Photo by Joe Huser
Like usual, this blog will review three cases from the last quarter. This time the common thread is that in all cases the federal courts came out in favor of the “Big Guy.” Although I am publishing before the election, and the outcome remains undetermined, just days ago the New York Times issued a poll showing that the majority of Americans believed that the country was plagued by corruption. In the poll, 62% said that the government was mostly working to serve itself and elites rather than any broader purpose of the common good. To be clear, I am not alleging any corruption in any of these cases in the strict sense of the word as I do not believe that money exchanged hands for an outcome. And undoubtedly, there would certainly be a plethora of other cases where the so-called Little Guy came out ahead. But I do think sometimes it’s worth asking: if an edge case existed between the parties below in the opposite direction, would the smaller party be treated so favorably?
Vulnerable by Design? The Cost of Digital Dependency and Corporate Immunity
As soon as they could crawl – and certainly before they could talk -- my nieces and nephews would come across a room and try to grab phones. Undoubtedly, they perceived it as some sort of magic device that enraptured every adult in their universe.
Our addiction to our phones – perhaps not so dissimilar from other addictions -- has evolved into a dependency. And in time, the devices became the gateway to seemingly every facet of our lives. Terpin v. AT & T Mobility LLC, 2024 U.S. App. LEXIS 24619 is a reminder that we only think that we control that gate. In the case, Terpin was the victim of a “SIM swap” when a teenager bribed an employee of AT&T to swap the number of Terpin to a device controlled by the teenager. Of course, the data remained on Terpin’s phone, but all his calls and messages started going to the teenage hacker’s device. Those calls and messages, of course, include the multi-factor authentications methods we are so accustomed to now. Armed with that backdoor into Terpin’s life, the teenager accessed the OneDrive account of Terpin and found the cryptocurrency credentials in a deleted folder or electronic trash bin and used those credentials to steal $24 million in cryptocurrency.
Presumably Terpin’s chosen asset class of cryptocurrency made him especially vulnerable to this scam. But I tell you, we are all Terpin. And though the appellate court, as will be discussed, left him with a path to recovery, there are portions of the opinion that seem a bit tone deaf to the danger this represents to ordinary consumers.
Terpin sued AT&T in the United States District Court for the Central District of California for failing to adequately secure his account. His complaint relied on seven California state law causes of action and one Federal cause of action. AT&T brought a motion to dismiss the complaint, and it was granted. Terpin appealed the dismissal to the United States Court of Appeals for the Ninth Circuit.
The appellate court reversed the trial court on whether Terpin had a claim under Section 222 of the Federal Communications Act, but affirmed the trial court in other respects. Here, we will discuss the dismissal of the breach of contract cause of action, which was affirmed by the appellate court.
This blog has in the past visited the issue of limitation of liability (see here). In this instance the appellate court found that complaint was only alleging consequential damages (the loss of cryptocurrency to hackers). However, the agreement had a limitation of liability clause that barred recovery "for any indirect, special, punitive, incidental or consequential losses.” The court recited the difference between general damages and consequential: general damages are "those that flow directly and necessarily from a breach of contract," while consequential damages "are those losses that do not arise directly and inevitably" from a breach but "are secondary or derivative losses arising from circumstances that are particular to the contract or to the parties.” Terpin v. AT & T Mobility LLC, 2024 U.S. App. LEXIS 24619, at 15. Accordingly, the court affirmed the dismissal of the breach of contract claim.
The Ninth Circuit did not engage in any meaningful explanation as to why this loss did not arise “directly and inevitably” from the breach by AT&T. I suppose, since the credentials were found in a OneDrive (one step removed?) there’s an argument to be made that it was not “inevitable” that the hacker would find the cryptocurrency credentials. But doesn’t that seem too neat for AT&T? To me, the type of loss suffered by Terpin is inevitable when an employee “SIM swaps” for a bribe. What would qualify as direct losses in the opinion of the Terpin court? Only the actual calls that he would have received during the time that the SIM card had been swapped?
Next, Terpin had argued in a footnote that the agreement was an unconscionable contract of adhesion and violated public policy. The court swatted that argument down primarily on the procedural grounds that Terpin had forfeited issues not "specifically and distinctly" argued in the opening brief. And besides, the court held, adhesion" contracts are not per se unconscionable under California law. Id. at 16.
To come to both of these conclusions was just too much. I try to imagine an average consumer at an AT&T store being given twenty pages of fine print (over a screen at this point). Next, I try to imagine a customer saying to a clerk, “Excuse me Sir, this paragraph on limitation of liability, can we strike that out?”
Of course this was a contract of adhesion. And though contracts of adhesion are not per se unconscionable, isn’t this one unconscionable? If the contract successfully limited consequential damages in this case, in what circumstances would the damages be deemed as direct? In largest part our calls exist because communication about things other than the call is exchanged.
Let us imagine that Terpin’s mother had called while his phone was ported to the other phone. She intended to express that she felt shortness of breath and to see if Terpin could come to her home or if he thought she should call an ambulance. Instead of reaching her son, let’s imagine she left a voicemail on the phone of the hacker and further let’s imagine she later died. In that event, would Terpin’s damage merely be the direct damage that he did not get to hear his mother’s voice on the last day of her life? Under Terpin v AT & T Mobility, LLC that would be the case because any other damages would have been deemed consequential. The point I am making is that damage from a missed call or text is by its nature in most all cases consequential. Isn’t it unconscionable that AT&T is effectively never on the hook for any damage?
Court Sides with PayPal, Apparently has never been to a Bodega
Unfortunately, Terpin wasn’t the only federal case in California that was a bit tone deaf to reality this quarter. In Sabol v. PayPal Holdings, Inc., 2024 U.S. Dist. LEXIS 151858, a group of merchants alleged that PayPal’s form contracts contain provisions that are anticompetitive in nature.
The chief allegations center on provisions in the PayPal form contracts that: i) prohibit merchants from offering a discount when consumer uses a non-PayPal form of payment; and ii) require that any fees charged on PayPal transactions may not be higher than fees charged "for non-PayPal transactions." The court referred to these as PayPal's anti-discrimination provisions ("ADP").
The matter was on a motion to dismiss. The court recited the rule that in an anti-trust matter it is mandatory for the plaintiff to demonstrate that the harm the plaintiff has suffered or might suffer from the [alleged] practice constitutes an injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful. Sabol v. PayPal Holdings, Inc., 2024 U.S. Dist. LEXIS 151858, at *5. The court recited the rule that courts have identified "four requirements for antitrust injury: (1) unlawful conduct, (2) causing an injury to the plaintiff, (3) that flows from that which makes the conduct unlawful, and (4) that is of the type the antitrust laws were intended to prevent. Id. at 6.
The court proceeded to find that Plaintiff had failed to adequately allege that the injury described flows from the allegedly unlawful conduct. Id.
Plaintiffs had alleged two types of harm.
First, Plaintiffs contended that PayPal's ADP's create a price "floor" by prohibiting discounting based on payment method. Plaintiffs essentially alleged that absent PayPal's ADPs, merchants would naturally provide discounts for customers who use PayPal's cheaper rivals or other payment methods.
The court adopted PayPal’s convenient position that the first theory of harm was too “attenuated” because it necessarily depended on the independent actions of millions of merchants choosing to provide discounts for customers that do not use PayPal. The court found that it does not necessarily follow that absent the ADPs, millions of merchants would naturally decide to offer specific discounts for customers who choose not to use PayPal either at the point of sale or at some other stage in the transaction process.
You gotta be kidding me. Judge White is from New York originally, but one wonders when the last time this George W. Bush appointee was in a bodega? Or a farmer's market? Informal, more fringe vendors are constantly offering cash discounts. It hardly seems "attenuated" that some consumers would choose a payment methodology that was cheaper if it was offered. Further, it hardly seems "attenuated" that some merchants would choose to offer a cheaper payment methodology. And if this possibility was so "attenuated" then why did PayPal contract to avoid that very outcome?
The second harm that Plaintiffs had alleged was that without the ADP restrictions merchants could fold the increases PayPal fees into prices on the goods only for transactions involving PayPal. Instead, unable to bake PayPal's fees only into transactions using PayPal, merchants are forced to increase prices across the board. Id. at 9
On this second theory, the court found that Plaintiffs failed to allege facts that explained the significance of the allegedly passed-on transaction fees relative to the other numerous pricing factors for any goods or services Plaintiffs allegedly purchased. Here, I think the court got it right. The harm here is actually attenuated. The factors in pricing are so numerous. For example, it’s possible that because PayPal is such a trusted name that consumers are willing to trust it with higher value transactions. And such higher value transactions may offset the fixed costs of operating the store. It could be the PayPal has more rigorous underwriting standards and therefore fewer chargebacks. And so on.
But even if the second form of harm had been “attenuated” because of the complexity of pricing, the court did a lot of heavy lifting for PayPal with respect to the first form of harm. When our eyes see human behavior that our institutions fail to acknowledge, it’s our esteem of the institution that changes and not the behavior.
Seeing Double: EYECONIC and EYE-CONIC Face Off in Court
Since this quarter’s blog is turning out to be federal courts siding with large defendants, for the third case we will review Amarte USA Holdings, Inc. v. Kendo Holdings Inc., 2024 U.S. Dist. LEXIS 159201. In the Amarte case, Amarte USA Holdings, Inc. was the seller of high-quality skin care products throughout the United States. It sells an eye cream for which is holds the trademark EYECONIC, which it has held since 2013.
Defendant Kendo Holdings, Inc. (“Kendo”) in 2012 had entered into an agreement with Marc Jacobs International, LLC (“Marc Jacobs”) to develop a line of beauty products to be sold under the MARC JACOBS trademark. In 2013 it launched the MJB product line, which included an eye shadow called "MARC JACOBS BEAUTY STYLE EYE-CON.” The external product packaging for the eye shadow depicted the phrase "EYE-CONIC COLORS.” In 2017, Kendo relaunched the eye shadow under the name "EYE-CONIC." Id at 6. Kendo stated that it had done “significant market research” prior to selecting the name and had not uncovered Amarte’s EYECONIC eye cream, or its registered trademark.[1]
Amarte did not become aware of the Kendo EYECONIC eye shadow until September of 2021. In the following month it sent a cease-and-desist letter to Marc Jacobs, which forwarded the letter to Kendo. Kendo responded that it had discontinued its MJB EYE-CONIC eye shadow and would be finished selling its remaining inventory "within the next sixty (60) days.” Kendo and Marco Jacobs had terminated the licensing agreement and discontinued the product line on September 30, 2021. Id. at 7. Further, Kendo stated it had no intention to revive the Marc Jacobs Beauty line or to use the name "EYE-CONIC" on any future product.[2] Id. at 7.
In December of 2022, Amarte sued, for among other things, trademark infringement. Both sides had moved for summary judgement and the court was considering whether either side was entitled to summary judgment, which would turn on whether the Plaintiff had demonstrated trademark infringement, the key question being whether likelihood of confusion existed between the marks.
Somewhat surprisingly, the court found that “no reasonable trier of fact” could find likelihood of confusion between EYECONIC and EYE-CONIC.[3] In general, I would beg to differ. But on review of the analysis, I would not go so far as to say the court got it wrong.
Likelihood of confusion is an eight-factor test. This is one of those classic common law “tests,” where each element is reviewed and then the court, essentially on its overall feeling, delivers an outcome. Those factors are: (i) strength of Plaintiff's mark; (ii) relatedness of the goods; (iii) similarity of the marks; (iv) evidence of actual confusion; (v) the marketing channels used; (vi) the degree of care likely to be exercised by purchasers; (vii) Defendants' intent in selecting its mark; and (viii) likelihood of expansion into other markets. Id.
The court then diligently went through each factor. This blog will not visit each of the factors but will only comment on the court’s analysis for three items.
First, the court reviewed the strength of Amarte’s mark and found the commercial strength of the mark to be lacking because Amarte’s sales of the product were not impressive.[4] Amarte argued that it had received significant unsolicited media coverage in well-known media outlets, including The Oprah Magazine, Vogue, the Wall Street Journal, Vanity Fair, People, and Fortune and that such coverage should show its commercial strength. But even here, the court was prickly, pointing out that several of the articles did not mention the EYECONIC product specifically. Having represented emerging brands, I cannot disagree with the court’s analysis, but I certainly have empathy for Amarte. It came up with a clever name, it put the product in the market for over a decade and it received significant press coverage. Sure, the brand didn’t become iconic, but doesn’t it deserve some protection?
On the next element, relatedness of the goods, I think the court really carried defendant’s argument too far. It found that anti-aging eye cream is neither complementary, nor similar in function, to an eye shadow palette. It reasoned that just because the products fall within the same general field—products to use around your eyes—does not mean that the two products or services are sufficiently similar to create a likelihood of confusion. Id. at 20.
Over the years I have often told clients the way to think of a mark is to imagine a fuzzy halo around your brand. The more famous the mark, the bigger the halo. The court’s analysis here I think only supports the advice I have given to clients. Over the years I KNOW that my clients have received office actions that block registration of a proposed mark on the grounds of likelihood of confusion with existing marks for products that have an even a more attenuated connection than anti-aging eye cream and eye shadow palette. Further, the court did no analysis on the channels of how the products are sold in the actual market. By way of example, it’s easy to imagine the same makeup counter at department store selling a range of a brand’s products that would include anti-aging creams and eye shadow.
Finally, the third element that I would like to review was the element regarding the similarity of the marks. Here, the court stated the rule that courts “should not myopically focus on only the alleged counterfeit marks to the exclusion of the entire product or even common sense.” Id. at 21. It then inserted actual photos of the products:
The court analyzed as follows: Considering the marks in their entirety, and despite both having the name EYECONIC, the Court concludes that they are not similar. First, and most importantly, both products have a prominent housemark. Amarte’s eye cream has an "amarte" housemark in big, bold letters, while Kendo's product has "MARC JACOBS" in big, capital letters on both the packaging and the eye shadow palette. Second, the shape and packaging of the products are different: Amarte's eye cream comes in a narrow white and gold tube, whereas Kendo's eye shadow is sold in a rectangular box with a flat white palette inside. Third, unlike Armte's mark, Kendo's mark separates "EYE" and "CONIC" with a hyphen. Fourth, Amarte’s corporate representative actually admitted that the packaging for Defendants' MJB EYE-CONIC eye shadow "looks nothing like" the packaging for Plaintiff's EYECONIC eye cream. Id. at 21.
Here, I think despite my other quibbles with the court’s analysis of other elements, it is in the end correct. The products do not look alike at all. Cynically I would suggest that someone wanting to copy a name should proceed and simply make very different packaging. However, considering that the marks did co-exist in the marketplace for several years and that Amarte present no evidence of actual consumer confusion, I must concede that the court got this element right.
Considering that merely a hyphen separates at the actual names, I would consider that a “reasonable trier of fact” could conclude that there was a likelihood of confusion. But unlike the other cases discussed in this quarter’s blog, even if the court came out in favor of the “Big Guy” I am not certain that it got it wrong.
What’s the Right Balance?
The cases of Terpin, Sabol, and Amarte each highlight a common thread: the challenge of balancing corporate interests with consumer and small business protections. For every legal nuance dissected and every precedent set, there remains a question of whether the courts’ interpretations are in step with the realities and risks of the times and of those faced by individuals and smaller entities. If we believe in democracy, the majority view that the government only works for the elites is presumptively correct and we should be asking if the courts are part of the problem?
In closing, two final thoughts, not particularly relevant, but other observations during the quarter:
First, during my travels I often take photos of brands abroad that might be infringing if marketed in America. These "Tinkies" in the featured image I found in South Africa. I do not know the history of this brand. There are other incidents in South Africa -- most notably Polo -- where the American mark did not obtain rights. Under Amarte (discussed above) it's not even clear that Tinkies would be infringing on Twinkies -- I just enjoy seeing examples like this.
Second I am not an antitrust lawyer so I would not have the best opinion as to whether the Sabol opinion is consistent with other opinions in the field. It just merely struck me as incredulous that the court would buy PayPal's argument that the harm was attenuated when our own eyes would suggest otherwise. The antitrust space, it should be noted is not entirely moribund and there is some great work going on with respect to potential collusion by hotels on pricing. See this informative blog that I read on the subject this past quarter.
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Endnotes
[1] I may have been more skeptical than the court with respect to the veracity of this particular statement. On the one hand, there have been instances where my own searches did not uncover marks that the USPTO found similar enough to cause a likelihood of confusion. However, my recollection in those instances the marks had not turned up, for example, because they were phonetically similar but not spelled the same. In the end I find it possible that Kendo’s research did not reveal the Amarte mark, I just bristle at their efforts being labeled as “significant market research” because I think in most cases of significant effort, the Amarte mark would have been discovered.
[2] In theory this would have no bearing on whether trademark infringement had occurred in the past. In practice though, this would seem to change the optics of the case.
[3] The court specifically stated “no reasonable trier of fact could find a likelihood of confusion between Defendants' MJB EYE-CONIC mark and Plaintiff's EYECONIC mark” – but the court’s phrasing in this way buries the lede. The record reflects that after 2017 Kendo had relaunched as EYE-CONIC without the MJB.
[4] Unfortunately, actual numbers were redacted, making it somewhat difficult to discern guidance for future Plaintiffs.
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