Opinion
Case No. C-3-00-566.
July 26, 2004
DECISION AND ORDER ON NUTRO'S MOTION FOR SUMMARY JUDGMENT ON THE IAMS COMPANY'S SECOND AND THIRD CLAIMS FOR RELIEF
This case is before the Court on Motion of Defendant Nutro Products, Inc., for Summary Judgment on The Iams Company's Second and Third Claims for Relief or, in the Alternative, Summary Adjudication that Iams May Not Seek Monetary Damages (Doc. No. 214). In ruling on the Motion, the Court has also considered Iams' Memorandum in Opposition (Doc. No. 248, in two parts), and Nutro's Reply Memorandum (Doc. No. 303). In deciding the Motion, the Court has not relied on any evidence submitted by Plaintiff to which Nutro has made objection in its Objections to Evidence Submitted in Support of [Plaintiff's] Dispositive Motions (Doc. No. 239).
The standard for considering summary judgment motions which the Court has followed on this Motion is set forth at length in the Court's Decision and Order Granting in Part and Denying in Part Plaintiff's Motion for Partial Summary Judgment Based on Defendant's Lack of Injury (Doc. No. 421).
Over twenty years ago, Nutro began a program to market its products by placing demonstrators in various pet specialty stores. At present Nutro employs over 2,000 such demonstrators who work at assigned stores, usually on weekends. As part of that program, the demonstrators often set up tables with Nutro products and are trained to respond to questions from pet store customers. During the relevant time period (May, 1999, to May, 2002), over 330,700 demonstrations took place.
The Court understands a "demonstration" to be defined as an occasion when one of the Nutro demonstrators was present in a pet specialty store. As the Court understands it, the entire period when the demonstrator is there is a single "demonstration", rather than a single encounter with a particular potential customer. The Court supposes that the name "demonstrator" is derived from the use of this marketing technique in other businesses and that no actual "demonstration" of the effectiveness of Nutro dog food is attempted during the "demonstrations."
Nutro emphasizes in its motion papers (Motion, Doc. No. 214, at 3-4), that its demonstrators are well-trained and taught to speak positively about Nutro products, as opposed to derogating the products of competitors. As part of their training, new demonstrators are "secretly monitored (often `mystery shopped') within their first six weeks on the job." Id. at 4.
Nutro's products were not sold in PetSmart stores from 1992 to 1999. During at least part of that time, PetSmart was Iams' largest customer. In April, 1999, Nutro reintroduced its products to PetSmart, which gave Nutro the exclusive right to place demonstrators in its stores and agreed that the Nutro demonstrators could, for a period of one year, approach customers who had already picked up an Iams' product and attempt to persuade them to buy a Nutro product instead.
Iams became concerned about its competitive position once Nutro re-entered the PetSmart stores and itself employed mystery shoppers to interact with Nutro demonstrators, particularly in the PetSmart locations. Nutro responded by creating its "Seven Questions" policy by the end of 1999. Its purpose was to teach Nutro demonstrators to answer certain question often expected to be used by Iams mystery shoppers "with a verbatim answer containing a positive message about Nutro's products." (Doc. No. 214 at 5). Nutro asserts its demonstrators continue to be instructed to convey positive messages about Nutro and to avoid disparaging competitors' products.
A "mystery shopper" is apparently someone who is hired to test either one's own or a competitor's marketing by pretending to be an actual customer.
Iams claims in its Fourth Amended Complaint that Nutro's demonstrators engaged in a pattern and practice of making false statements disparaging Iams' products, in violation of the Lanham Act (Second Claim for Relief) and the Ohio Deceptive Trade Practices Act (Third Claim for Relief). The Court has already determined that the legal standards governing claims for relief under these two statutes are identical (See Doc. No. 421) and thus only analysis under the Lanham Act will be made.
Nutro does not assert that the statements attributed to its demonstrators by Iams are literally true. Instead, it asserts that Iams cannot produce sufficient admissible evidence of those statements to withstand summary judgment. Should Iams overcome this hurdle, Nutro asserts that the statements do not qualify as advertising under the Lanham Act, that Iams cannot prove any monetary damages were caused by the statements or that any false statements continue to be made so as to justify injunctive relief. The Court analyzes each of these assertions in turn.
The Demonstrator Statements
In discovery and through its own investigation, Iams has collected the Nutro demonstrator statements of which it complains from a number of sources. Iams details at length the false and disparaging character of these demonstrator statements, e.g., Iams' products contain carcinogens, have ingredients that are bad for dogs, contain sugar, contain animal fat from road kill, do not contain linoleic acid, were reformulated by Procter Gamble, and contain chicken by-products in contrast with Nutro's human-edible chicken components. (Memorandum in Opposition, Doc. No. 248, 9-21.)
First of all, Iams has had a practice for some time of conducting an annual "mystery tour" during which 20-25 mid- to senior-level Iams employees visit retail pet stores throughout the United States "to gain a snapshot of current market conditions and to expose senior and middle levels of management to the marketplace." (Doc. No. 248 at 5.) In 1999 the Iams' mystery tour focused on Nutro demonstrators. The Iams' employees were instructed to engage Nutro demonstrators in conversation and make a record of what happened on a standardized form immediately after leaving the location where it occurred.
Secondly, apart from the mystery tour, 100 Iams employees engaged in mystery shopping of Nutro's demonstrators exclusively in the PetSmart stores in Spring, 1999. The primary intent was to furnish the information to PetSmart.
Third, in order to verify these results to PetSmart, Iams retained Consumer Link, a consumer research organization, to mystery shop the Nutro demonstrators. The Consumer Link employees were instructed to record verbatim the substance of their conversations with demonstrators immediately upon leaving the stores.
Fourth, Nutro itself monitors the work of its demonstrators, both by working with them oneon-one, and by mystery shopping them.
Finally, Nutro's retained expert in this case, Cogan Research Group, mystery shopped Nutro demonstrators between June 30 and September 23, 2001, in order to test whether the "Seven Questions" policy was being followed and to provide data for Dr. Cogan's conclusions as an expert witness in this case.
At the first level of analysis, statements made by the Nutro demonstrators are not hearsay because they are not being offered to prove the truth of their content, but merely to show what that content was. Thus they do not come within the definition of hearsay. Fed.R.Evid. 801(c). Nutro does not contest this point.
Iams of course asserts that the content — the demonstrators' statements about its products — was false.
Iams, however, has not listed any of the Nutro demonstrators as trial witnesses. Instead, it intends to prove what they said by introducing reports of others about what they said. To the extent those reports were prepared by Nutro employees or gathered by Dr. Cogan for her report, they constitute admissions of a party opponent and are therefore defined as non-hearsay by Fed.R.Evid. 801(d)(2)(A) and (D). Because reports of mystery shopping prepared by Nutro employees or for Nutro are admissible on this basis, the Court need not decide whether they are also admissible under the business records exception, Fed.R.Evid. 803(6).
Iams contends that written reports by its own mystery shoppers are admissible under Fed.R.Evid. 803(6). That Rule provides that the following may be admitted:
A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record or data compilation, all as shown by the testimony of the custodian or other qualified witness, or by certification that complies with Rule 902(11), 902(12), or a statute permitting certification, unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness.
The only proof offered by Iams to satisfy the foundation requirements of Fed.R.Evid. 803(6) is the admission of Nutro, made in the instant Motion, that Iams has conducted annual or semi-annual mystery tours as part of its business for some time. That foundation is inadequate. The Iams mystery shopper reports offered in opposition to the instant Motion are authenticated by Daniel Binegar, an attorney with the law firm representing Iams in this action, who is manifestly not the business custodian of these records and does not even purport to testify about the business practice of preparing these reports. For example, at ¶ 24 of his Declaration, Mr. Binegar affirms that "Attached as Exhibit 23 to this Declaration are true and correct copies of Mystery Shopper Records of Visits" and then affirms that Iams produced them to Nutro in discovery.
Fed.R.Civ.P. 56(e) provides in pertinent part:
Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein. Sworn or certified copies of all papers or parts thereof referred to in an affidavit shall be attached thereto or served therewith. . . . When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or otherwise as provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party.
Documents submitted in support of, or in opposition to, a motion for summary judgment must satisfy the requirements of Rule 56(e); otherwise, they must be disregarded. Dole v. Elliott Travel Tours, Inc., 942 F. 2d 962, 968-69 (6th Cir. 1991); State Mutual Life Assurance Co. of America v. Deer Creek Park, 612 F. 2d 259, 264 (6th Cir. 1979). The written reports of Iams' mystery shoppers are hearsay and not made admissible by Fed.R.Evid. 803(6).
Iams also seeks to introduce under Fed.R.Evid. 803(6) the mystery shopper reports generated by Consumer Link. However, Iams has failed to provide an adequate foundation for these documents as well, on the same basis that if failed to do so for its internal mystery shopper reports. In its Memorandum in Opposition (Doc. No. 248 at 24), it identifies the deposition testimony of Tracey Gerdon; but at the locations cited, she merely testifies that mystery shopping is part of the regular business activity of Consumer Link without testifying about its practices in preparing reports of that activity and without authenticating any documents.
Iams also asserts that its mystery shopper reports and those of Consumer Link are admissible under the residual hearsay exception embodied in Fed.R.Evid. 807. That Rule provides in pertinent part:
A statement not specifically covered by Rule 803 or 804 but having equivalent circumstantial guarantees of trustworthiness, is not excluded by the hearsay rule if the court determines that (A) the statement is offered as evidence of a material fact; (B) the statement is more probative on the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts; and (C) the general purposes of these rules and the interests of justice will best be served by admission of the statements into evidence.
Iams correctly asserts that the mystery shopper reports are evidence of material facts — what Nutro demonstrators said about Iams products that was false or misleading and therefore actionable under the Lanham Act. The Court agrees with Iams that the reports are more probative on the point for which they are offered than other evidence which Iams could reasonably produce at trial: it would indeed be burdensome to produce all the mystery shoppers from all over the country who had heard a Nutro demonstrator make one of the contested statements about an Iams product. The general purpose of the Federal Rules of Evidence to have relevant evidence admitted for the jury's consideration would be served by admitting these reports. Finally, Nutro has had notice of the names of the mystery shoppers and an opportunity to interview or depose them, thereby serving the purpose of the last sentence of Rule 807.
Nutro correctly points out that Iams did not identify any mystery shoppers except Todd Lohmeier and Glenn Williams as potential trial witnesses. Nutro argues that Iams refused to identify the mystery shoppers and Iams counters that the names of those persons are on the reports themselves. Whether that constituted sufficient identification to permit Nutro to find these possible witnesses is not raised by the parties. Nor does the Court recall having been asked to compel such identification. If that was done, its place in the record is not identified in the instant motions papers.
However, the Court is not persuaded that these reports have "equivalent circumstantial guarantees of trustworthiness" to declarations admitted under Fed.R.Evid. 803 and 804. At least some of the mystery shoppers knew that they were looking for evidence of wrongdoing by Nutro demonstrators; the Consumer Link mystery shoppers were attempting to confirm reports of Nutro demonstrator wrongdoing (Gerdon Depo. at 163). Thus the mystery shoppers had a motive to construe what they heard in a manner favorable to Iams. Nor were these reports being gathered for any purpose other than to show Nutro demonstrator false statements: they had the possibility of being used in this litigation and also to persuade PetSmart to "rein in" the Nutro demonstrators, but both those purposes have specific competitive content. In contrast, in most of the Rule 803 exceptions, there is a non-litigative purpose for preparing the record.
Iams principally relies on Federal Trade Commission v. Figgie Int'l., Inc., 994 F. 2d 595 (9th Cir. 1993). There the court of appeals allowed as evidence of prices paid for home fire detection devices the letters written to the FTC by 127 consumers of the product. The letters were found to have appropriate circumstantial guarantees of trustworthiness because they were written independently of one another, the writers all reported roughly equivalent experiences, and the writers had no motive to lie. Id. at 608. The situation here is different on each of those points.
The Court is not implying any conclusion that a mystery shopper actually wrote an untrue or exaggerated report. The question is not whether the reports are accurate, but whether the writers had a motive to exaggerate.
The Court concludes that the mystery shopper reports are not admissible under Fed.R.Evid. 807.
The admissible evidence of what Nutro demonstrators said, as presented in Iams' Memorandum in Opposition, is as follows:
1. On May 20, 2001, a Nutro employee (#20062) mystery shopped Nutro demonstrator Amy Donovan and provided the following report in pertinent part:
I mentioned that I currently was feeding Whiskas. By-products came up and the specifics of them were discussed.
Demonstrator then mentioned that Whiskas, along with other grocery store brands, were "full of crap", referring to the fact that they all have by-products. She then mentioned that a lot of those ingredients "can lead to or cause cancer." Also mentioned during this discussion that these other brands "lack proper ingredients to fight urinary track [sic] infections, which can hit the wallet hard."
(Binegar Declaration, Doc. No. 248, Ex. 8.)
2. On June 16, 2001, Nutro demonstrator Eugene Griffith was mystery shopped by Angela Regan, and noted to have said that Iams contains by-products which come from a rendering plant and include heads, feet, guts, liver, brains, and anything else they want to throw into it, including possibly road kill. Id. at Exhibit 10. Mr. Griffith was fired for the content of his demonstration and admitted in a post-termination letter that he had said "brains" instead of "claws." Id.
3. On September 14, 2001, Nutro demonstrator Jan Tanco told one of Dr. Cogan's interviewers that Iams contains chicken by-products and yellow corn meal, that the corn meal is not good for the digestive tract and that by-products are not good at all. She continued that it has not been proven that any of the Iams' ingredients cause cancer or other disease, "but it has been suggested that it's not good because of the contamination factor." Id., Exhibit 14.
4. On September 8, 2001, Nutro demonstrator Patrick Smith told Cogan interviewer Michael Horan that the corn meal in Iams is hard to digest and by-products are bad. He also said that by-products include chicken feet. Id. at Exhibit 15.
5. On September 9, 2001, Nutro demonstrator Bonnie Sindelar told Cogan interviewer James Flanagan that Iams uses chicken by-products which are not really good for the animal. She further said that corn meal was not as easy to digest as rice; that chicken by-products are not really good for the animal because they contain ground up necks, heads, feet, and guts; and that it was believed that some of the by-products could aggravate certain conditions such as skin irritation. Id. at Exhibit 16.
6. On September 15, 2001, Nutro demonstrator Leona Stewart told Mr. Flanagan that Iams used chicken feet and heads as a substitute for protein and that yellow corn meal was bad for digestion. Id.
7. On September 8, 2001, Nutro demonstrator Doris Williams told Cogan interviewer Michael Horan that Iams uses chicken by-products and corn meal which are both bad for your dog, that the corn meal would make your dog constipated and that chicken by-products were unhealthy. Id.
8. On September 15, 2001, Nutro demonstrator Jackie Jacqueline told Cogan interviewer Anita Murray that the corn meal and chicken by-products in an Iams product "are not the best ingredients to give your dog." "Corn," she said, "provides little substance. You know it doesn't stick to his guts. You'll find it in the backyard more than anywhere." She represented that chicken by-products consist of the guts, head, legs, and some bones of the chicken. Id.
9. On September 8, 2001, Nutro demonstrator Angela Pool-Harris told Cogan interviewer Denise Love-McDonnell that Iams was not an adequate diet for her dog, that corn meal in Iams was only 30% digestible, and that the by-products in Iams were not as healthy for her dog as Nutro. Id.
10. On September 20, 2001, an anonymous Nutro demonstrator told Cogan interviewer Sharon Gabor that Iams could eventually hurt her dog because of what was in it, that whether Iams' ingredients were bad for her dog depended on how she felt about by-products and corn, and that corn meal was hard to digest. Id.
11. On September 7, 2001, Nutro demonstrator Georgette told Ms. Gabor that she didn't think Iams was good for Ms. Gabor's dog because it had chicken by-products in it. She said that corn was hard to digest and that a human wouldn't want to eat heads and feet of chickens. Id.
These eleven instances of false or misleading statements by Nutro demonstrators obviously do not meet the "commercial advertising or promotion" requirement of the Lanham Act because they were not alone widely enough disseminated within the relevant industry: each of them is a one-onone statement and they represent a tiny proportion of the Nutro demonstrations conducted during the relevant time period. See Fashion Boutique of Short Hills v. Fendi USA, Inc., 314 F. 3d 48 (2d Cir. 2002). However, Nutro's expert, Dr. Cogan, collected these examples as part of a survey which Nutro intends to introduce in evidence to show that its Seven Questions policy works and that only some small proportion of Nutro demonstrators make false statements about Iams products. Assuming for purposes of this Motion that Dr. Cogan's sample was scientifically constructed and that the results can therefore be extrapolated to entire population of Nutro demonstrators, there remain genuine issues of material fact regarding Iams' claim about Nutro demonstrators. For example, whether the number of false statements made is 2,000 per 100,000 demonstrations or some lesser number, a jury could reasonably find that the number was not insignificant and therefore constituted advertising or promotion, especially given that there is evidence that the Nutro demonstrator program targeted Iams products. Unlike the Fendi case, supra, this is a case of national, not just local, competition.
Printed Advertisements
In addition to demonstrator comments, Iams relies on the following to support its Lanham and Ohio Deceptive Trade Practices Acts claims:
1. A promotional point-of-sale piece entitled "Why did PG/Iams Reformulate Iams Chunks?" A copy of this item is attached as Exhibit C to the Fourth Amended Complaint (Doc. No. 195)
2. A claim made by Nutro in print media and point-of-sale advertisements that, unlike Iams' products, Nutro's products contain only those portions of a chicken which humans eat. A copy of this advertisement is attached as Exhibit E to the Fourth Amended Complaint (Doc. No. 195). In deposition, Richard Hamlet, one of Nutro's group demonstration managers admitted that this is part of the message Nutro demonstrators regularly convey to potential customers (Hamlet Depo. Vo. 1, p. 91.)
Although Iams relies on these advertisements in its Memorandum in Opposition, Nutro has not sought to prove the truth of the claims made in them, nor claimed that they do not constitute advertising or a promotion. (See Reply Memorandum, Doc. No. 303, at 17.)
Nutro does object to consideration of an email from a PetSmart manager complaining about Nutro demonstrator behavior. The objection is well taken on both hearsay and authentication grounds.
Nutro is not entitled to summary judgment with respect to these printed materials.
Damages
Nutro asserts (Motion, Doc. No. 214, at 10) that Iams had limited its damages evidence to the amounts and types to be quantified by its damages expert, Dr. Steven Schwartz). Iams does not respond directly to that assertion. Instead, it argues as follows:
1. Nutro's own documents show it gained market share at Iams' expense from the first quarter of 1999 to the second quarter of 2000 and was successful in competition with Iams/Procter Gamble in 2001. (Memorandum in Opposition, Doc. No. 248, at 40-41.)
2. As related by Marty Walker in his deposition, Iams' employees have witnessed customers switching from Iams to Nutro after hearing a false and misleading Nutro demonstration. Id.
3. Mr. Walker also believes that these attacks damage Iams' goodwill. Id. at 42.
4. Mr. Walker also believes they have damaged Iams' business relationships, causing it, for example, to spend significant time negotiating with PetSmart about the Nutro demonstrator activity. Id.
5. Finally, Mr. Walker believes the activity damaged Iams' relationship with retail sales associates in pet specialty stores. Id. at 43.
Apart from this evidence of actual injury, Iams argues it is entitled to a presumption of injury based on the fact that the false or misleading statements are comparative in nature, relying on Balance Dynamics Corp. v. Schmitt Indus., Inc., 204 F. 3d 683 (6th Cir. 2000). Nutro responds that Balance Dynamics requires proof of actual damages.
Mr. Walker's testimony about loss of goodwill is insufficient to support an award of damages because he offers no testimony to show an actual diminution of goodwill. In other words, the Nutro demonstrator activity of which Iams complains would be expected to lead to an impact of Iams' reputation in the marketplace and therefore to a diminution of its goodwill, but there is no proof offered that this has actually happened.
With respect to the time spent of negotiating with PetSmart and on repairing relationships with sale associates, these might show recoverable damage control costs if Iams were proceeding on that theory of damages, but it has specifically foresworn any such theory of recovery.
Iams' sole support for quantifying its monetary damages is the report and projected testimony of Dr. Steven Schwartz, an economist retained by Iams to calculate damages. In a separate Motion not yet decided (Doc. No. 215), Nutro has moved to exclude Dr. Schwartz altogether as an expert witness. Since the Court has not yet decided that Motion, it assumes here that Dr. Schwartz's testimony would be admissible at trial. Even assuming admissibility, Dr. Schwartz's testimony does not provide sufficient support for a recovery of money damages by Iams because he has not apportioned Nutro's sales volume among the various Lanham Act violations claimed by Iams. That is, he calculates Nutro's gross revenue for the relevant period at $507 million and assumes, as he was told to do, that this revenue was generated because of Nutro's alleged Lanham Act violations. Iams' claim for money damages is a claim for unjust enrichment in the amount of Nutro's profits arising from the violations. It argues in opposition to the Motion in Limine that its burden under the Lanham Act is to prove Nutro's gross revenues and then the burden shifts to Nutro to prove appropriate deductions from that figure, presumably in the nature of cost of goods sold and overhead. Assuming the correctness of this analysis, Dr. Schwartz's calculations fail to account for the fact that only some of Iams' asserted Lanham Act violations have survived summary judgment, to wit, the printed media items and the Nutro demonstrator statements provable from Nutro witnesses. Dr. Schwartz's report provides no basis on which a jury could reasonably determine how much of Nutro's revenue arises from those violations.