554 72 00, palexiadis@gibsondunn.com) Jens-Olrik Murach (+32 2 554 72 40, jmurach@gibsondunn.com) Balthasar Strunz (+32 2 554 72 25, bstrunz@gibsondunn.com) Please also feel free to contact any of the following practice group leaders and members: Brussels Peter Alexiadis (+32 2 554 72 00, palexiadis@gibsondunn.com) Jens-Olrik Murach (+32 2 554 72 40, jmurach@gibsondunn.com) David Wood (+32 2 554 72 10, dwood@gibsondunn.com) London Ali Nikpay (+44 20 7071 4273, anikpay@gibsondunn.com) Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com) Charles Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com) Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com) Deirdre Taylor (+44 20 7071 4274, dtaylor2@gibsondunn.com) Munich Michael Walther (+49 89 189 33-180, mwalther@gibsondunn.com) Benno Schwarz (+49 89 189 33 110, bschwarz@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Hong Kong Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com) Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com) Washington, D.C. Scott D. Hammond (+1 202-887-3684, shammond@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) D. Jarrett Arp (+1 202-955-8678, jarp@gibsondunn.com) David P. Burns (+1 202-887-3786, dburns@gibsondunn.com) Cynthia Richman (+1 202-955-8234, crichman@gibsondunn.com) David Debold (+1 202-955-8551, ddebold@gibsondunn.com) New York Randy M. Mastro (+1 212-351-3825, rmastro@gibsondunn.com) Eric J. Stock (+1 212-351-2301, estock@gibsondunn.com) Peter Sullivan (+1 212-351-5370, psullivan@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Dallas Veronica S. Lewis (+1 214-698-3320, vlewis@gibsondunn.com) Brian Robison (+1 214-698-3370, brobison@gibsondunn.com) Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) San Francisco Rachel S. Brass (+1 415-393-8293, rbrass@gibsondunn.com) Trey Nicoud (+1 415-393-8308, tnicoud@gibsondunn.com) Los Angeles Daniel G. Swanson (+1 213-229-7430, dswanson@gibsondunn.com) Samuel G. Liversidge (+1 213-229-7420, sliversidge@gibsondunn.com) Steven E. Sletten (+1 213-229-7505, ssletten@gibsondunn.com) Jay P. Srinivasan (+1 213-229-7296, jsrinivasan@gibsondunn.com) Rod J. Stone (+1 213-229-7256, rstone@gibsondunn.com) Sarretta C. McDonough (+1 213-229-7227, smcdonough@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 21, 2017 |
Supreme Court Strikes Down Ban on Registration of Disparaging Trademarks on First Amendment Grounds

On June 19, 2017, the Supreme Court unanimously held in Matal v. Tam that a decades-old statute prohibiting the registration of disparaging trademarks violates the First Amendment to the U.S. Constitution.  The Court concluded that, because trademark registration is a mere administrative recognition of private speech rather than government speech, the registration process must be viewpoint-neutral.  Gibson Dunn filed a brief in the case on behalf of the United States Chamber of Commerce as amicus curiae, urging the conclusion that the Court reached.

*          *          *

The Tam case arose from a decision of the United States Patent and Trademark Office ("PTO") to refuse registration of a trademark for "THE SLANTS," the name of an Asian-American rock band.  The PTO relied on a provision of the Lanham Act prohibiting the registration of trademarks that "may disparage . . . persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt, or disrepute."  15 U.S.C. § 1052(a).  Applying the PTO's framework for disparagement, the examining attorney concluded that "THE SLANTS" was likely to disparage a significant number of Asian Americans. On appeal, the U.S. Court of Appeals for the Federal Circuit found that the Lanham Act's disparagement clause was facially unconstitutional under the Free Speech Clause of the First Amendment.  The Supreme Court agreed, though several Justices expressed a difference of opinion as to the reasoning. Justice Alito announced the judgment of the Court, which was unanimous with respect to the conclusion that, despite the role of government in the registration process, trademarks constitute private rather than government speech.  The Court reasoned that the government merely registers the contents of others' trademarks; it "does not dream up these marks," "it does not edit marks submitted for registration," and the PTO has made clear in the past that registration does not constitute government approval of a particular mark.  It also found that prior Supreme Court precedents fail to support trademark registration as a form of government speech.  Trademarks are vastly different from, for example, speech used to convey a government message—as was the case with selected monuments placed on governmental property in Pleasant Grove City v. Summum—and there is no evidence the public associates trademarks with the government itself—as was the case with specialty license plates in Walker v. Texas Division, Sons of Confederate Veterans.  Further backing away from Walker, which the Court noted "likely marks the outer bounds of the government-speech doctrine," the Court emphasized that government registrations in other, related contexts like copyright registration do not constitute government speech.[1] Justice Alito went on to reject the remainder of the government's arguments, writing only for himself, Chief Justice Roberts, Justice Thomas, and Justice Breyer.  First, Justice Alito explained that trademark registration is not a form of government subsidy, which would permit the government to subsidize speech expressing a particular viewpoint while refusing to subsidize activities it does not wish to promote.  He also refused to create a new "government-program" doctrine for trademarks that would allow for some content- and speaker-based restrictions.  Finally, Justice Alito explained that it is unnecessary to decide whether the relaxed-scrutiny afforded commercial speech under the First Amendment applies here, because the disparagement clause is too broad to withstand even that lesser standard of review. Justice Kennedy, in a separate opinion joined by Justices Ginsburg, Sotomayor and Kagan, emphasized in greater detail why the First Amendment protects "THE SLANTS" trademark from governmental disapproval of a viewpoint the government finds unacceptable.  He reasoned that the case involved viewpoint discrimination that warranted heightened scrutiny, without undertaking a commercial speech analysis as in Justice Alito's opinion. Justice Thomas filed a short concurrence in part and in the judgment, reiterating his view that whenever the government seeks to restrict truthful speech in order to suppress the ideas conveyed, strict scrutiny applies.  Justice Gorsuch took no part in the consideration or the decision.

*          *          *

Tam's central holding—that the Lanham Act's disparagement clause is unconstitutional—is likely to have only a limited impact, as most trademarks are not accused of disparagement.  One company likely to benefit from the decision, however, is the Washington Redskins professional football team, which had seen several of its trademark registrations invalidated by the PTO under the same Lanham Act provision.  The Supreme Court's decision resolves a split on the constitutionality of the statute between the approach of the Federal Circuit in the Tam case and that of the U.S. District Court for the Eastern District of Virginia in the Washington Redskins case, Blackhorse v. Pro-Football, Inc. More broadly, the Supreme Court's unanimous government-speech ruling suggests that it is poised to cabin what is considered to be government speech in the context of government registration and regulation.   The Court explicitly warned that courts "must exercise great caution before extending" government-speech rules to messages that originate from private parties.  And the Justices' emphasis on viewpoint-neutrality as it relates to the government suggests that the Court is unlikely to extend the government speech doctrine any time in the near future.
   [1]   In a portion of the opinion in which only Justice Thomas abstained, Justice Alito also wrote for the majority in concluding that the term, "persons," in the Lanham Act's disparagement clause was meant to prohibit registration of marks that disparage members of a racial or ethnic group.

Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or the authors:

Howard S. Hogan - Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Michael R. Huston - Washington, D.C. (+1 202-887-3793, mhuston@gibsondunn.com) Christine Demana - Dallas (+1 214-698-3246, cdemana@gibsondunn.com) Rachel Y. Wade - Dallas (+1 214-698-3273, rwade@gibsondunn.com)

Please also feel free to contact the following practice group leaders:

Intellectual Property Group: Josh Krevitt - New York (+1 212-351-4000, jkrevitt@gibsondunn.com) Wayne Barsky - Los Angeles (+1 310-552-8500, wbarsky@gibsondunn.com) Mark Reiter - Dallas (+1 214-698-3100, mreiter@gibsondunn.com) Appellate and Constitutional Law Group: Mark A. Perry - Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com) James C. Ho - Dallas (+1 214-698-3264, jho@gibsondunn.com) Caitlin J. Halligan - New York (+1 212-351-4000, challigan@gibsondunn.com) Fashion, Retail and Consumer Products Group: David M. Wilf  - New York (+1 212-351-4027, dwilf@gibsondunn.com) Howard S. Hogan - Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Media, Entertainment & Technology Group: Ruth E. Fisher - Los Angeles (+1 310-557-8057, rfisher@gibsondunn.com) Scott A. Edelman - Los Angeles (+1 310-557-8061, sedelman@gibsondunn.com) Orin Snyder- New York (+1 212-351-2400, osnyder@gibsondunn.com) Sports Law Group: Andrew S. Tulumello - Washington, D.C. (+1 202-955-8657, atulumello@gibsondunn.com) Maurice M. Suh - Los Angeles (+1 213-229-7260, msuh@gibsondunn.com) Richard J. Birns - New York (+1 212-351-4032, rbirns@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 31, 2017 |
Supreme Court Establishes National Test to Determine When an Artistic Element of a Useful Item Is Protectable Under the Copyright Act

On March 22, 2017, the Supreme Court issued its decision in Star Athletica v. Varsity Brands, holding that design features incorporated into clothing and other useful articles are copyright eligible under Section 101 of the Copyright Act, 17 U.S.C. § 101.  Star Athletica, L.L.C. v. Varsity Brands, Inc., 580 U.S. ___, *1 (2017) ("Op.").  Below, we provide a brief review the Star Athletica case and possible effects of the Supreme Court's decision.  Gibson Dunn's intellectual property, transactional, and appellate attorneys are available to discuss in more detail at your convenience.

I.    Background

Varsity Brands, Inc. and related entities ("Varsity") design, make, and sell cheerleading uniforms.  Many of these uniforms are emblazoned with two-dimensional designs, such as chevrons, stripes, or zigzags, which give the uniforms their distinctive cheerleading look.  Varsity holds copyrights for many of these two-dimensional designs.  The company brought a lawsuit for copyright infringement against Star Athletica, L.L.C.--another seller of cheerleading uniforms--alleging that Star Athletica was infringing several of its copyrights by selling cheerleading uniforms with similar two-dimensional designs. Star Athletica defended the suit on the ground that the uniform designs were not "separable" from the uniform itself, and were thus not copyrightable.  The Copyright Act does not protect "useful article[s]," like garments, which have "an intrinsic utilitarian function that is not merely to portray the appearance of the article or to convey information." 17 U.S.C. § 101.  But the Act does protect design features of useful articles that are "separable" from the useful article.  A design feature is separable "if, and only to the extent that, such design incorporates pictorial, graphic, or sculptural features that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article."  Id. Star Athletica argued that Varsity's uniform designs were not "separable" from the uniforms themselves--and were therefore not copyrightable--because the designs served the utilitarian function of identifying the garments as cheerleading uniforms.  The district court agreed with Star Athletica, but the Sixth Circuit reversed, holding that the designs were separable. Star Athletica then sought a writ of certiorari from the Supreme Court, supported by amici who noted that courts had enumerated no fewer than nine distinct tests for conceptual separability and urged the Supreme Court to create a uniform test.

II.    The Majority Opinion Affirming The Sixth Circuit

In a thoroughly textualist opinion written by Justice Thomas, the Supreme Court affirmed the Sixth Circuit.  The Court declined to engage in a "free-ranging search for the best copyright policy,"  Op. 6, and held that Varsity's two-dimensional cheerleading-uniform designs are "separable features . . . of those cheerleading uniforms."  Id. at 4. Hewing closely to the text of Section 101 of the Copyright Act, the Court held that two requirements must be satisfied for a design to be separable from a useful article:
  • First, under the "separate-identification" requirement, a useful article must be capable of being "perceived as a two- or three-dimensional work of art separate from the useful article."  Op. 1, 17.
  • Second, under the "independent-existence" requirement, "the separately identified feature . . . must be able to exist as its own pictorial, graphic, or sculptural work . . . once it is imagined apart from the useful article."  Id. at 7.
Thus, the separately identified feature "cannot itself be a useful article or 'an article that is normally a part of a useful article' (which is itself considered a useful article)."  Id. at 7 (quoting 17 U.S.C. § 101).  "Nor could someone claim a copyright in a useful article merely by creating a replica of that article in some other medium . . . . Although the replica could itself be copyrightable, it would not give rise to any rights in the useful article that inspired it."  Id. at 7-8. Summarizing the test, the Court characterized the "ultimate separability question" as "whether the feature for which copyright protection is claimed would have been eligible for copyright protection . . . had it originally been fixed in some tangible medium other than a useful article before being applied to a useful article."  Op. 8.  That separability inquiry, the Court concluded, comports with the Act's structure and the Court's precedent by ensuring that "copyright protection extends to pictorial, graphic, and sculptural works regardless of whether they were created as freestanding art or as features of useful articles."  Id. The Court rejected Star Athletica's argument that only "solely artistic"--as opposed to utilitarian--features of useful articles can be separable.  It was thus irrelevant whether the cheerleading uniforms remain "equally useful," or even "'similarly useful,'" once the designs are imaginatively removed.  Op. 13 (citation omitted).  That is so, the Court concluded, because the "focus of the separability inquiry is on the extracted feature and not on any aspects of the useful article that remain after the imaginary extraction."  Id.  In addition, limiting copyright protection to "solely artistic" features of useful articles would make an otherwise copyright-eligible design "lose that protection simply because it was first created as a feature of the design of a useful article"--a result inconsistent with the Copyright Act and the Court's precedent.  Id. at 14. In rejecting this argument, the Court "necessarily abandon[ed] the distinction between 'physical' and 'conceptual' separability, which some courts and commentators h[ad] adopted based on the Copyright Act's legislative history."  Op. 15.  The Court determined that "separability is a conceptual undertaking," and does not depend on whether the design can be "'physically separated from the article.'"  Id. (citation omitted). Applying its separability test to Varsity's uniform designs was "straightforward."  Op. 10.  The chevrons, stripes, and shapes, if "separated from the uniform and applied to . . . a painter's canvas," would "qualify as 'two-dimensional . . . works of . . . art,'" eligible for copyright.  Id. (quoting 17 U.S.C. § 101).  The fact that this hypothetical painter's canvas would "retain the outline of a cheerleading uniform" is "not a bar to copyright," the Court said.  Id. at 11.  The imaginary painter's canvas still "would not replicate the uniform itself" as a useful article, just as "a design etched or painted on the surface of a guitar," when placed on an album cover, "does not 'replicate' the guitar as a useful article," even though the design "would still resemble the shape of a guitar."  Id. at 10-11.  Varsity's uniform designs were thus separable from the uniforms themselves and copyrightable. At the same time, the Court emphasized the limits of its ruling.  Varsity Brands and its related entities "have no right to prohibit any person from manufacturing a cheerleading uniform of identical shape, cut, and dimensions to the ones on which the decorations in this case appear.  They may prohibit only the reproduction of the surface designs in any tangible medium of expression--a uniform or otherwise."  Op. 12.  And the Court expressed "no opinion on whether these works are sufficiently original to qualify for copyright protection, or on whether any other prerequisite of a valid copyright has been satisfied."  Id. at 11 n.1 (citation omitted).[1]

III.    The Dissenting Opinion

Justice Breyer wrote a dissenting opinion, which Justice Kennedy joined.  The dissent, emphasizing the legislative history of the Copyright Act of 1976, primarily took issue with the majority's conclusion that a design on a useful article can be copyrightable when the design, imagined apart from the useful article, simply "picture[s] the useful article."  Dissent 6.  Under that approach, the dissent worried, "virtually any industrial design" could be "imaginatively reproduced on a painter's canvas" and thus be eligible for copyright.  Id. at 6-7.  The dissent believed that such expansive copyright protection ignored Congress's repeated decisions "not to grant full copyright protection to the fashion industry" and "risk[ed] increased prices and unforeseeable disruption in the clothing industry, which in the United States alone encompasses nearly $370 billion in annual spending and 1.8 million jobs."  Id. at 9. The dissent's view appeared to be focused on a concern that by extending copyright protection to basic forms of surface designs, the majority would restrict competition for the underlying item.  Justice Breyer wrote that a copyright claim consisting of "a plain rectangular space depicting chevrons and stripes, like swaths from a bolt of fabric" would be ineligible for copyright because it would be "plainly unoriginal."  Dissent 11.  But under the majority's approach, the dissent argued, Varsity could "prevent its competitors from making useful three-dimensional cheerleader uniforms by submitting plainly unoriginal chevrons and stripes as cut and arranged on a useful article"--here, a cheerleading dress.  Id.  That result, the dissent continued, will improperly allow Varsity to "obtain copyright protection that would give them the power to prevent others from making those useful uniforms . . . ."  Id.  In reaching that result, the dissent believed the majority "lost sight of its own important limiting principle"--namely, that one may not "'claim a copyright in a useful article merely by creating a replica of that article in some other medium.'"  Id. (quoting Op. 7).

IV.    Possible Effects of The Supreme Court's Decision in Star Athletica

The Star Athletica decision has important implications for the fashion and industrial design industries. In brief, the Star Athletica decision confirms that two-dimensional designs incorporated into useful articles, such as clothing, can be copyright eligible.  The Court characterized the first step of the separability analysis--the "separate-identification" step--as "not onerous." Op. 7.  And while it labeled the "independent-existence requirement" as "ordinarily more difficult to satisfy," id., the Court had no trouble determining that the uniform designs at issue in the case could stand alone as "pictorial" or "graphic" works when imagined apart from the uniforms themselves.  Id. at 10-11.  That low bar for the copyright eligibility of clothing designs may lead fashion designers to attempt to "kill[] knock-offs with copyright," as Justice Sotomayor put it at oral argument. The decision may, however, lead to additional litigation over three-dimensional artistic features that are incorporated into useful articles.  In dissent, Justice Breyer observed that courts have "denied copyright protection to objects that begin as three-dimensional designs, such as measuring spoons shaped like heart-tipped arrows, candleholders shaped like sailboats, and wire spokes on a wheel cover."  Dissent 4-5 (citations omitted).  But the majority expressly refused to adopt a bright-line rule that would render unprotectable two- and three-dimensional designs that are incorporated into useful items.  Thus, to the extent that the design of a "heart-tipped arrows" (id.) could be "imaginatively remov[ed]" and "appl[ied] in another medium" without replicating the spoons "as a useful article" (Op. 10-11), the design of the heart-tipped arrow would be protectable if it were sufficiently original to qualify for protection as a pictorial, graphic, or sculptural work standing on its own. On one hand, this could create new issues of fact for particular artistic elements of useful items.  On the other hand, it is generally in keeping with prior decisions that have found that elements like a decorative animal-theme hood on a children's costume may be protectable to the extent it is separable from the more utilitarian function of covering the wearer's body.  See, e.g., Chosun Int'l, Inc. v. Chrisha Creations, Ltd., 413 F.3d 324, 329 (2d Cir. 2005). The determining factor in these cases may be the factual question of how the court defines a given useful item's "use."  In this case, the majority appeared to view the use of the uniform in a narrow sense to clothe the wearer and not to represent a school or a make a particular impression, rendering it easier to separate the decorative elements of the cheerleader's uniform.  In a future case, however, it may be more difficult to determine if the protected work is integral to or separate from the relevant item's intended use.
   [1]   Justice Ginsburg concurred only in the judgment.  Concurrence 1-3.  In her view, the case could have been resolved on narrower grounds urged by the United States as amicus curiae.  The majority declined to consider the United States' argument because it was "not raised below" and was "not advanced in this Court by any party."  Op. 6.
Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update.  Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm's Intellectual Property, Appellate and Constitutional Law, Fashion, Retail and Consumer Products or Media, Entertainment & Technology practice groups, or the following practice leaders: Intellectual Property Group: Josh Krevitt - New York (+1 212-351-4000, jkrevitt@gibsondunn.com) Wayne Barsky - Los Angeles (+1 310-552-8500, wbarsky@gibsondunn.com) Mark Reiter - Dallas (+1 214-698-3100, mreiter@gibsondunn.com) Appellate and Constitutional Law Group: Mark A. Perry - Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com) James C. Ho - Dallas (+1 214-698-3264, jho@gibsondunn.com) Caitlin J. Halligan - New York (+1 212-351-4000, challigan@gibsondunn.com) Fashion, Retail and Consumer Products Group: Lois F. Herzeca - New York (+1 212-351-2688, lherzeca@gibsondunn.com) David M. Wilf  - New York (+1 212-351-4027, dwilf@gibsondunn.com) Howard S. Hogan - Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Media, Entertainment & Technology Group: Ruth E. Fisher - Los Angeles (+1 310-557-8057, rfisher@gibsondunn.com) Scott A. Edelman - Los Angeles (+1 310-557-8061, sedelman@gibsondunn.com) Orin Snyder- New York (+1 212-351-2400, osnyder@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 9, 2017 |
Corporate Social Responsibility Statements – Recent Litigation and Avoiding Pitfalls

Over the past few years, interest in corporate social responsibility ("CSR")[1] has increased significantly.  The spotlight on CSR has led companies to expand and strengthen their CSR efforts.  Many companies in turn have published sustainability reports, posted materials on their websites and made other statements about their past CSR efforts and future CSR goals.  Certain website CSR disclosures are also required by statutes such as the California Transparency in Supply Chains Act of 2010 and the U.K. Modern Slavery Act 2015.[2]  Some organizations are also encouraging companies to include more CSR statements in their filings with the Securities and Exchange Commission ("SEC").[3]

While CSR statements may foster public goodwill and inform customers and investors about positive company initiatives, they can also create real litigation and liability risks.  This alert discusses a recent wave of litigation taking aim at CSR statements and steps companies can take to minimize these risks.

Background

Over the last two years, a significant number of lawsuits were filed challenging companies' CSR-related statements as false and misleading under various state consumer protection laws.  These include more than ten cases against major consumer products manufacturers and retailers alleging that the companies made misstatements and omissions regarding various aspects of their supply chains, including the use of forced and child labor, factory safety, and working conditions. Several securities fraud lawsuits challenging CSR-related statements were also filed during the past few years, including a case against a leading restaurant company challenging CSR statements about supply chain food safety initiatives and audit processes, and a case against a leading oil and gas company challenging CSR statements about safety reform efforts and environmental cleanup capabilities.  In addition, leading consumer products manufacturers have received "books and records" complaints demanding access to company records and seeking details about whether companies knew their CSR statements were false or misleading. The majority of these cases were brought as class actions on behalf of consumers and shareholders.  Most challenge disclosures on corporate websites, including statements in sustainability reports, human rights documents, employee codes of conduct, third-party supplier codes, statements of ethics and integrity, and audit protocol descriptions.  They assert that consumers and investors relied on and were deceived by the statements and suffered damages by either paying an unwarranted price premium for a product or security or making a purchase they otherwise would not have made.  The plaintiffs in these cases have sought injunctive relief in the form of modifications to the challenged disclosures, damages (including punitive damages), restitution (including refunds for products) and attorneys' fees and costs. To support assertions that the challenged statements are material to consumers and investors (a required element of many consumer protection and securities claims), a number of the suits point to studies by major consumer data collection and securities consulting firms purportedly reflecting that:  (1) consumers may be willing to pay a premium for products provided by companies committed to sustainability efforts and positive environmental impact; (2) consumers may consider companies' social responsibility efforts when deciding whether to buy those companies' products; (3) CSR statements may impact purchase decisions when included on product labels or advertising; and (4) institutional investors may consider corporate sustainability efforts in their investment strategies. Some examples of CSR statements challenged in recent cases include:
  • Company and supplier workers "are treated with respect and in compliance with the law."
  • The company "is committed to fair treatment of all employees wherever it operates."
  • The company requires its suppliers and their employees to "demonstrate honesty, integrity, and fairness."
  • The company "expects its suppliers to comply with all applicable laws and regulations."
  • Suppliers "must under no circumstances use, or in any other way benefit, from forced labor."
  • The company "has the right to audit third-party suppliers."
  • The company follows a "rigorous quality assurance program to ensure . . . safety and the highest quality products for our customers."
Most of the suits claim the statements are false or misleading based on public reports regarding instances of:  (1) mistreatment of employees; (2) forced labor in supply chains; (3) child labor in supply chains; (4) unsafe working conditions in supply chains; and (5) failures of audit protocols and practices to eradicate these and other problems in supply chains.  Some of the suits also assert that CSR statements are rendered false or misleading by major industrial accidents, which the plaintiffs claim would have been avoided if the statements regarding CSR initiatives and efforts were truthful.

Recent Decisions in CSR Statement Litigation

Thus far, the majority of these claims have been unsuccessful and dismissed at the pleading stage.  Most courts find that statements in employee codes of conduct, guidelines for third-party suppliers, and ethics and integrity statements are aspirational in nature and not guarantees that companies, and their employees and suppliers, will in all circumstances follow the codes' requirements.
  • For example, one federal district court in California recently dismissed a suit against a leading food manufacturer with prejudice, holding that proof that some of the company's suppliers actually used forced or child labor did not render statements in the company's supplier code false, because the company's statements "were aspirational, and when read in context, were actually a nuanced and correct summary of its efforts to combat forced labor."  The court noted that the company "asks its suppliers and their sub-tier suppliers to comply with its requirements and that the standards of the Code set forth expectations for suppliers."  It concluded that the statements would "not mislead" reasonable consumers "into thinking that [the company's] suppliers abide by those rules and meet those expectations in every instance."
  • Similarly, in Ruiz v. Darigold, Inc./Northwest Dairy Association, another federal district court dismissed challenges to CSR statements, noting that "in order to construe the [company's] CSR [report] as a guarantee of perfection . . ., plaintiffs ignore[d] the vast majority of the report, its purpose, and its structure to focus on a handful of sentences or, in some cases, phrases.  Such an interpretive practice is, itself, unreasonable."  No. 14-cv-1283, 2014 WL 5599989, at *3 (W.D. Wash. Nov. 3, 2014).  The court examined each of the challenged statements, and found that they were, when read in context, "aspirational statements," or were not shown to be "false in any material respect."  Id. at *4.
  • In Bondali v. Yum! Brands, Inc., a federal appellate court affirmed the dismissal of claims challenging CSR statements in a company's supplier code of conduct, noting that the plaintiffs failed to allege any facts suggesting the company did not require its suppliers to abide by its standards.  620 Fed. Appx. 483, 489 (6th Cir. 2015).  The court said that the fact "that a few suppliers did not adhere to the standards does not mean [the company] did not have the standards in place, and it is not reasonable to interpret [the company's] statements as a guarantee that its suppliers would, in all instances, abide by the corporate standards and protocols."  Id.  The court held that "a code of conduct is not a guarantee that a corporation will adhere to everything set forth [therein]," but rather "a declaration of corporate aspirations." Id. at 490.  It also stated that "to treat a code of conduct as a statement of what a corporation will do, rather than what it aspires to do, would turn the purpose of a code of conduct on its head."  Id.
Courts have also rejected challenges to CSR statements where plaintiffs fail to allege that they viewed and relied on the challenged statements before making their purchase decisions.  Most consumer protection and securities laws require plaintiffs to show reliance as an element of a misstatement claim.
  • For example, in Sud v. Costco Wholesale Corporation, a federal district court recently dismissed claims challenging website statements in a "Disclosure Regarding Human Trafficking and Anti-Slavery" and supplier "Code of Conduct" regarding the prohibition of forced labor, based on purported violations by third-party suppliers in Thailand, Indonesia, Vietnam and Malaysia.  No. 4:15-cv-03783, 2017 WL 345994, at *5 (N.D. Cal. Jan. 24, 2017).  The court held that the claims failed for lack of standing and reliance because the plaintiffs did not allege they read and relied on the website statements prior to purchasing the products at issue.  Id.
A number of federal district courts have also rejected CSR claims based on alleged disclosure omissions, where plaintiffs asserted that companies had an affirmative duty to disclose the existence of problems like forced or child labor in their supply chains on their websites or product packaging.
  • For example, in one case, the plaintiff sought additional disclosures regarding forced labor in a company's supply chain, but the court held that such disclosures would be inconsistent with California's Transparency in Supply Chains Act (the "California Act").  According to the court, this statute requires retailers doing business in California to make disclosures on their website about their efforts to eradicate slavery and human trafficking, but nothing more.  The court held that the California Act's provisions created a safe harbor against the proposed additional disclosures.
  • Another district court also held, with respect to challenged omissions pertaining to child labor in a company's supply chain, that while such disclosures are not protected by the California Act (it drew a distinction between child labor and slave labor), the company had no affirmative duty to disclose "situations . . . where information may persuade a consumer to make different purchasing decisions."  Hodson v. Mars, Inc./Mars Chocolate North America, LLC, No. 15-cv-04450, 2016 WL 627383, at *6 (N.D. Cal. Feb. 17, 2016).  It noted that while child labor was a terrible humanitarian tragedy and that consumers may very well care about the use of child labor in a manufacturer's supply chain, absent any false or misleading statements regarding child labor, there was no duty to disclose.  Id.  Other district courts have subsequently come to the same conclusion.  See, e.g., Dana v. Hershey Co., No. 15-cv-04453, 2016 WL 1213915, at *9 (N.D. Cal. Mar. 29, 2016) ("the weight of authority limits a duty to disclose . . . to issues of product safety, unless disclosure is necessary to counter an affirmative representation."); Sud v. Costco, 2017 WL 345994, at *7-8 (same).
In a few instances, however, claims challenging CSR statements have survived motions to dismiss, where companies made more concrete and measurable factual statements or promises to meet CSR goals by dates certain.
  • In one securities fraud case, for example, a federal district court found that a major oil and gas company's statements about its safety reform efforts and environmental protection measures, including statements in sustainability reports and sustainability reviews on its corporate website, were sufficiently concrete to form the basis of a misstatement claim.  The court held that the safe harbor for forward-looking statements did not apply to a number of the statements because they were not predictions of future events or aspirations, but rather "statements of existing fact."  The court also found that the plaintiffs adequately pled that the website statements were actionable because the plaintiffs alleged that the statements "were intended to reach shareholders and the investing public."
  • Similarly, in a relatively recent books and records case, a Delaware Chancery court permitted a complaint to proceed past the motion to dismiss stage.  It found that plaintiffs' allegations pointing to the company's public promises and stated goals over the past two decades to eradicate the problem of child labor in its supply chain by 2020, adequately supported an inference that the company's board of directors knew of at least some instances of exploitation of child labor in its supply chain "that would have triggered a duty to inform."  The court allowed discovery to proceed against the company and its directors regarding a number of topics, including:  (1) procedures the company used to monitor child labor in its supply chain; (2) reports, investigations and documents presented to the board; (3) reports from the company's suppliers; (4) discussions regarding the public promises the company made; and (5) reporting or compliance requirements the company imposed on its suppliers.

Minimizing Litigation and Liability Risks

These cases highlight the importance of taking steps to minimize the risk that CSR statements will result in a lawsuit.  While the majority of the recent civil suits challenging CSR statements and omissions have failed, many of those cases are now on appeal.  Claims challenging CSR statements have also survived the pleading stage in at least a few instances, subjecting companies to costly discovery.  CSR statement lawsuits are also increasing in popularity, and may start gaining traction given the increasing prevalence of CSR statements and the growing number of studies reflecting that CSR issues may be important to consumers and investors.  Companies need to be aware that there are real litigation risks relating to CSR statements.  There are, however, a number of steps companies can take to minimize litigation and liability risks.
  1. Add disclaimer language.  Generally, companies should consider having disclaimer language accompany CSR statements.  The disclaimers should note that the standards are not guarantees or promises.  It also may be appropriate to note that the standards of measurement and performance are developing or are based on assumptions.  In addition, it is particularly important for companies to consider such disclaimers on the website postings of CSR statements if they include a cross-reference or link to the website in their proxy statement or other SEC filings.
  2. Check the facts.  As with other types of public statements, companies should confirm the accuracy of CSR statements before they are made public.  This includes reviewing CSR statements for overstatements, misstatements, or concrete statements about initiatives that might be rendered misleading or untrue by an adverse supplier or other event.  For example, companies that publish commitments to achieve specific CSR goals/targets by certain dates may face litigation alleging misrepresentations to consumers if the goals/targets are not met.  Companies should also confirm they have adequate diligence procedures in place for information in sustainability and other reports about progress on CSR goals, and consider whether to involve internal or external auditors to help verify or attest to the concrete facts and numbers included in CSR documents.
  3. Use aspirational language and estimates.  Companies should also endeavor to keep CSR statements aspirational.  For example, when discussing CSR initiatives or codes of conduct, companies should favor words like "should," "expect," or "strive," as opposed to making broad and generalized assertions that the company, its employees, or its suppliers "are" in compliance or "do" comply with applicable laws and standards.  Companies can also minimize litigation risk when measuring progress on CSR goals by talking about "estimates" or "approximations"--as opposed to stating concrete measurements.  Companies should also consider process-based or soft goals, rather than setting objective targets.
  4. Location matters.  Detailed CSR statements in SEC filings or on product packaging may increase the risk of litigation, as courts may presume that the statements are material or that investors and consumers relied on them.  Statements on websites can also present heightened risks, particularly if products are sold through websites, as courts might presume that consumers have seen the statements before making purchases.  Statements suggesting that CSR initiatives and statements are material to the company, investors, or consumers also could be problematic in litigation.
  5. Educate internally on litigation trends.  Companies should educate employees responsible for updating and preparing CSR documents about the growing risk of lawsuits based on alleged misstatements.  Employees should also understand that CSR statements need to be consistent with descriptions of the company's business and material trends and risks in SEC filings.  Even if CSR materials are not required in SEC filings, companies may face pressure in the future to incorporate them.
  6. Consider internal and external processes carefully.  Companies should carefully consider who signs off on CSR statements, and what role directors and senior management have in their review, if any.  Companies should also carefully evaluate the role of outside CSR consultants, understanding that communications with these consultants may not be privileged, and that consultants often benchmark against other companies' CSR reports and are not always sensitized to litigation risks.
 
  [1]   The phrase "corporate social responsibility" often encompasses a broad variety of corporate goals and initiatives, including efforts regarding environmental sustainability (such as combating climate change and resource scarcity), human rights (including protecting human health and labor rights), responsible sourcing and audit procedures, compliance with laws in places where companies do business, and ethics and integrity.   [2]   California Civil Code § 1714.43; U.K. 2015 c. 30.   [3]   For example, the Sustainability Accounting Standards Board (SASB) has developed a voluntary reporting approach for U.S. publicly traded companies that encourages companies to identify sustainability issues material to their business and discuss their performance on those issues in their SEC filings.
The following Gibson Dunn lawyers assisted in the preparation of this client alert:  Jason Meltzer, Elizabeth Ising, Andrew Tulumello, David Debold, Perlette Jura, Lori Zyskowski and Bryson Smith. Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these developments.  If you have any questions or would like to discuss these issues further, please feel free to contact the Gibson Dunn lawyer with whom you usually work or one of our subject matter lawyers: Class Actions, Consumer Products and Securities Litigation Groups: Andrew S. Tulumello - Washington, D.C. (+1 202-955-8657, atulumello@gibsondunn.com) David Debold - Washington, D.C. (+1 202-955-8551, ddebold@gibsondunn.com) Jason R. Meltzer - Washington, D.C. (+1 202-955-8676, jmeltzer@gibsondunn.com) Securities Regulation and Corporate Governance Group: Elizabeth Ising - Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Lori Zyskowski - New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Transnational Litigation Group: Andrea E. Neuman - New York (+1 212-351-3883, aneuman@gibsondunn.com) William E. Thomson - Los Angeles (+1 213-229-7891, wthomson@gibsondunn.com) Perlette Michèle Jura- Los Angeles (+1 213-229-7121, pjura@gibsondunn.com)   © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 25, 2016 |
E-Textiles: Regulating The Future Of Fashion

​New York partner Lois Herzeca is the author of "E-Textiles: Regulating The Future Of Fashion" [PDF] published on August 25, 2016 by Law360.

June 13, 2016 |
Drone Privacy: Voluntary Best Practices Released by Multi-Stakeholder Group

​Los Angeles of counsel Eric D. Vandevelde and Orange County associate Jared Greenberg are the authors of "Drone Privacy: Voluntary Best Practices Released by Multi-Stakeholder Group" [PDF] published in the June 13, 2016 issue of the Privacy and Security Law Report.

April 29, 2016 |
Follow the Money

Washington, D.C. partner Howard Hogan, ​New York partner Robert Weigel and associate Anne Coyle are the authors of "Follow the Money" [PDF] published in the April/May 2016 issue of World Trademark Review.

March 30, 2016 |
FTC Enforcement Targets Native Advertising

The use of native advertising--paid advertising that is integrated into the media in which it appears--is exploding.  Native advertisements commonly appear online, but can be found in almost any form of communication, including radio, television, and print, among other media.  Native advertising takes many forms, and examples include:

  • A paid blog post displayed alongside non-sponsored content written by the blogger;
  • A sponsored full-length article about a product in a magazine;
  • An online video that integrates a product into the story line or videography in exchange for consideration from the product's seller; and
  • Billboards inside a videogame's virtual world that display ads sold to advertisers.[1]
A distinguishing feature of native advertising is that the content in the advertisement is often related to the surrounding non-sponsored content.  One benefit of native advertising for publishers is that it can provide viewers with a less disruptive user experience, encouraging greater user engagement with the advertisement.

The Growth of Native Advertising

Advertisers' and publishers' use of native advertising is growing rapidly.  Media companies including The New York Times, The Atlantic, Buzzfeed, and The Wall Street Journal have integrated some form of native advertising into their content.[2]  A 2013 survey estimated that 73% of online publishers offer some form of native advertising.[3]  Annual spending on native advertising has risen from $4.7 billion in 2013 to an estimated $7.9 billion in 2015, and is forecasted to balloon to $21 billion by 2018.[4] One area of particularly notable growth is paid content created and posted by online "influencers."  Influencers are individuals with large web or social media audiences whose opinions and behavior may affect their audiences' purchasing decisions--e.g., a fashionista with millions, or even tens-of-millions, of Instagram followers who regularly posts pictures of her outfits.  Such individuals may monetize their online or social media audience by accepting payments from advertisers to display or reference the advertisers' goods or services on the individual's website or social media postings.  Such arrangements are attractive to advertisers in part because studies have shown that social recommendations influence customer purchases.[5]  A 2015 online survey estimated that 59% of marketers planned to boost their social media influencer marketing budgets over the coming year and described "influencer marketing" as the "fastest growing online customer acquisition channel."[6]

FTC Guidance and Enforcement Actions

Section 5 of the FTC Act prohibits "unfair or deceptive acts or practices in or affecting commerce," and grants the FTC the authority to prevent parties from using deceptive practices.[7]  Pursuant to this authority, the FTC has long held that advertising that consumers cannot identify as advertising is deceptive when it misleads consumers into believing it is independent, impartial, or not from the sponsoring advertiser itself.[8]  As far back as 1968, the FTC issued an advisory opinion finding it deceptive to publish an advertisement in the format of a news article without adequately disclosing it is an advertisement.[9]  Because native advertising can blur traditional barriers between content and advertising, the FTC has dedicated significant resources to establishing--and policing--guidelines relating to native advertising. In December 2015, the agency issued an Enforcement Policy Statement Addressing "Native" Advertising and Deceptively Formatted Advertisements ("Native Advertising Guides") setting forth the "rules of the road" for native advertisers and publishers.  The Native Advertising Guides incorporate the FTC Staff's analysis of information collected at a workshop held in December 2013 titled "Blurred Lines: Advertisement or Editorial?"[10] and builds upon past FTC guidance in related areas, including guides released in 2009 directing nontraditional advertisers (e.g., talk shows, comment forums, blogs, and social media) to disclose when endorsements were part of paid advertisements and 2013 guidance addressing the search engine industry on the need to adequately distinguish advertisements or sponsored search results and organically produced search results. The FTC's Native Advertising Guides came on the heels of several enforcement actions, and generally reflect the policies underlying those actions.  In August 2010, the FTC settled charges with Reverb Communications, a public relations firm, regarding allegations that the firm's employees posted game reviews on an online media store without disclosing that the firm was hired to promote the game and often received a portion of the sales.[11]  Soon after in March 2011, Legacy Learning Systems, a company that sells guitar lessons on DVD, agreed to pay $250,000 to settle FTC charges that its online affiliate advertising campaign deceived consumers.[12]  Allegedly, the company recruited bloggers and other content providers to endorse its DVDs and place hyperlinks to the Legacy website near those endorsements in exchange for a sales commission, but did not clearly disclose the affiliate compensation arrangement.[13]  In November 2014, the FTC announced a settlement with Deutsch LA, an advertising agency representing a gaming company, resolving allegations that the agency instructed its employees to generate awareness and excitement on Twitter for the launch of a new gaming system without instructing the employees to disclose their connection to the agency and its client.[14]  In February 2015, the FTC announced a settlement with AmeriFreight, an automobile shipment broker that allegedly touted its number of favorable reviews without disclosing that it offered cash discounts and other financial incentives to users who wrote reviews.[15]  And in September 2015, Machinima, Inc., a California-based online entertainment network, entered into a settlement with the FTC to resolve allegations that Machinima paid influencers to post YouTube videos endorsing Microsoft's Xbox One system and several games without adequately disclosing that they were being paid for seemingly objective opinions.[16] Earlier this month, the agency announced its first enforcement action since promulgating the Native Advertising Guides.  The action, against retailer Lord & Taylor, included allegations that Lord & Taylor deceived consumers by not adequately disclosing that its native advertisements were paid promotions.[17]  The FTC alleged that the company paid for, reviewed, and pre-approved a "seemingly objective" article in an online publication without disclosing or otherwise making clear the commercial arrangement.[18]  In addition, the FTC alleged that Lord & Taylor paid over 50 fashion influencers to post Instagram pictures featuring a Lord & Taylor dress without ensuring that the influencers adequately disclosed that the endorsement was paid for.[19]  The posts included the "@lordandtaylor" Instagram designation and the "#DesignLab" campaign hashtag, but failed to include any disclosure "that the influencer had received the dress for free, that she had been compensated for the post, or that the post was a part of a Lord & Taylor advertising campaign."[20]  Pursuant to the terms of the settlement, Lord & Taylor is, among other requirements, (i) prohibited from misrepresenting that paid advertisements are from an independent source, (ii) required to ensure that its influencers clearly disclose when they have been compensated in exchange for their endorsements, and (iii) obligated to establish a monitoring and review program.[21]  Although the Lord & Taylor action is in keeping with the FTC's guidance and precedents in the Native Advertising space, it is notable because it targets a large, established retailer's use of influencer marketing. To date, the FTC has required a monetary remedy in only the Legacy Learning Systems settlement.  In that matter, there was a direct link between the offending advertising and particular sales because the advertising included a link through which consumers could make purchases.  However, the FTC may (as it has done in other areas of its jurisdiction) seek to expand its use of monetary remedies to a broader range of fact patterns, including situations where the link between the offending conduct and particular sales is less direct, as its policies become more established through additional enforcement actions.

Takeaways for Native Advertisers and Publishers

The Native Advertising Guides and the FTC's enforcement actions focus on several basic principles:
  • Transparency is key – Advertisers are responsible for ensuring that consumers can identify native advertising as advertising.  Even if an advertisement features a disclosure and the content advertised is truthful, the format of a native advertisement can be deceptive if it misleads consumers about the content's commercial nature.
  • Net impression is the standard – In determining whether native formatting is deceptive, the FTC will consider the net impression the advertising conveys to reasonable consumers.  Notably, even if fewer than 50 percent of consumers take away a deceptive interpretation it can be "reasonable" in the FTC's view.
  • When there is a similarity in subject matter between advertising and non-advertising content, the advertising likely requires disclosure – The FTC's guidance provides 17 examples to help clarify when disclosures in native advertising are required.  Although it depends highly on the context, one theme that emerges is that disclosure is likely required when the subject matter of the native advertising content is related to the subject matter of the non-advertising content.
  • Disclosures must be clear and conspicuous – If disclosures are required, they should be clear, in plain language, easily identify what is being advertised, and be featured before a consumer arrives at the main advertising page.  They should use the word "ad" or "advertisement" instead of ambiguous terms like "promoted by," "sponsored by," or "brought to you by."  Disclosures should appear on all devices that consumers will use to access the content, and disclosures should be carried through if republished (e.g., shared on Facebook).

Conclusion

Native advertising is a clear focus of the FTC.  Publishers and advertisers who use native advertising should be mindful of the FTC's guidance in how they present native advertisements.  While the FTC's enforcement actions to date have focused on advertisers and their agents, we anticipate that the FTC would not hesitate to pursue publishers as well in situations where the publisher knew (or should have known) of noncompliant advertising and was well positioned to address the issue.
[1] See Fed. Trade Comm'n, Native Advertising: A Guide for Business (Dec. 21, 2015), available at https://www.ftc.gov/tips-advice/business-center/guidance/native-advertising-guide-businesses. [2] Joe Lazauskas, Study: Article or Ad? When it Comes to Native, No One Knows, Contently (Sep. 8, 2015), available at https://contently.com/strategist/2015/09/08/article-or-ad-when-it-comes-to-native-no-one-knows/. [3] Fed. Trade Comm'n, Blurred Lines: Advertising or Content? An FTC Workshop on Native Advertising at 7:12-15 (Dec. 4, 2013), available at https:www.ftc.gov/system/files/documents/public_events/171321/final_transcript_1.pdf. [4] BI Intelligence, Spending on Native Advertising is Soaring as Marketers and Digital Media Publishers Realize the Benefits, Business Insider (May 20, 2015), available at www.businessinsider.com/spending-on-native-ads-will-soar-as-publishers-and-advertisers-take-notice-2014-11. [5] Jacques Bughin, Getting a Sharper Picture of Social Media's Influence, McKinsey & Company (July 2015), available at http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/getting-a-sharper-picture-of-social-medias-influence. [6] Influencer Marketing Study, Tomoson Blog (Mar. 2015), available at http://blog.tomoson.com/influencer-marketing-study/. [7] 15 U.S.C. § 45(a)(1); 15 U.S.C. § 45(a)(2). [8] Fed. Trade Comm'n, Enforcement Policy Statement on Deceptively Formatted Advertisements at 1(Dec. 21, 2015), available at https://www.ftc.gov/system/files/documents/public_statements/896923/151222deceptiveenforcement.pdf. [9] Id. at 3. [10] Press Release, Fed. Trade Comm'n, FTC Issues Enforcement Policy Statement Addressing "Native" Advertising and Deceptively Formatted Advertisements (Dec. 22, 2015), available at https://www.ftc.gov/news-events/press-releases/2015/12/ftc-issues-enforcement-policy-statement-addressing-native. [11] Press Release, Fed. Trade Comm'n, Public Relations Firm to Settle FTC Charges that It Advertised Clients' Gaming Apps Through Misleading Online Endorsement (Aug. 26, 2010), available at https://www.ftc.gov/news-events/press-releases/2010/08/public-relations-firm-settle-ftc-charges-it-advertised-clients. [12] Press Release, Fed. Trade Comm'n, Firm to Pay FTC $250,000 to Settle Charges That It Used Misleading Online "Consumer" and "Independent" Reviews (Mar. 15, 2011), available at https://www.ftc.gov/news-events/press-releases/2011/03/firm-pay-ftc-250000-settle-charges-it-used-misleading-online. [13] Id. [14] Press Release, Fed. Trade Comm'n, Sony Computer Entertainment America To Provide Consumer Refunds To Settle FTC Charges Over Misleading Ads For PlayStation Vita Gaming Console (Nov. 25, 2014), available at https://www.ftc.gov/news-events/press-releases/2014/11/sony-computer-entertainment-america-provide-consumer-refunds. [15] Press Release, Fed. Trade Comm'n, FTC Stops Automobile Shipment Broker from Misrepresenting Online Reviews (Feb. 27, 2015), available at https://www.ftc.gov/news-events/press-releases/2015/02/ftc-stops-automobile-shipment-broker-misrepresenting-online. [16] Press Release, Fed. Trade Comm'n, FTC Approves Final Order Prohibiting Machinima, Inc. from Misrepresenting that Paid Endorsers in Influencer Campaigns are Independent Reviewers (Mar. 17, 2016), available at https://www.ftc.gov/news-events/press-releases/2016/03/ftc-approves-final-order-prohibiting-machinima-inc?utm_source=govdelivery. [17] See Press Release, Fed. Trade Comm'n, Lord & Taylor Settles FTC Charges It Deceived Consumers Through Paid Article in an Online Fashion Magazine and Paid Instagram Posts by 50 "Fashion Influencers" (Mar. 15, 2016), available at https://www.ftc.gov/news-events/press-releases/2016/03/lord-taylor-settles-ftc-charges-it-deceived-consumers-through. [18] Id.; see also Ex. C, Complaint, In the Matter of Lord & Taylor, LLC, FTC Docket No. 152 3181 (Mar. 15, 2016), available at https://www.ftc.gov/system/files/documents/cases/160315lordandtaylexhibit-c.pdf. [19] Id. [20] Complaint at ¶ 7, In the Matter of Lord & Taylor, LLC, FTC Docket No. 152 3181 (Mar. 15, 2016), available at https://www.ftc.gov/system/files/documents/cases/160315lordandtaylcmpt.pdf; see also Ex. A, Complaint, In the Matter of Lord & Taylor, LLC, FTC Docket No. 152 3181 (Mar. 15, 2016), available at https://www.ftc.gov/system/files/documents/cases/160315lordandtaylexhibit-a.pdf. [21] Press Release, Fed. Trade Comm'n, Lord & Taylor Settles FTC Charges It Deceived Consumers Through Paid Article in an Online Fashion Magazine and Paid Instagram Posts by 50 "Fashion Influencers" (Mar. 15, 2016), available at https://www.ftc.gov/news-events/press-releases/2016/03/lord-taylor-settles-ftc-charges-it-deceived-consumers-through.
The following Gibson Dunn lawyers prepared this client alert: Alexander H. Southwell - Co-Chair, Privacy, Cybersecurity and Consumer Protection Group, New York (+1 212-351-3981, asouthwell@gibsondunn.com) Richard H. Cunningham - former Senior Trial Counsel, Federal Trade Commission, Denver (+1 303-298-5752, rhcunningham@gibsondunn.com) Timothy M. Zimmerman - Denver (+1 303.298.5721, tzimmerman@gibsondunn.com) Joshua Rosario - Denver (+1 303.298.5719, jrosario@gibsondunn.com) Gibson Dunn's lawyers are available to assist with any questions you may have regarding these issues and have substantial experience counseling companies on all aspects of advertising law, FTC investigations, and litigating against private plaintiffs and government enforcers.  For further information about these issues or any global privacy or cybersecurity issue, please contact the authors of this alert, the Gibson Dunn lawyer with whom you usually work, or any of the following members of the firm's Privacy, Cybersecurity and Consumer Protection Group: United States M. Sean Royall - Co-Chair, Dallas (+1 214-698-3256, sroyall@gibsondunn.com) Alexander H. Southwell - Co-Chair, New York (+1 212-351-3981, asouthwell@gibsondunn.com) Debra Wong Yang - Co-Chair, Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com) Howard S. Hogan - Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Shaalu Mehra - Palo Alto (+1 650-849-5282, smehra@gibsondunn.com) Karl G. Nelson - Dallas (+1 214-698-3203, knelson@gibsondunn.com) Joshua A. Jessen - Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com) Michael Li-Ming Wong - San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com) Ryan T. Bergsieker - Denver (+1 303-298-5774, rbergsieker@gibsondunn.com) Richard H. Cunningham - Denver (+1 303-298-5752, rhcunningham@gibsondunn.com) Eric D. Vandevelde - Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com) Europe James A. Cox - London (+44 (0)20 7071 4250, jacox@gibsondunn.com) Andrés Font Galarza - Brussels (+32 2 554 7230, afontgalarza@gibsondunn.com) Bernard Grinspan - Paris (+33 1 56 43 13 00, bgrinspan@gibsondunn.com) Penny Madden - London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Jean-Philippe Robé - Paris (+33 1 56 43 13 00, jrobe@gibsondunn.com) Michael Walther - Munich (+49 (0)89 189 33-180, mwalther@gibsondunn.com) Nicolas Autet - Paris (+33 1 56 43 13 00, nautet@gibsondunn.com) Eryk L. Dziadykiewicz - Brussels (+32 2 554 72 03, edziadykiewicz@gibsondunn.com) Kai Gesing - Munich (+49 (0)89 189 33-180, kgesing@gibsondunn.com) Alejandro Guerrero Perez - Brussels (+32 2 554 7218, aguerreroperez@gibsondunn.com) Sarah Wazen - London (+44 (0)20 7071 4203, swazen@gibsondunn.com) Asia Kelly Austin - Hong Kong (+852 2214 3788, kaustin@gibsondunn.com) Jai S. Pathak - Singapore (+65 6507 3683, jpathak@gibsondunn.com) Robert S. Pé - Hong Kong (+852 2214 3768, rpe@gibsondunn.com) © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 9, 2015 |
Webcast – From Distressed to Dressed: Overcoming the Challenges and Realizing Opportunities for Fashion, Retail, and Consumer Businesses

​Fashion and retail companies face significant challenges in the current financial climate. With the decline of brick and mortar stores and shopping malls, fashion retailers must invest in on-line and social media strategies. At the same time, suppliers are facing their own economic pressure, adding uncertainty to supply sourcing and costs. All of these challenges plus the need to focus on innovation, selling experiences, and becoming consumer centric should be top of mind for any fashion, retail, or consumer business looking to succeed. In this presentation, we address these challenges and opportunities faced by fashion, retail, and consumer businesses as well as present practical advice on how to face both operational and financial stresses. This webinar is hosted by Gibson Dunn’s Fashion, Retail and Consumer Products Practice Group. The group is comprised of a team of highly experienced attorneys who focus on the complex and unique issues facing companies in the Fashion, Retail and Consumer Products industries. Members of the Practice Group include attorneys from our corporate, litigation, intellectual property, tax, real estate and business reorganization departments. View Slides [PDF]


https://player.vimeo.com/video/176203808
PANELISTS: Harry J. Kobritz — Mr. Kobritz is a Managing Director of SHM Corporate Navigators. In his 30 years as a senior financial, operating executive, and strategic advisor, he has primarily served middle market companies in enhancing financial and operational performance, due diligence, corporate and family governance. Mr. Kobritz has initiated and completed transactions with a combined value of $500 million and provided strategic advisory services for companies with enterprise values exceeding $1 billion. His extensive expertise includes retail, fashion and beauty, manufacturing, global import and distribution, cross border transactions, staffing, advertising and marketing. He has restructured legendary retail chains and structured the US path to entry for some of the most iconic fashion brands in the world such as Max Mara, Issey Miyake, and several others. In 2010, he co-founded SHM Corporate Navigators, a corporate advisory and merchant banking firm to enable middle market companies, family businesses, and portfolio companies of private equity firms to further differentiate themselves in the market and grow by integrating and enhancing their financial, marketing, operational, and channel performance, and providing the necessary capital to achieve these results. Mr. Kobritz’ executive experience includes roles as Chief Operating Officer, Chief Restructuring Officer and Chief Financial Officer at both public and private middle market companies. He holds a BS in Finance and Accounting from Brooklyn College and graduated with honors. He is a Certified Public Accountant, licensed in New York and is an alumnus of Ernst and Young where he was a member of the Assurance Group as a Senior Audit Manager for over seven years. Industry affiliations include: New York State Society of CPAs Financial Reorganization Committee, Chairman Emeritus; The Economic Club of New York, Member; Association for Corporate Growth (ACG), Member, Programming Committee; and American Institute of CPAs, Member. He has published editorials and white papers in Middle Market Growth published by ACG. Sam Newman — Mr. Newman is a partner in the Los Angeles office of Gibson, Dunn & Crutcher and a member of both the Business Restructuring and Reorganization Group. His practice involves representing creditors, debtors and other parties-in-interest in Chapter 11 cases. He also advises buyers, sellers, lenders and borrowers in transactions involving distressed assets. Mr. Newman has also represented debtors in significant cases and out-of-court restructurings. He has been named as one of California's leading lawyers in business and restructuring by Chambers USA – America's Leading Business Lawyers and recognized by his peers as one of The Best Lawyers in America® in the area of Bankruptcy and Creditor-Debtor Rights Law. Mr. Newman currently serves as a member of the Boards of Directors of the Turnaround Management Association, the Financial Lawyers Conference and the Los Angeles Bankruptcy Forum. Martin L. Okner — Mr. Okner is a Managing Director of SHM Corporate Navigators. With a total of over 20 years of experience in branded consumer goods, Mr. Okner has created and developed strategic plans in marketing, channel development, and business lifecycle management to grow middle market companies through proven methodologies. He has accomplished this with middle market companies and with companies such as Revlon, Cadbury and Philip Morris. His strategies have generated over $2.5 billion of incremental retail value with many iconic brands. In 2010, he co-founded SHM Corporate Navigators, a corporate advisory and merchant banking firm to enable middle market companies, family businesses, and portfolio companies of private equity firms to further differentiate themselves in the market and grow by integrating and enhancing their financial, marketing, operational, and channel performance, and providing the necessary capital to achieve these results. He has advised private equity firms on investment targets in fashion and beauty retail such as Fossil, Timberland, Hanesbrands and Wet Seal. Mr. Okner holds an MBA from Fordham University Graduate School of Business Administration in Corporate Finance, and a Bachelor of Arts degree in Political Science (Minor, Business Administration) from Seton Hall University where he graduated summa cum laude. Additionally, he is an Adjunct Professor of Marketing at Fordham Graduate School of Business Administration and Parsons, The New School for Design. Industry affiliations include: Association for Corporate Growth (ACG), Chairman; the Economic Club of New York, Member; and ACG Cares New York Chapter, Inc., Board Member. He has published editorials and white papers in Forbes, Chain Drug Review, Mergers & Acquisitions and Middle Market Growth published by ACG. Mr. Okner was recognized by M&A Advisor as the 2011 winner of the 40 Under 40 Award and by Walmart and Cadbury Adams USA as 2005 Supplier of the Year. Janet Weiss — Ms. Weiss is a partner in the New York office of Gibson, Dunn & Crutcher LLP and a member of the Business Restructuring and Reorganization Practice Group. She has more than 25 years of experience representing debtors, creditors, committees, secured lenders, DIP financing lenders and acquirers in bankruptcy cases, including pre-negotiated and pre-packaged cases, and out-of-court restructurings. She also has significant experience in bankruptcy litigation and bankruptcy aspects of asset-backed and mortgage-backed securities. Ms. Weiss has been named as one of the elite bankruptcy lawyers in New York and one of New York City’s top women lawyers by Avenue Magazine. The Deal’s Bankruptcy Insider named her as one of the top ten lawyers for acquirers in bankruptcy acquisitions. She has lectured on bankruptcy topics at numerous programs sponsored by the American Bankruptcy Institute, the American Bar Association and the New York State Bar. Her article, The Time Bomb in Your Indenture—No Action Clauses and Creditor Standing, and a chapter entitled Rights of Trademark Licensees: Protection for Non-Debtors After Rejection of Trademark License Agreements were recently published. Ms. Weiss’s fashion related representations include: Saks Fifth Avenue in proposed acquisition of Barney’s in its first chapter 11 case (In re Barney’s Inc.) ; BCBG Max Azria Group in acquisition of substantially all leases from G+G Retail’s chapter 11 case; (In re G&G Retail, Inc.), Hoop Holdings LLC, which sold Disney clothing and other Disney products, in its chapter 11 case (In re Hoop Holdings LLC); The Finish Line in proposed acquisition from In re Foodstar Inc.; and landlord for Syms’ retail space in its chapter 11 case (In re Syms Corp.).

October 13, 2015 |
U.S. CFPB Announces Rulemaking To Curtail Use Of Arbitration Agreements That Bar Class Actions In Consumer Financial Contracts

​On October 7, 2015, the United States Consumer Financial Protection Bureau announced that it is "launch[ing] a rulemaking process" that is intended to impede the use of "pre-dispute arbitration agreements for consumer financial products and services."[1]  The proposal currently under consideration by the Bureau would (1) "prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts;" and (2) "require companies to send to the Bureau all filings made by or against them in consumer financial arbitration disputes" and any resulting decisions, "which might be made public."[2] If the CFPB ultimately adopts the current proposal, it will affect products and services in nearly every industry, including, according to the CFPB, "credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans," and even mobile wireless providers.  Not only would the proposal interfere with a company's ability to control costs associated with consumer contracting, but also it will encourage a new wave of class action litigation. Given the widespread impact this proposal could have on businesses' ability to use arbitration clauses in consumer contracts to manage risk, and the CFPB's expansive view of its jurisdiction, companies in all industries should consider participating in the CFPB's rulemaking.

I.   The Dodd-Frank Act Authorized The CFPB To Study Use Of Arbitration Agreements

The Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the CFPB to study and issue a report on the use of arbitration clauses in consumer contracts for financial services and products, and to consider issuing any regulations necessary to protect customers, consistent with the results of its study. The CFPB published the results of its study in a 700-page report in March 2015.  The study found that roughly 90% of arbitration clauses bar consumers from filing group arbitrations or class action litigations.[3]  The report also concluded, unsurprisingly, that class actions are dramatically more lucrative for plaintiffs and their attorneys than individual lawsuits or arbitrations.  Indeed, even with arbitration agreements included in the overwhelming majority of consumer contracts, the CFPB found that in the five-year period it studied, "group lawsuits delivered, on average, about $220 million in payments to 6.8 million consumers per year in consumer financial services cases."[4] Notably, the Act expressly banned pre-dispute arbitration clauses in most residential mortgage contracts as part of the Truth in Lending Act.  As expected, the mortgage industry has seen a corresponding increase in class action litigation since the ban took effect in June 2013.

II.   CFPB's Current Proposal Would Prohibit Use Of Arbitration Agreements To Bar Class Actions And Would Require Reporting Of Arbitral Decisions

In the wake of its study, the Bureau resolved to increase consumers' ability to pursue group lawsuits in order to "create the leverage to bring about . . . changes in business practices."[5]  Accordingly, in a speech on October 7, 2015, CFPB Director Richard Cordray announced that "the Bureau has decided to launch a rulemaking process" to limit the use of mandatory arbitration provisions that preclude consumers from filing class actions.[6] The proposed rule described by Cordray has two primary components: First, "the proposal under consideration would prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts."[7]  Although not an outright ban on all arbitration agreements, the current proposal would require any arbitration provision "to say explicitly that it does not apply to cases brought on behalf of a class unless and until the class certification is denied by the court or the class claims are dismissed in court."[8]  The CFPB's position is that this carve out in any arbitration provision will increase the frequency and amount of consumer recoveries, and subject companies to "court orders" that "force companies to change the way they do business."[9] In effect, this proposal could allow consumers to file (and force businesses to defend against) even frivolous class actions.  Indeed, the CFPB's own report indicates that at least 70% of individual arbitration claims are inappropriate for class treatment (and could not satisfy Rule 23(b)'s predominance requirement) because they concern primarily "the amount of debt the consumer owed the company," with only a fraction of those challenging any "particular conduct by the company."[10] Second, the current proposal "would require companies to send to the Bureau all filings made by or against them in consumer financial arbitration disputes and any decisions that stem from those filings."[11]  Not only is the CFPB proposing to undertake this massive data collection about consumers, their consumption practices, and financial services they receive, but the Bureau also is "considering publishing this information for all to see, so the public can analyze it as they see fit."[12]  The CFPB's proposed reporting requirement is burdensome, but it is particularly troubling insofar as publication of the reported information could invade consumers' privacy rights and materially compromise trade secrets and other legitimately confidential commercial information. The Bureau's proposal could jeopardize the viability of arbitration as a means to resolve disputes.  At least at this early stage, the CFPB has not acknowledged the benefits of arbitration to consumers and businesses, or explained how the proposal would comport with Congress's express support for arbitration as set forth in the Federal Arbitration Act.

III.   Considerations For Companies Employing Arbitration Agreements In Consumer Contracts

The CFPB intends to submit its current proposal to a "small-business review panel," but it has not given any indication that it intends to solicit other industry views.[13]  If it decides to proceed with its current proposal, the Bureau will issue a formal notice of proposed rulemaking, after which it will receive public comments and potentially issue a final rule. In the interim, companies should seek legal counsel to determine whether any proposed rulemaking will affect their use of arbitration agreements.  This could turn on factors such as whether consumers can elect to opt out of arbitration or whether group arbitrations are permitted.  If counsel determines that a company's arbitration agreement could be subject to the Bureau's ultimate rule, the company should consider participating in the rulemaking. In addition, companies should undertake reviews to evaluate their litigation risks and insurance coverage.  The CFPB's report found that between 2010 and 2012, across six different consumer finance markets, 3,462 individual lawsuits were filed about consumer finance disputes (two went to trial resulting in $1 million in damages), but "[n]o class cases went to trial."[14]  If arbitration provisions are required to carve out consumer class actions, and even a small subset of cases that would have otherwise been filed as individual actions are filed as class actions, companies could face exposure and litigation costs that impose significant settlement pressure.  Companies should, therefore, consult with counsel well in advance of the CFPB's formal rulemaking to understand the financial impact such a rule could have on their business.
[1] Prepared Remarks of CFPB Director Richard Cordray at the Arbitration Field Hearing, Oct. 7, 2015 (Cordray Remarks), available at http://www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-arbitration-field-hearing-20151007/. [2] Cordray Remarks. [3] CFPB Says 90% of Banks' Arbitration Clauses Bar Class Suits, Juan Carlos Rodriguez, Law360 (Dec. 13, 2013). [4] Cordray Remarks (emphasis added). [5] Id. [6] Id. [7] Id. [8] Id. [9] Id. [10] Consumer Financial Protection Bureau Study Finds That Arbitration Agreements Limit Relief for Consumers, available at www.consumerfinance.gov. [11] Cordray Remarks. [12] Id. [13] CFPB Weighs Axing Class Action Bans In Arbitration Clauses, Evan Weinberger, Law360 (Oct. 7, 2015). [14] Consumer Financial Protection Bureau Study Finds That Arbitration Agreements Limit Relief for Consumers, available at www.consumerfinance.gov.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or the authors in the firm's Washington, D.C. office:   Douglas R. Cox (202-887-3531, dcox@gibsondunn.com) Jason J. Mendro (202-887-3726, jmendro@gibsondunn.com) Chantale Fiebig (202-955-8244, cfiebig@gibsondunn.com)   Please also feel free to contact the following leaders of the Administrative Law and Regulatory Practice Group and the Financial Institutions Practice Group: Helgi C. Walker - Washington, D.C. (202-887-3599, hwalker@gibsondunn.com) Arthur S. Long - New York (212-351-2426, along@gibsondunn.com) © 2015 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.  

August 14, 2015 |
IP Suit Over Katy Perry Dress Faces Big Hurdles

​Washington D.C. partner Howard S. Hogan and associates Ashley S. Boizelle and Naomi Takagi are the authors of "IP Suit Over Katy Perry Dress Faces Big Hurdles" [PDF] published on August 14, 2015 by Law360

April 27, 2015 |
Lynch Provides ‘Beast Mode’ Seminar on use of Trademarks

Washington, D.C. partner and Co-Chair of the Fashion, Retail and Consumer Products Practice Group, Howard Hogan and Washington, D.C. associate Alexander Mooney are the authors of "Lynch provides a 'Beast Mode' seminar on use of trademarks" [PDF] published in the Sports Business Journal on April 27, 2015.