Maryland Digital Ad Tax for Education Hits Advertiser Opposition

Maryland state senators have proposed a bill that would tax digital advertisers and use the proceeds to finance education reform in the state, much to the concern of local and national advertisers who say the bill is unconstitutional.

Senate Bill 2, proposed by Maryland Senate Democrats Thomas V. "Mike" Miller and Bill Ferguson, would impose a Digital Advertising Gross Revenues Tax of between 2.5 and 10 percent on digital advertising service providers' revenue in Maryland. Although estimates of expected revenue from the proposal are not currently available, the bill aims to target digital ad revenue of big tech companies. The tax will fund educational initiatives Maryland has prioritized in light of a recent state commission's recommendation to make wholesale improvements to education infrastructure.

Senator Ferguson referred to the legislative proposal as “an important initiative for the budget committee to look through to see if it makes sense to tie to the revenues for our investments in a 21st-century education.” But, the bill faces steep opposition from local and national advertisers, with one advertiser apparently saying he hopes the bill is “dead on arrival.” Advertisers say the bill as drafted is harmful to the state’s already existing reputation as being unfriendly to business.

Advertisers see steep constitutional issues with the proposed legislation. They say the bill is vague about who exactly it would affect: The tax would apply to digital ad service providers with either a Maryland IP address or who "are known or reasonably suspected to be using the device in the state." This definition, say advertisers, is so vague that it could even apply to state news media outlets, for example, who sell online ads in Maryland. One industry ad group called the bill discriminatory, since it targets only digital ad services and no other type of digital services.

"The thing that scares me the most is the vagueness in the definition of the bill," said Matt McDermott, president of the American Advertising Federation of Baltimore. "We can talk about that being who they are going after, but it’s so vague it could affect anybody who works in this industry."

Although the bill ostensibly targets big digital ad companies, industry leaders say its effects will trickle down to consumers and small businesses. They have expressed concern that tax "pyramiding" – that is – double taxation that occurs when a tax is assessed on a service and not the final product, would tack on the price of the ad tax to the existing sale tax, which would then be passed on to the consumer.

Another concern is the legislation’s self-reporting requirement, which advertisers have called onerous and difficult to enforce. They note that advertisers would encounter a "huge logistical challenge" parsing out the Maryland portion of national ad sales because ad buys are not always earmarked for a particular state.

Key Takeaways

Although Maryland is not the first state to consider taxing advertisement revenue (Florida enacted a similar law, which was subsequently repealed), it has recently come under fire on constitutional grounds for only targeting digital advertisers. It is also worth noting that just two months ago a federal appeals court struck down a Maryland law that imposed disclosure and record keeping requirements on digital media platforms that carry political ads as a violation of the First Amendment. Advertisers worried about this current proposed tax bill have raised similar constitutional issues by calling the law vague and discriminatory, concerns that will no doubt be carefully considered by state legislators.

Marketing Co. Seeks Sanctions Against Attorney Over TV Interview 

An invention marketing company is seeking sanctions against plaintiff's counsel in a class action suit against the company, claiming counsel violated the state's rules of professional conduct by badmouthing the marketing company on television and publicly making allegations outside the scope of the complaint.

Invention Submission Corp, doing business as InventHelp, faces a proposed class action suit in federal court in Pittsburg, charging it with misrepresenting the efficacy of its inventor assistance services. The suit accuses InventHelp of making false promises to inventors about its ability to help them patent, license, and market their inventions.

Now InventHelp is seeking sanctions against plaintiff’s attorney Julie Pechersky Plitt and her firm Oxman Law Group for violating Pennsylvania’s attorney code of conduct. InventHelp claims Plitt violated Pennsylvania Rule of Professional Conduct 3.6, which prohibits attorneys from making statements in public beyond the scope of the case, which could affect the outcome of a case.

InventHelp argues that Plitt violated the code during a television appearance on a local news channel, when she told reporters that the company is a "fraud pure and simple from start to finish. False promises, false companies, false licensing agreements. Everything about it is fraudulent." InventHelp maintains Plitt’s statements were "hyperbolic, editorialized commentary on pending litigation" which InventHelp called "particularly troubling" in light of the Pennsylvania Bar's special admonition about the ethical dangers for attorneys in giving TV interviews.

InventHelp says not only were counsel’s statements a violation of the state's professional code of conduct, but a website the law firm set up for potential plaintiffs also violated the code because it contained a link to the offending video. The website also "editorialized" the pending complaint's allegations, accusing the company of wrongdoing far beyond that which the complaint alleged, claims InventHelp.

The motion for sanctions also asserts that counsel's website made false claims, including those directed at the company's business model. "Fact issues aside, the very issuance of these statements creates a risk of material prejudice to defendants ... and warrant sanctions by this court," argued defendants in the motion. In addition to asking for sanctions against Plitt and her firm, InventHelp's motion seeks to compel Oxman to take down the offending information from its website.

For her part, Plitt downplayed the accusations, painting them as defendant's modus operandi, accusing them of using the motion to bully plaintiffs and their attorneys.

Key Takeaways

Whether or not Pitt's claims that InventHelp is using the threat of sanctions as a bullying tactic are true, the matter is a reminder that attorneys should be mindful of the substance of public statements they make about pending litigation to ensure they dont run afoul of attorney codes of conduct.

CA Court Dismisses ScanDisk False Ad Class Action

Ejecting a case that was all about the gigabytes, a California court dismissed with prejudice a class action lawsuit accusing ScanDisk of misrepresenting the storage capacity of its USB flash drives, finding the company did not deceive customers about the number of storage gigabytes in its drives.

Plaintiff John Dinan alleged that ScanDisk misled consumers about the storage capacity of its flash drives by representing that one gigabyte (GB) of space in a ScanDisk USB is equal to one billion bytes, whereas many computer systems use GB to mean a greater number of bytes per GB (1,073,741,824 bytes in each gigabyte). By doing so, plaintiff alleges that defendant violated California's false advertising and unfair competition laws, the CA Consumer Legal Remedies Act, and the state’s safe harbor doctrine.

In dismissing the case on January 22, 2020, Judge Beth Labson Freeman held that plaintiff failed to allege that any of ScanDisk's representations were misleading. The judge noted that plaintiff had an opportunity to amend the original complaint to properly allege the claims, but its amended complaint failed to remedy the deficiencies. The court had already found that a reasonable consumer would not be deceived by ScanDisk's representations when it gave plaintiff leave to amend the original complaint.

"Plaintiffs have failed to cure the deficiencies identified by the court, and the court is skeptical that plaintiffs would be able to do so if allowed to amend their complaint again," wrote Judge Freeman.

Plaintiff's attempt to argue that ScanDisk had an obligation to clarify the exact number of bytes in its flash drives was rejected by the court, "The implication appears to be—though the argument is not clearly made—that defendant is therefore obligated to clarify the ambiguity," wrote the judge.

However, the court held that "gigabytes" is an ambiguous rather than a deceptive term. Moreover, ScanDisk's packaging contains an asterisk directing consumers to fine print that discloses the exact number of bytes per GB in its products. Further, the judge held that plaintiff failed to allege any additional words or images "other than GB that might be misleading.”

Key Takeaways

Judge Freeman's ruling focuses on two primary elements of plaintiff's complaint: that ScanDisk specifically stated the GB capacity in its packaging, and that plaintiff could not equate the ambiguity inherent in how many bytes are contained in a GB with deliberately misleading statements. Because ScanDisk clearly specified the byte value of a GB on packaging, even if via an asterisk and in small print, plaintiff could not successfully argue that ScanDisk was misleading consumers. This conclusion was bolstered by the fact that GB size is ambiguous rather than deceptive.

Plaintiff Goes to Bat on Sporting Goods Class Action Cert. Request

The plaintiff in a proposed class action alleging false advertising claims against a baseball bat manufacturer has filed a request for class certification. Plaintiff Richard Sotelo' suit against Rawlings Sporting Goods alleges that kids' baseball bats sold by the company were two or three ounces heavier than advertised. In his 2018 complaint, Sotelo argued that this significant weight difference made the bats unusable and unsafe.

Due to the additional weight of the bat, Sotelo could not use a one-pound bat he bought for his young son, which turned out to be 2.6 ounces heavier than advertised. The complaint averred the bat could cause bodily injury or harm to other players.

Rawlings filed a motion to dismiss the suit, arguing, among other things, that plaintiff was not an adequate representative for the class if his only connection to the allegations was that he purchased one baseball bat. Rawlings also argued that a third party advertised the false information about the bat's weight on its website, not the company.

The court partially granted the motion to dismiss as to the breach of implied contract and unjust enrichment claims; however, Sotelo's claims for false advertising and unfair competition survived.

Now, with the recent motion for class certification, Sotelo asked the court to certify a class of all California customers who purchased Rawlings non-wood adult bats or kids' baseball bats since 2014, arguing that a large class size exists and common questions of fact predominate and that can be resolved with evidence common to all class members.

As to the common questions of fact, Sotelo asserted that false advertising allegations could be resolved through plaintiffs' common questions of fact, including whether customers would find any weight difference between the advertised and actual bat weights material, and whether defendant misrepresented the weight of the bat and violated consumer protection laws.

As to the large class size, Sotelo argued that a large number of the bats were offered for sale throughout California by Rawlings and other retailers, making the class of affected consumers large enough to justify certification. The request for certification also provided (redacted) sales numbers, ostensibly further backing up the claims of a large class.

Sotelo asked the court to name him class representative and that his counsel, The Sultzer Law Group PC and McLaughlin & Stern LLP, be named as co-lead class counsel.

Key Takeaways 

With plaintiff's false advertising claims surviving defendant's motion to dismiss, the court's decision on whether to certify the class is the next crucial hurdle that plaintiff must pass in order for the suit to progress. As to the substance of the case, it remains to be seen whether the extra ounces of a baseball bat's weight would make enough of a difference to render the challenged representations misleading.

Court Dismisses "Frivolous" False Ad Suit vs. American Fitness Wholesalers, and Awards Fees

An Arizona federal court has thrown out a lawsuit accusing nutritional supplement distributor American Fitness Wholesalers of false advertising in violation of the Lanham Act, calling the suit “frivolous.”

Plaintiff ThermoLife International sells patented diet supplement ingredients and licenses its patents to sports supplement manufacturers. In its lawsuit, the company alleges that defendant American Fitness sold illegal and mislabeled products as natural dietary supplements on its website.

In a 354-page complaint, ThermoLife alleged false advertising in violation of the Lanham Act, common law claims of unfair competition, False Marking Statute (a patent law cause of action) and civil conspiracy claims against American Fitness. It had sought to recover damages it claimed it incurred as a result of American Fitness' false advertising and unfair competition activities.

Judge James A. Teilborg this month struck down ThermoLife's allegations, finding that the complaint merely "parrots the elements of a false marketing claim with few specific factual allegations and fewer still relevant ones."

Regarding the false advertising claim, the court found that ThermoLife did not properly allege a competitive injury, as required to plead a false ad claim under the Lanham Act. Plaintiff was not operating in the same market as American Fitness, so it could not show a competitive injury because it could not show that it was in competition with defendant. The court also dismissed the company's False Marking claim for the same reason: Plaintiff failed to show competitive injury, also required to make a claim under that statute.

Judge Teilborg also found that ThermoLife could not show that its sales of products dropped as a result of defendant’s use of allegedly illegal supplements: "Plaintiff has made no attempt to connect the drop in sales it alleges with [d]efendant's sale of allegedly illegal products that are advertised as dietary supplements. None of [p]laintiff's well-pled factual allegations nudges its claim into the realm of plausibility," wrote the court.

As to the unfair competition claim, Judge Teilborg found that the failure of the false advertising claim also precluded the unfair competition claim since the two claims are "substantially congruent."

Judge Teilborg noted that the court had given ThermoLife an opportunity to amend its initial complaint in order to properly allege the claims, but that the company's amended complaint failed to do so. He declined to give plaintiff further opportunity to amend given the lack of competition between the companies and plaintiff's ample unmet opportunities to plead facts that properly allege false advertising.

The court granted defendant's request to assess ThermoLife with attorneys' fees because of what he called plaintiff's "frivolous and harassing" claims, saying ThermoLife’s failure to "raise debatable issues of law and fact" rendered the claims frivolous.

"It is objectively unreasonable that the facts Plaintiff pled would lead it to believe it had a reasonable basis to believe it could attain success on the merits," said the court.

Key Takeaways 

The court's decision to dismiss the case and award attorneys' fees echoes another recent matter involving ThermoLife, in which the company was assessed substantial attorneys' fees in a patent infringement suit. Defendant in that case also argued that ThermoLife lacked a reasonable basis to allege infringement.