Consumer Advertising Law Blog

Apple’s False Advertising Claim Fails for Lack of a False Statement

On January 2, 2013, the US District Court for the Northern District of California granted partial summary judgment in favor of Amazon on a false advertising claim brought by Apple, which argued that Amazon’s use of the word “Appstore” falsely implies an association with Apple’s App Store. 

In the lawsuit, Apple claims that Amazon’s use of “Appstore” as the name of its online store, where consumers can purchase applications for use on Android and Kindle devices, infringes and dilutes Apple’s alleged trademark rights in “APP STORE.” Amazon argues that “app store” is generic in the same way that phrases such as “camera store” or “grocery store” are generic. Amazon also contends that there is no likelihood of confusion because consumers understand that in order to purchase apps for their Apple devices, they must go to Apple’s App Store. While Apple owns trademark registrations for APP STORE in several countries internationally, Microsoft challenged Apple’s application to register the mark in the United States. That dispute is the subject of a proceeding before the Trademark Trial and Appeal Board and has been stayed pending the outcome of the litigation between Apple and Amazon.

In addition to its trademark claims, Apple claimed that Amazon’s use of “Appstore” reached beyond simply trademark infringement and dilution; Apple contended that the use of the term “Appstore” constituted false advertising.

In granting summary judgment on the false advertising claim, the court focused on “whether Amazon made a false statement of fact in a commercial advertisement about its own or another’s product.” Apple did not argue that Amazon had made an affirmative false statement about “the nature, characteristics, or quality” of Amazon’s Appstore. Instead Apple contended that Amazon’s use of the word “Appstore” falsely implied an association with Apple and deceived consumers by making them think that Amazon’s Appstore would share the same characteristics as, and offer as many applications as, Apple’s App Store.The court explained in its opinion that while an express or explicit statement of fact is not required to state a claim for false advertising, “if an advertisement is not false on its face… the plaintiff must produce evidence, usually in the form of market research or consumer surveys, showing exactly what message was conveyed that was sufficient to constitute false advertising.”  The  court found that Apple had offered no evidence that consumers had an expectation that the Amazon Appstore would have specific qualities or characteristics of the Apple APP STORE, “particularly given that Apple APP STORE sells apps solely for Apple devices, while the Amazon Appstore sells apps solely for Android and Kindle devices.”

Apple’s other claims for trademark infringement, false designation or origin, false description, dilution, and unfair competition remain to be decided in the case.

- Amie Medley

A Masterpiece . . . If I Do Say So Myself

Imagine that you’re an avid reader and look to the many book reviews posted on the Internet in selecting your next novel.  Can you trust those reviews?  Not always, because the reviewer may, in fact, be the author trumpeting his or her own horn.

In fact, this is exactly what happened recently when an award winning British writer R.J. Ellory posted glowing but fake reviews of his own work on amazon.com.  Not only did he praise his own work, but he made up negative reviews of other authors’ works. 

Ellory, writer of such well known works as A Simple Act of Violence and Winner of the “Crime Novel of the Year”, has written gushing reviews of his works under pseudonyms such as “Jelly Bean” and “Nicodemus Jones”, lauding his “magnificent genius”.  Ellory was first exposed on Twitter by an author living in Sweden, Jeremy Duns.  Other popular writers, including the well-known author of gothic novels, Anne Rice, have also roundly criticized Ellory for his practices.  And authors have claimed that his fake reviews have damaged the publishing industry.  He has now admitted on Facebook to writing fictional reviews for a decade:  “Over the last 10 years I have posted approximately 12 reviews of my own books….”

And he’s not the only one.  For example, American John Locke, the American bestselling author, has been accused of the same.  Bing Liu, a data mining expert at the University of Chicago, estimates that approximately one-third of all consumer reviews on the Internet are fabricated.  Moreover, there are variations on the theme of made-up reviews.  The New York Times recently revealed that a Mr. Todd Rutherford wrote glowing book reviews and charged for them.  Mr. Rutherford started GettingBookReviews.com, on which he eliminated the middlemen reviews and, for the right price, would create and post numerous favorable reviews for his well-heeled clients.  For example, he charged $499 for 20 online reviews; 50 online reviews would set an author back $999.  Mr. Rutherford’s business collapsed, however, after a public complaint from a would-be customer and a Google suspension of his advertising account.  He is now reputedly selling RV’s in Oklahoma City but is planning a comeback.

Is this illegal?  A deceptive practice?  False advertising?  They could be actionable under the FTC Act as violating the Endorsement Guides, which require endorsers to disclose any connection with advertisers that might affect the weight or credibility of the endorsements (i.e., that the reviewer is actually the author), or as a misrepresentation of the source of the review.  Recently, the FTC has been actively cracking down on fake endorsements and fake news sites touting product benefits.  In addition, the federal law governing false advertising, the Lanham Act, prohibits false or misleading representation, in commercial advertising, that is material to a purchasing decision and damaging to the plaintiff.  

Can we say that about Mr. Ellory’s enthusiastic reviews of his own works, if they prompt his sales to skyrocket and take away from others’ sales?  Hard to know.  If Mr. Ellory’s novels really are masterpieces, he would argue, there is no misrepresentation.  On the other hand, readers of the reviews are duped into believing that they are receiving independent opinions.

So, next time you see on unbroken string of ecstatic reviews online, take a “page” out of my advice instead:  ask someone you know for a candid assessment before picking up the book.  What a “novel” idea.

- Roberta Horton and Matthew Shultz

Expedited Appeal in Lanham Act Cat Litter Case Will Address Sensory Perception Testing and Key Ingredient Testing

On January 17, 2012, the Second Circuit granted Clorox’s motion for expedited appeal in the cat litter case (Church & Dwight Co., Inc. v. The Clorox Company), which centers on sensory perception testing and key ingredient testing (along with other issues, including necessary implication and presumption of irreparable harm).  Earlier this month, Judge Jed Rakoff of the Southern District of New York preliminarily enjoined Clorox from airing a commercial claiming that carbon used in its Fresh Step cat litter was more effective at absorbing odors than the baking soda (which happens to be the active ingredient in Church & Dwight’s cat litter, although C&D products are not mentioned in the ad).  The court found that Clorox’s sensory perception test that was cited in the ad, using human “sniffers”, was not sufficiently reliable to permit (a) the explicit claim that the key ingredient (carbon) is superior to baking soda in controlling odor; and (b) the necessarily-implied claim that the overall cat litter product is superior at odor control based on the test.  The decision has some vulnerabilities on important issues. 

The Parties & Products.  The case concerned Clorox’s “Fresh Step” cat litter and Church & Dwight’s Arm & Hammer cat litter products, Double Duty and Super Scoop.  The Clorox product uses carbon as the odor fighting ingredient whereas Church & Dwight’s products use baking soda.

The Commercial.  The Clorox commercial features two laboratory beakers (one represented as “Fresh Step” which is filled with a black substance labeled “carbon”; and the other unidentified by brand, but filled with a white substance labeled as “baking soda”).  Green gas then fills the beakers, and rapidly evaporates in the carbon beaker but barely changes in the baking soda beaker.  Small text appears during this display that says “dramatization” and “based on a sensory lab test.”

The Claim.  A voiceover in the commercial states:  “we make Fresh Step scoopable litter with carbon, which is more effective in absorbing odors than baking soda.”  The express claim is limited to carbon and baking soda, not the cat litter products.

The Sensory Test.  The sensory lab test relied upon by Clorox involved separate sealed jars of cat urine and of cat feces, which were kept: (a) uncovered; (b) covered with carbon; or (c) covered with baking soda.  Each jar was permitted to mellow for 24 hours, and was then placed in a “booth” that replicated a small room (where cat boxes are normally kept).  The smell of the booth was later evaluated by eleven human panelists trained by Clorox.  The panelists would open a portal to the booth, which was approximately 6 feet away from the stimulus.  The results reflected that carbon was 32% superior to baking soda in reducing odor.

Government Contractor Defeats Lanham Act False Advertising Claim

On October 27, 2011, a federal court in Virginia dismissed a Lanham Act claim seeking to hold a government contractor liable for statements contained in an environmental assessment report. US Demil v. ARA Group. Arnold & Porter LLP represented the Defendant.

Background:  Lanham Act applies to GoCo statements. The scope of “advertising” under the Lanham Act is broad and applies to non-traditional promotional statements such as those in emails and slide decks provided to government or business purchasers. In the government contracting sector, courts already have held that bid proposals even to government agencies can constitute Lanham Act false advertising. 

Plaintiff’s case. The plaintiff attempted to expand the reach of the Lanham Act to cover technical data, included in an environmental assessment report, prepared after the contractor was already working for the agency. The information in question was allegedly provided to the U.S. Army regarding a project to demilitarize munitions, and was provided pursuant environmental regulations. 

The court’s analysis. The court cited three reasons supporting the dismissal:  

1. Context. The court observed that “it is not just what is said but the context in which it is said, and given this context, I don't see how the Lanham Act can go forward as a matter of law.”  Here, the “purpose” of the statements was to provide data for an environmental assessment, which is distinguishable from a bid proposal, where the purpose is promotion / to induce a sale. 
2. Customer sophistication. The court considered the sophistication of the Army personnel requesting the data and the highly technical nature of the data. The court noted that the audience here was “not just your ordinary GSA person, but these are highly technical people, so you have also an audience much less likely to be duped.”
3. Policy considerations. The court commented on the need to limit the scope of the Lanham Act in the government contracting sector to prevent cases from being filed based on every communication sent to every government agency. The court sought to avoid a decision that would “open the floodgates,” noting that “the vigor with which competitors fight with each other in government contracting is well known.”

Significance. Although the defendant was able to dismiss the Lanham Act claim on the facts of the case, the case confirms that Lanham Act false advertising is a potential tool to police unfair competition in the government contracting sector. Before bringing a claim, however, plaintiffs should make sure that the Complaint contains detailed allegations to prove that the primary purpose of the communication is for promotion in a competitive context (and not for some other purpose such as to provide technical data for inclusion in an environmental assessment), and that the statements have the potential to mislead the target audience. 

- Randy Miller

NOTICE: ADVERTISING MATERIAL. Results depend upon a variety of factors unique to each matter. Prior results do not guarantee or predict a similar result in any future matter undertaken by the lawyer.  

Attend a Mock Lanham Act Argument Focusing on the “Havana Club” Case

The recent Havana Club case is potentially a huge development in Lanham Act false advertising law, and it is the subject of an ABA Antitrust-Private Advertising Committee teleseminar, tomorrow (October 11) at 12:30 eastern. 

It’s hornbook law that a literally truthful advertising claim can be enjoined because it conveys a false implied claim as measured by a survey.  Previously, the only real exception to this rule was the 7th Circuit’s Mead Johnson case regarding the claim “1st Choice in Doctors,” which Judge Easterbrook said could not be attacked with a survey because the claim was “objectively verifiable.” 

Mead Johnson has not really been followed, and previously was thought to be an issue unique to the Seventh Circuit. That is, until Havana Club.  There, the Third Circuit joined the Seventh Circuit and adopted the Mead Johnson rule that a literally truthful and unambiguous claim is not subject to attack by a survey. The court said that plaintiff could not introduce a survey to show that “Havana Club” conveyed a false implied message that the rum was made in Cuba -- because the bottle disclosed that it was actually from Puerto Rico. 

Thus, when a court decides that an implied falsehood theory is too tenuous, it can exclude and not even consider a survey (regardless of how well the survey is designed).

The implications remain to be seen.

Dial in for the free ABA teleseminar where Lanham Act litigators will debate a mock hypothetical that features the Havana Club issue. 

- Randy Miller

Advertising Offer to Beat “Anyone’s Price by 15% or It’s Free” Survives False Advertising Attack

A federal court in Massachusetts recently affirmed a jury verdict in favor of an advertiser who proclaimed it could beat the competition’s price by 15% (“or it’s free”) because of inadequate proof at trial. 

The case involved competing carpet and flooring companies:  National Floors Direct and Empire Today.  NFD advertised, including in television commercials, that it would beat any competitor’s price by 15% or would give its products away for free. Empire alleged that NFD was not providing the discount that it advertised and brought claims for false advertising under Massachusetts state law (Chapter 93(a)), which is governed under the identical standard as Lanham Act false advertising cases.  Empire sought approximately $5 million in damages.

At trial, Empire introduced evidence that NFD’s sales representatives complied with the advertising offer by “dividing the competitor’s price by 1.15.”  This method proved that the advertised offer was not being honored – dividing the competitor’s price by 1.15 “results in only 13% off the competitor’s price, whereas multiplying by 0.85 would result in a 15% price reduction.”  Notwithstanding this smoking gun, the district court concluded that this was simply an innocent “miscalculation” or was evidence of “an internal disagreement at NFD over a mathematical calculation.”  The court concluded that this type of “negligence” does not support a claim of false advertising.  (This part of the ruling is interesting given that “intent” to deceive is not a required element of a Lanham Act false advertising claim).

The court also was skeptical of Empire’s damages claim. Although Empire was able to show a diminishment in sales, the district court concluded that there were “a bounty of reasons” for plaintiff’s suffering sales, including “management issues.” Even though Empire was able to show that an increase in NFD’s sales corresponded to a decrease in Empire sales, the district court concluded that this evidence “only proves a correlation, not a causation.” 

This case underscores the difficulty of prevailing in a false advertising case in the setting of a trial to obtain money damages. Although the facts of this case could have supported injunctive relief, it fell short of the kind of proof necessary to collect damages. Practitioners should manage their clients’ expectations to let them know that even a technical showing of false advertising will not guarantee a money damages award. In cases like this, where the evidence appears to be anecdotal, a strategy intended for injunctive relief may be more appropriate. 

- Deborah Birnbaum and Randy Miller

Is it “Advertising”? The Threshold Issue in Lanham Act False Advertising Cases

A recent Florida federal case illustrates that Lanham Act false advertising defendants can win summary judgment on the threshold question of whether a communication to a customer qualifies as “commercial advertising” under the Lanham Act.

In Suntree Technologies, Inc. v. Ecosense Intern., Inc., the parties sold competing “baffle boxes,” which are “stormwater treatment structures that remove organic debris, trash, oil and other pollutants from stormwater before the stormwater reaches lakes, rivers and streams.” The baffle boxes are sold to cities and counties through a government contracting process.

The plaintiff challenged defendant’s product brochure and maintenance presentation provided to government purchasers as “false advertising,” including because the materials contained pictures of the plaintiff’s product and falsely suggested that the defendant’s product had the same features and performance as the plaintiff’s product.

The case law was on the plaintiff’s side in the sense that, although the Lanham Act is limited to “commercial advertising or promotion,” this definition is extremely broad and applies to: (1) non-traditional advertising such as emails, slide presentations and brochures; and (2) to communications made solely to business and government purchasers (which the general public never sees). Thus, the Lanham Act is not limited to advertising in the classic sense. Even a single letter or slide presentation to a business or government purchaser -- as long as it touts a product or service -- can be actionable under the Lanham Act as false “advertising.”

A key requirement, however, is that the plaintiff prove the statement was made to influence customers to buy defendant’s goods or services. In Suntree, the court found at least two reasons that the product brochure at issue was not “advertising”:

1. “the purpose of the maintenance presentation was not to influence consumers to purchase EcoSense's product but rather to provide training to those who had already done so”; and
2. plaintiff “failed to present any evidence relating to the brochure's dissemination, and, due to the sophistication of the consumers, it is unlikely that a simple product brochure could influence them to purchase EcoSense's baffle boxes.”

The court also rejected Plaintiff’s related trademark claims holding that the Plaintiff failed to prove likelihood of confusion.

Although the Lanham Act’s definition of “commercial advertising and promotion” is broad, litigants should not take this threshold issue for granted. As indicated by the Suntree case, to survive summary judgment, a plaintiff will have to affirmatively prove that the nature, purpose and use of the challenged statement qualifies it as “advertising” under the Lanham Act -- defendants should hold them to this burden.

- Randy Miller

Feuding Over Family Tradition--TRO Denied in Lanham Act Hot Dog Case

A Chicago federal court denied a TRO in a Lanham Act case between rival hot dog companies -- operated by different members of the same famous hot dog family.  The court balanced the right to truthfully associate oneself with “family tradition” against the harm from trading on a competitor’s reputation.   The Plaintiff is Chicago’s famous Vienna Beef (which controls 75% of the market); the defendant is Red Hot Chicago, Inc., run by the grandson of Vienna Beef’s founder.  At issue was the grandson’s attempt to use advertising statements about his family’s “118-year tradition” of hot dogs and sausages in Chicago.  The court denied the TRO on two main grounds:  (1) acquiescence (most of the challenged advertising had been running for years); and (2) the absence of extrinsic evidence to demonstrate consumer confusion. Background. Vienna Beef was founded after the Ladany family sold sausages at the 1893 Columbian exposition in Chicago.  Grandson Scott Ladany worked for Vienna Beef for 12 years, left the company, waited out his 2.5 year non-compete, and then formed rival Red Hot Chicago.  Ladany recently began to advertise Red Hot Chicago with statements about “our family,” including the “family recipe,” and the “118 years” that the family has been in the business. 

Vienna Beef’s Implied Falsehood Claim.  In its brief, Vienna argued both literal and implied falsity, but the claim appeared to rest more on the latter:  “Each separate statement” is “crafted to work in conjunction” with the others, to “convey” (i.e., “imply”) a “single, false conclusion” -- that the grandson, by virtue of his status “as a member of the Lanady family … is carrying on the Vienna tradition.”  As Vienna Beef’s CEO stated, “We’re concerned that he is attempting to mislead people into thinking that he is part of our organization or we’re a big happy family.”

TRO Denied.  The TRO was denied based chiefly on delay -- defendant was able to show that almost all of the challenged phrases were in use for years, which, at a minimum, undermines the urgency necessary for a TRO.  In addition, the court found that the advertising statements were “literally true” and that Vienna’s real argument -- that the ads “conveyed a false impression” -- was a nonstarter because the plaintiff failed to present evidence of consumer confusion.  The court also disapproved of plaintiff’s related trademark claims, such as use of the phrases like “make me one with everything,” and “drag it through the garden,” holding that such phrases were used “descriptively” to describe a hot dog with all of the toppings.

Significance for practitioners.  Practitioners should recommend against bringing emergency TRO motions for promotional statements in use for a long period of time.  Courts don’t like this.  The result might have been different with a slower-paced and fully-developed preliminary injunction hearing.  In addition, plaintiffs should present extrinsic evidence of actual consumer confusion or deception before arguing that a claim, although literally true, creates a false impression.  The plaintiff here committed both errors with the result being that this “family beef” was decided in favor of Red Hot Chicago.

- Randy Miller & Quin Landon

Things Are Heating Up in the Sunscreen Legal World

The Consumer Advertising Law Blog wishes all of our US readers a happy Independence Day. As you look forward to a long weekend with family grilling, at parades or waiting for fireworks, we also wanted to remind you not to forget your high SPF sunscreen. And for those reading our blog this weekend using our mobile app, things are heating up in the sunscreen legal world and we wanted to share some timely developments.

Earlier this month, the FDA announced new regulations, which will take effect in 2012, governing how sunscreen manufacturers label and advertise their products to consumers. Janet Woodcock, from the FDA’s CDER, described the benefits for consumers, “These changes will help people make better-informed decisions about how to use sunscreens and allow them to more effectively protect themselves and their families.” Some of the key changes in the new regulations include:

• A standard test for over-the-counter sunscreen to determine whether products can be labeled as “Broad Spectrum,” a label indicating that the product protects against both ultraviolet A (UVA) and ultraviolet B (UVB) rays
• A proposed regulation that would limit the maximum label on sunscreen products to SPF 50+, because the FDA lacks data demonstrating that products with values higher than 50 provide any additional protection
• A regulation prohibiting manufacturers from labeling their products as “waterproof” or “sweatproof” or “sunblock”
• Water resistance claims on the product’s front label must inform consumers how much time they can expect to get the declared SPF level of protection, with permissible durations of 40 or 80 minutes

The FDA is also issuing draft guidance to help sunscreen manufacturers understand the final and proposed regulations and to assist them in properly labeling and testing their products.

In related news, a Delaware federal district court declined to enter a permanent injunction in a Lanham Act false advertising case involving two sunscreen manufacturers. Schering-Plough, the plaintiff, and manufacturer of Coppertone sunscreen, brought claims for false advertising against Neutrogena. Schering-Plough alleged that Neutrogena’s print advertising and packaging for its Ultra Sheer Dry-Touch Sunblock SPF 100+ product falsely claimed that the product contained helioplex, a photo-stabilizing agent. In May, the district court granted partial summary judgment for Schering-Plough, on the basis that lots of defendant’s product shipped in 2009 and 2010 did not contain DEHN, a component of helioplex. Thus, the claim “with helioplex” misrepresented the qualities of the sunscreen and therefore was literally false.

Watching the Clock: Limitations Periods For Lanham Act Claims

A recent decision from the Eastern District of Pennsylvania demonstrates one of many bases courts have used to limit the time period in which a company can bring a false advertising claim under the Lanham Act: time limits imposed by contract. Although the Lanham Act does not have its own statute of limitations, courts have used limitations periods contained in “related” contracts between the parties, limitations periods in “analogous” state statutes, and the doctrine of laches to support a ruling that a claim is time barred. Awareness of these factors can help avoid a valid Lanham Act claim from being dismissed.

Dismissal of Aetna’s Lanham Act claim as time barred. In the recent decision Aetna Inc. v. Laboratory Corporation of America Holdings, the District Court applied the one-year statute of limitations contained in the contract between the parties to find the Lanham Act claim time-barred. In the lead count of the complaint, Aetna asserted that LabCorp made “false and misleading statements” in violation of the Lanham Act, and argued that the false statements were part of an “ongoing and continuous” campaign causing “competitive harm,” including harm to “Aetna’s reputation and competitive business model.” In other words, Aetna made traditional allegations of a violation of the Lanham Act (and the obligations to comply with the Lanham Act arise independent of any contract between the parties). Notwithstanding these allegations, however, the court found that the alleged false statements had a logical nexus to the termination of the parties’ prior contract, mandating the application of the contractual limitation period. The contract broadly provided that “no action, regardless of form, arising out of or related to this Agreement may be brought by either party more than twelve (12) months after such cause of action has arisen.”

Other Lanham Act decisions incorporating time limitations. Other courts considering the timeliness of a Lanham Act claim have used the analogous state limitations period. But state statutes of limitations alone do not provide the solution. Even if an action is brought within the analogous state limitations period, courts have suggested that a laches defense may still bar a remedy. Laches is an equitable defense that limits a party’s ability to bring a suit when they have “slept on their rights,” and their delay in bringing the suit was unreasonable and unduly prejudiced the defendant. In PBM Products v. Mead Johnson & Co., the Fourth Circuit upheld the District Court’s application of the doctrine of laches to claims inside the statute of limitations. Similarly, in Hot Wax, Inc. v. Turtle Wax, Inc., the Seventh Circuit reasoned that without laches to bar a claim, even within the statute of limitations, a party “could, theoretically, delay filing the suit indefinitely.”

The Second Circuit, Third Circuit, and Ninth Circuit have found that when a claim is brought outside the applicable state statute of limitations, there is a presumption that laches applies, and the burden is on the plaintiff to prove it does not. For a claim brought within the statute of limitations, there is a presumption against laches that a defendant raising the laches defense must overcome. The issue also was litigated in the well-known Splenda case, where a lengthy delay did not prevent the Lanham Act claim from reaching the jury notwithstanding the laches defense.

In addition, even a brief delay (of weeks or months) between the discovery of alleged wrongdoing and filing of a case may bar a preliminary injunction. Although delay may not rise to the level of laches and thereby bar permanent injunctive relief or damages claim, it may still indicate an absence of the kind of urgency required to support a preliminary injunction. For example, the Second Circuit has consistently held that waiting 8-10 weeks undercuts the sense of urgency that ordinarily accompanies a motion for a preliminary injunction.

Conclusion. The bottom line is that plaintiffs asserting Lanham Act false advertising claims should move fast or risk an argument that certain remedies -- or the entire case itself -- is time barred notwithstanding the absence of any limitations period in the Lanham Act. And defendants facing a Lanham Act challenge should consider whether to assert the action is too little too late or time barred, recognizing that there are more creative arguments than simply a statutory maximum on which to rely.

- Randy Miller and Ellen Mossman

Spell out the Details: Trend Continues Toward Heightened Pleading Requirement For Lanham Act False Advertising Cases

Another recent case underscores a trend requiring Lanham Act plaintiffs to plead false advertising claims with increasing particularity.

In Process Controls Intl, Inc. d/b/a Automation Svc. v. Emerson Process Mgmt., the Eastern District of Missouri denied a motion to amend a complaint alleging Lanham Act false advertising based on a “smear campaign” because the complaint lacked sufficient factual allegations to show that the alleged false statements ever reached the audience at issue or influenced its decision making.

In its proposed amended complaint, Automation alleged that Emerson disseminated disparaging statements about Automation into the “general market” that caused a third party organization (an insurer of industrial companies that use Emerson’s products) to deny a “certification” to Automation’s products. The court denied the amendment as “futile” because the amendment lacked factual allegations that would suggest:

• That the third-party certification company actually received the “advertising”;
• How third party’s certification decisions were made; and
• Whether (and how) the alleged false statements influenced the certification decisions.

At first glance, this result may seem unusual given that the parties only were at the pleading stage with no burden to “prove” anything, and also given the “liberal” standard for amending a complaint (where leave to amend must be “freely given”). However, Lanham Act false advertising decisions increasingly have applied heightened pleading requirements. First, all complaints face higher pleading standards in the post-Twombly/Iqbal era, and this standard is applicable under to the “futility” defense to a Rule 15 motion to amend. Second, many courts regard false advertising cases as tantamount to “fraud” cases, requiring “particularity” pleading under Rule 9. In the face of these trends, false advertising complainants frequently must spell out, with very detailed pleading allegations, the “who, what, where, when, why, and how” related to their claim.

In this case, there was another problem: the certification organization was not a customer or potential customer of Automation. Thus, the promotional statements at issue -- sent into the “general market” -- were not alleged to influence purchasing decisions, but rather alleged to influence a “certification” decision by an entity who does not consume the product. These circumstances took the case out of the traditional Lanham Act rubric.

In any event, practitioners should take note and endeavor to draft Lanham Act pleadings (and amendments to pleadings) to contain as much factual detail as possible, particularly when stretching a claim into novel territories.

- Randall Miller and Sava Berhane

Subjective Superiority Claims Not Sharp Enough to Survive Motion to Dismiss

Anyone that has visited a local drug store recently knows the complexities involved in selecting a man’s razor. Schick or Gillette? Three blades or four? MACH3 Turbo or Fusion Power? (We will save the complexities in selecting women’s hair removal products for another day.) The abundance of choices also create a multitude of price points, as manufacturers charge a premium for razors that employ the most sophisticated shaving technologies. A recently filed lawsuit shows that one consumer didn’t seem to be buying these price-quality distinctions, alleging deception when a company touted the benefits of one blade over another, but a California judge concluded his allegations were not razor sharp enough to survive the heightened pleading standard of Twombly and Iqbal.

Ryan Edmundson is the named plaintiff in a proposed class action filed against Gillette in federal district court in California alleging claims under the California’s UCL and CLRA and of express warranty. Mr. Edmundson claims that since introducing its Fusion product line in 2006, Gillette has engaged in deceptive advertising by suggesting that its Fusion Power razor cartridges are materially different from, and superior to, its Fusion manual cartridges. In other words, this was a case not where the superiority claims related to a claim that one product is superior to a competitor’s product, but where a manufacturer was claiming that one product in its product line was superior to another product in the line. The plaintiff also alleged that Gillette misrepresented that its Fusion Power razor handles are only compatible with its Fusion Power razor cartridges. He alleged that Gillette’s advertising induced consumers to purchase Fusion Power cartridges, which sell at a 20% premium over the Fusion manual counterparts.

Last week, U.S. District Judge Irma E. Gonzalez granted Gillette’s motion to dismiss all of the claims in the lawsuit. The Order granted Mr. Edmundson leave to file an amended complaint within twenty days. Two aspects of Judge Gonzalez’s Order are particularly interesting.

No State Consumer Protection Act Claim in Competitor False Advertising Case

The Lanham Act is not a “consumer protection act,” and courts have recognized that the Lanham Act false advertising cases vindicate “competitive” injuries virtually without regard to “consumer” interests. A recent decision confirms a related principle: Lanham Act plaintiffs may not automatically tack on state consumer protection claims to their competitor cases.

In a decision on May 26, 2011 involving competing tax services, Jackson Hewitt v. H&R Block, the Southern District of New York dismissed a New Jersey consumer protection act (CPA) claim from a lawsuit alleging competitive misconduct. In its complaint, Plaintiff Jackson Hewitt alleged that H&R Block, plaintiff’s “direct competitor” in the tax preparation business, disparaged Jackson Hewitt by suggesting that 2 out of 3 tax returns prepared by Jackson Hewitt contained errors (see H&R Block's Second Look Review program here). The court noted that Jackson Hewitt’s case alleged “unfair practices that have disadvantaged Jackson Hewitt in the marketplace.” Significantly, however, the court found that “[n]owhere does Jackson Hewitt allege a harm associated with consuming H&R Block's services”. While the allegations stated a claim under the Lanham Act, the court dismissed the New Jersey CPA claim because that statute remedies “consumer fraud,” not competitive injuries.

This is the outcome, even though the advertising at issue actually was directed to consumers, and, if the advertising is false, consumers could bring a separate lawsuit for the same conduct. But not in this lawsuit. The court concluded that “Jackson Hewitt has brought this lawsuit as a competitor of H&R Block, not a consumer of its services, and therefore cannot avail itself of the [consumer protection] Act.” This will not be the result in all competitor cases because some state CPA statutes also reach competition injuries.

- Randy Miller

Prior Bad Acts Are Admissible in Lanham Act False Advertising “Wars”

A recent Fourth Circuit decision establishes that when competitors have locked horns in prior false advertising cases, the substance of the old battle can come spilling into evidence in the new case.

False Brain and Eye Development Claim

On April 20, the Fourth Circuit affirmed a $13.5 million jury verdict and permanent injunction involving infant formula. In the underlying case, the district court found that Mead Johnson’s direct-to-consumer “mailer” falsely claimed that Mead’s brand name product, Enfamil, had superior nutritional benefits over PBM Products, which makes a less expensive “generic” store-brand infant formula (sold to Walmart, Target, Kroger and other major retailers). Mead’s mailer claimed that “only Enfamil LIPIL is clinically proven to improve brain and eye development” and that “there are plenty of other ways to save on baby expenses without cutting back on nutrition.” Contrary to these claims, the parties’ infant formulas were shown to have equivalent active ingredients and nutritional benefits. PBM successfully positioned the case as a fear mongering campaign about infant health. PBM won a jury verdict and permanent injunction, and defeated Mead’s counterclaim.

Rulings on Appeal

Affirming this result in toto, the appeals court addressed a laundry list of issues, including:

• Injunction scope applies broadly to the ad “claim”. The court held that the permanent injunction was not limited to Mead’s mailer itself but properly prohibited the substantive claim, in any form, whether made expressly or by implication (courts enjoin claims, not just particular ads).
• Voluntary cessation does not avoid injunction. The court affirmed entry of the permanent injunction notwithstanding Mead’s claim that it had discontinued the mailer, and did not intend to resurrect it in the future (Mead’s voluntary cessation could not un-ring the bell or undo the Lanham Act violation).
• Rejection of the counterclaim. The court affirmed the dismissal of Mead’s counterclaim based on (a) Virginia’s two-year statute of limitation, which was used to establish that Mead had committed laches (unreasonable delay in bringing suit) on the Lanham Act claim; (b) Mead’s failure to prove implied falsity due to survey flaws; and (c) Mead’s failure to prove causation and damages.
• “Lies” statement is safe. The court affirmed the rejection of a defamation counterclaim based on PBM’s press release stating: “Mead Johnson Lies About Baby Formula . . . Again”. The court held that the statement was “substantially true” because the word “lies” can refer to false advertising, even if that advertising is not “intentionally” false.

Ruling on Prior “Bad Acts”

In an interesting ruling, the appeals court affirmed the admission of evidence from prior lawsuits between the parties. Having lost injunction motions in two older cases (from 2000 and 2001) prior to settlements in those cases, Mead argued that the prior litigation was not probative to the current dispute, and its admission allowed PBM to unfairly portray Mead as a “serial lawbreaker” (i.e., arguably improper bad character or propensity evidence). The Fourth Circuit disagreed and held that the prior lawsuits could come in to show Mead’s “intent.” Intent is not a required element of a Lanham Act case, but it can be used by a plaintiff to establish implied falsehoods in lieu of doing a survey or in the event that a survey is disbelieved. But this kind of intent ordinarily is shown by facts in the current case, not based on prior lawsuits and settlements (although dicta in the Fourth Circuit’s Scotts v. United Industries case suggested this could be accomplished by showing “defendant’s history of false advertising”).

The ruling seems to track FRE 404(b), which provides that evidence of a defendant's prior bad acts is not admissible to show the character of a defendant or his propensity to commit the charged offense, but such evidence may be admissible for “other purposes”, such as knowledge, intent, or absence of mistake. The appeals court did not discuss or even cite Rule 404(b), but focused instead on FRE 401 (relevance) and FRE 403 (exclusion of evidence that is more prejudicial than probative). The issue did not get the marquis position in the briefs, but it appeared to be quite material, not only to the jury but also to the appeals court panel. For example, in addressing the “balance of the hardships” issue regarding injunctive relief, the court commented, “As the litigation history of the parties demonstrates, despite having twice been restrained from disseminating misleading advertising, Mead Johnson continued to do so. PBM cannot fairly compete with Mead Johnson unless and until Mead Johnson stops infecting the marketplace with misleading advertising.” In closing argument, PBM’s counsel invited the jury to use the prior cases in forming an opinion about Mead as a company, saying among other things: “this mailer, as you heard, is not the first time that Mead Johnson has engaged in false advertising ….I'm going to ask you to just remember the testimony here in evaluating what Mead Johnson was all about.”

Significance of “Bad Acts” Ruling

Practitioners should take heed. Once Lanham Act false advertising litigation erupts between two competitors, there is a reasonable chance that the same competitors will jump back into the ring again. The Lanham Act landscape is littered with false advertising “wars” -- that is, multiple serial lawsuits and/or NAD cases involving the same companies with similar claims. Practitioners are familiar not only with the infant formula wars, but also others involving vacuum cleaners, motor oil, razor blades, antihistamines, and pain relievers. Knowing that there is now Circuit level authority blessing admission of evidence about the prior fights in Lanham Act cases, practitioners who have suffered any lost motions should consider adding a provision to their settlement agreements that precludes use of the lawsuit in any future case.

- Randy Miller

Surveys are not the Only Way to Prove Implied Claims in Lanham Act False Advertising Cases

A Manhattan federal court confirmed that surveys are not the only method of proving implied falsehoods in Lanham Act false advertising cases.  Deposition testimony will suffice, particularly for promotional statements made to a small group of “business customers” where a survey would not be possible. 
The court denied defendants’ motion for summary judgment on the basis that plaintiff’s implied claim was supported by depositions of five distributors of the nutritional products at issue, which was enough to create a jury issue.

In Merck Eprova AG v. Gnosis SPA, the parties sold raw ingredients to manufacturers and distributors of nutritional supplements.  The parties promote their products directly to those distributors, including at trade shows, through brochures and power point presentations, and verbally during in-person visits to potential clients.  Plaintiff alleged that Defendant misrepresented the isomer content of its nutritional ingredient, including by implication, using an improper chemical designation and suggesting that the ingredient contained a “pure” isomer (when in fact it contained an isomer “mixture” of inferior purity and efficacy).

In Lanham Act false advertising cases, it is well-established that a claimant must adduce “extrinsic evidence” of consumer deception in order to prove an implicitly false message.  Merck argued that five depositions of distributors was probative of the implied claim -- and in some ways preferable to a survey because it was direct evidence, under oath, showing “actual” deception.  Gnosis responded that no reported Lanham Act case excuses a plaintiff from doing a survey when prosecuting an implied claim, and that the “hand-picked” depositions were not representative of Defendants’ actual customers (12 of them) or the target audience of approximately 200 “potential” purchasers.  The court recognized that “surveys are certainly the regular method” of demonstrating implied claims.  But surveys are not the only method and not required when the promotional statements are made to distributors. 

The court held that “a plaintiff is required only to introduce evidence showing how the statements are perceived by those who are exposed to them” but added that “the court sees no reason why this cannot be done in the form of depositions in a case like this where the number of potential direct consumers is arguably fairly small.”  The court held that the deposition testimony “has probative value as evidence that some of those consumers were confused.” 

This decision illustrates that when promotional statements are made to an intermediary (such as a retailer or distributor) or to a small group of business customers, as opposed to a consumer product marketed to the general public, conducting a survey may not be a realistic option.  But that fact does not immunize such promotional statements from a competitor challenge under the implied falsehood prong of the Lanham Act.  In such circumstances, a court may allow the challenger to adduce other extrinsic evidence, such as client testimony, to show that the promotional statement conveyed an implied falsehood. 

- Randy Miller

“Tests Prove” Challenge Fails to Stop Competitor’s Diaper Pail Superiority Claim

Denying Playtex’s motion for preliminary injunction, a Los Angeles federal court decision illustrates the limits of attacking your adversary’s product test methodology instead of also presenting your own product testing data in Lanham Act cases.

In Munchkin, Inc. v. Playtex Products LLC, Playtex alleged that competitor Munchkin’s laboratory test did not reliably support its superiority claim regarding odor control for diaper pails. Playtex makes the “Diaper Genie” and Munchkin makes a newer product, “Arm & Hammer Diaper Pail” -- both competing diaper disposal products. Munchkin’s advertising claim of superior odor control cited a “laboratory test,” and Playtex challenged Munchkin’s test methodology.

In Lanham Act false advertising cases, it is well established that a when an advertising claims cites to a test or study, the plaintiff can prevail by proving that the cited test does not reliably support the claim made. The claim is an “establishment claim,” also known as a “tests prove” claim, and Playtex could prevail by proving that Munchkin’s laboratory test is not sufficiently reliable to establish superior odor control. Notably, Playtex did not present its own “counter” test to refute the Munchkin test; Playtex relied solely on attacking Munchkin's methodology

Munchkin’s laboratory used an ammonia soaked diaper and mechanically measured the ammonia emitted from the diaper at five time intervals. Ammonia was used as the “proxy” for diaper odor, and Munchkin argued that the analytical measurement avoided the subjectivity of using “human sniffers” in a sensory perception test. Playtex argued that Munchkin’s test did not “replicate real world conditions,” which is often a requirement for product testing claims. Playtex identified many differences between the test conditions and the real world experience of using diaper pails, such as the difference between actual consumers smelling odor and analytical measurement; the amount of time the unit’s lid was artificially propped open during the test; and the fact that soiled diapers emit many more odors than ammonia. Munchkin responded that its test was objective and powerful, and that its product scored better at capturing the ammonia odor compared to Playtex’s product at each of the five testing intervals, which enhanced the confidence level associated with the superiority claim.

Although Playtex advanced a thorough argument using well-established “tests prove” concepts and precedents, Munchkin’s laboratory test results -- showing head-to-head superior odor control for Munchkin at each of the five testing intervals -- appeared to convince the court that Munchkin’s product in fact had some odor trapping advantage over Playtex’s product. At a minimum, Playtex failed to prove otherwise. Munchkin’s advertising also disclosed that it was a “laboratory test,” not a real world test. The court denied Playtex’s request for a preliminary injunction.

The case shows that it may be risky to attack your opponent’s product test without also doing your own “counter” test. Had Playtex offered its own testing with a different result, such as a sensory perception test using real world conditions, the court would have faced a more difficult choice. But it did not. The case is similar to Lanham Act false advertising cases involving surveys, where one party attacks the survey methodology used by its opponent but fails to offer a competing survey. It is not difficult to poke holes in your opponent’s scientific test; however, the cases often turn on affirmative evidence. Litigants should do more than merely critique and expose methodological weaknesses of their adversary’s test. To be safe, litigants should affirmatively demonstrate the proposition at issue through scientific evidence of their own.

- Randy Miller

Lanham Act False Advertising Injunction Entered on Advertising Sent Only to National Retailers, Not the Ultimate Consumer

Recently, a federal court in Manhattan issued a preliminary injunction to stop advertising messages regarding rodenticides, which were conveyed to large national retailers like The Home Depot, Wal-Mart, Lowe’s, CVS/Pharmacy, Walgreens, Wegmans, Kroger, Safeway, and other national retail chains.

The case, Reckitt Benckiser Inc. v. Motomco Ltd., involved Reckitt Benckiser's d-CON® brand rodenticides. Reckitt alleged that competitor Bell Laboratories, Inc. (conducting business under the name of Motomco Ltd.) made false promotional and disparaging statements. Specifically, Reckitt filed suit alleging that Motomco, seller of TOMCAT® brand rodenticides, made false statements about environmental "regulations" that, in fact, did not exist. The false statements included:

1. The use of "White Papers" that appeared as if they issued by government agencies but were really created by Motomco;
2. Statements that government regulators had enacted a "law or regulation" adversely affecting certain rodenticides; and
3. That retailers could face fines if they purchased d-CON®.

The Court issued a Preliminary Injunction against Motomco, ordering, among other things, Motomco cease:

1. Using its White Papers that created a "misleading impression" that the documents were created by regulators.
2. Stating that regulators issued a "law or regulation" or "anything else having current legal force."
3. Stating that retailers who choose to carry d-CON will face regulatory action "or any words to that effect, without making clear that [Motomco] is only expressing its opinion about possible future actions by regulators."

The Court held that regulators had not taken any legally binding action, that it was unclear what the regulators would do in the future, and, "at the very least, a long process would be required before [regulators] could force" the kind of changes Motomco suggested had already occurred. The Court also partially enjoined Reckitt Benckiser, Inc. from making certain statements, but left its advertising largely intact, rejecting most of Motomco's retaliatory counterclaim. Reckitt Benckiser, Inc. denies making any false statements.

The case illustrates that the Lanham Act reaches a very broad range of commercial advertising, including those sent to retailers, businesses, resellers, or “sophisticated” purchasers, rather than just individual consumers.

The ABA Private Advertising Litigation Committee is hosting a teleseminar on this topic this coming Friday, April 15 at 12:30PM EDT. To register for the free event, click here.

- Randy Miller

Fifth Circuit Requires Lanham Act Plaintiffs to Demonstrate Causation in Order to Have Standing to Sue

In Huggins Realty, Inc. et al. v. FNC, Inc., the Fifth Circuit reversed a Lanham Act dismissal based on lack of prudential standing, but the decision underscores the need for Lanham Act plaintiffs to demonstrate causation and injury from the very beginning of the case, including to establish standing to sue. 

At issue in the case were misleading advertisements made by FNC about its web-based transmittal service called AppraisalPort. Lending institutions use AppraisalPort to order and receive completed real estate appraisals. Appraisers use AppraisalPort to confirm acceptance of an order and to transmit the completed appraisal. In order to receive and confirm orders, appraisers paid fees to AppraisalPort, and, as a result, were customers of FNC. FNC gave appraisers repeated assurances that the data they entered into AppraisalPort would remain confidential and FNC would not use the data for commercial gain. These assurances apparently were false because FNC allegedly used the data from AppraisalPort to build the National Collateral Database, an electronic database service that sells appraisal data about residential real estate properties to lending institutions as an alternative to paying for a new appraisal. The plaintiffs, four appraisers representing a similarly-situated class who used AppraisalPort, claimed that they are direct competitors of the National Collateral Database, and that FNC’s misrepresentations caused them economic injury in the form of lost business and diminished profits.

In granting FNC’s motion to dismiss, the district court held that the plaintiffs lacked prudential standing under the Lanham Act because it believed the plaintiffs’ damages claim was too speculative in that the relationship between FNC’s conduct and the plaintiffs’ alleged injury was too tenuous and too complex in terms of apportioning damages among various appraisers that used AppraisalPort.

On appeal, the Fifth Circuit employed a five-factor test to determine prudential standing: (1) whether the plaintiffs’ alleged injury is the type Congress sought to redress in providing a private remedy for violations of the Lanham Act; (2) the directness or indirectness of the asserted injury; (3) the proximity or remoteness of the plaintiffs to the alleged injurious conduct; (4) the speculativeness of the damages claim; and (5) the risk of duplicative damages or complexity in apportioning damages.

The Court found that 4 of the 5 factors were satisfied. First, the court concluded that the plaintiffs alleged precisely the type of injury the Lanham Act intended to redress: deterioration of their competitive position in the market due to FNC’s false advertising. The plaintiffs claimed that they lost business as the result of FNC’s misrepresentations because FNC was able to build a competing electronic database that lending institutions could choose in lieu of purchasing appraisal services from the plaintiffs. The plaintiffs also alleged that by using their appraisal data, FNC was misappropriating the goodwill and reputation associated with the plaintiffs’ in-person, on-the-ground appraisals. As both of these injuries limited the plaintiffs’ ability to generate new sales, the court found that this factor weighed in favor of standing

Second, the court found that a direct relationship between FNC’s misrepresentations and the plaintiffs’ injury was lacking. In the typical direct injury case, the defendant runs a false advertisement, the advertisement causes customers to switch from the plaintiff’s product to the defendant’s product, and the plaintiff suffers economic injury as a result. In this case, the FNC’s false advertisement did not directly cause lending institutions to choose the National Collateral Database instead of the plaintiffs’ services. There were the intervening steps of FNC taking the plaintiffs’ data and building the database before the plaintiffs suffered economic injury. Thus, the court concluded that the second factor weighed against standing

Third, the court found that FNC’s conduct was sufficiently proximate to the plaintiffs. This factor requires the party whose injury is most immediate to the defendant’s conduct bring to suit. The court determined the plaintiffs alleged an injury that was not derivative to another party’s injury and that no other party could allege an injury that was more immediate to FMC’s misappropriation of the plaintiffs’ data. Therefore, this factor weighed in favor of standing.

Fourth, regarding speculativeness, the court found that the plaintiffs made two damages claims that required no speculation about the nexus between FNC’s conduct and the plaintiff’s injury: (a) the lost profits from lending institutions using the National Collateral Database instead of the plaintiffs’ appraisal services; and (b) FNC earning substantial profits that it would not have earned in absence of their false advertisements for AppraisalPort.

Fifth, regarding risk of duplicative claims or complexity in apportioning the damages, the court stated that as long a plaintiff alleges damages that are particular to him, there is little risk that other members of the public could raise duplicative damage claims. In addition, the court disagreed with the district court’s analysis that apportioning the damages to different appraisers would be overly complex because the fifth factor is only concerned with the complexity of allocating damages among differently-situated claimants, not within a class of claimants who are similarly-situated. The latter issue, according to the court, should be addressed at the class certification stage, not here.

Despite there being a less-than-direct relationship between FNC’s misrepresentations and the plaintiffs injury, the court reversed the district court and held that on balance, the five factors weighed in favor of the plaintiffs having prudential standing to sue under the Lanham Act. The court acknowledged that the case presented unique facts and the plaintiffs’ standing was borderline. However, the court was convinced that due to the “zero-sum” competitive relationship between FNC and the inextricable link between FNC’s false advertisements and the plaintiffs’ diminished sales, the plaintiffs suffered injuries that the Lanham Act was meant to address.

- Randy Miller and Chester Choi

Tennis String Manufacturer Serves Competitor with False Advertising Suit Over No. 1 Claim

Makers of tennis racket strings will be going at it in the Northern District of Georgia in a Lanham Act false advertising case over allegedly false claims of coming out on top in an industry product quality survey. It is marketing 101 that a company would rather say its products or services are “preferred” or “No. 1”. Case law varies as to whether claiming to be the favorite is a puff or a claim that requires substantiation. Here, there seems to be no dispute that in a survey run by the United States Racquet Stringers Association (USRSA), Gamma Sports came out on top. The complaint of Unique Sports Products, a competing string manufacturer, is that Gamma allegedly played dirty to get its top rating. Both Unique and Gamma offer strings that are used in re-wiring tennis racquets. These products are offered to stringers, who repair and replace the strings used in sports racquets. Many of these stringers are part of the USRSA, which puts out a report on string quality based on a survey of 1000–2000 of its members. In the USRSA’s most recent survey, Gamma came out on top as the number one provider of racquet strings. However, Unique claims that this rating is based on manipulated results. Unique alleges that high-level employees at Gamma had subordinates and family members sign up for USRSA memberships (which they were reimbursed for) using fictitious business names. Unique’s Complaint further states that none of these individuals were qualified to take the survey, as they had not met the survey’s requirement that responders have used the strings of each producer a specific number of times. After obtaining the requisite membership, these employees and relatives purportedly gave Gamma the highest scores while giving competitors’ strings the lowest ratings.

Unique alleges that Gamma violated the Lanham Act by advertising its strings as having the #1 rating with full knowledge that the relied-upon survey results had been manipulated and that these ads “misrepresent[ed] the nature, characteristics, and qualities of [Gamma]’s goods.” The Complaint states that these falsities were “willful and intentional” and damaged the plaintiff’s business. Unique further asserts that Gamma “intended for customers to reply upon” the false rankings and that customers were in fact deceived by these advertisements.

Because of what Unique says are the “exceptional” circumstances of this case, it is seeking treble damages on the Lanham-Act claim, as well as attorneys’ fees. While, until relatively recently, damages at all were fairly rare in Lanham Act false advertising cases, and certainly enhanced damages even rarer. The few such cases on record are typically reserved for cases where the defendant engaged in willful and malicious false advertising. It also asserts counts under state consumer protection laws.

- Amy Mudge and Michael Thorpe

Lanham Act Suit Brought By Group of Salons Adds Color to Standing Issues

If you thought Lanham Act false advertising cases were just about getting a company to stop saying something untrue, think again. A group of salons is attempting to use the Lanham Act to stop its suppliers’ alleged false advertising, or, in the alternative, to pressure the suppliers to make changes to their distribution practices that would actually make the advertising … true!

A group of professional salons, led by Salon FAD, a non-profit organization dedicated to fighting against the diversion of professional hair-care products into non-professional retail channels, filed a class action lawsuit against several large hair-care product manufacturers, alleging that defendants advertise their hair-care products as “Sold Only in Professional Salons,” and other similar claims, to boost consumers’ perception of the quality of the product, all the while turning a blind-eye to what plaintiffs claim is the wide-spread diversion of these “salon-only” products into retail chains such as CVS and Walgreens. Plaintiffs contend that after the defendant-manufacturers ship product to wholesalers, the defendants are not doing enough to stop the wholesalers from diverting these supposedly “salon-only” products to large retail chains. According to the complaint, more than $1 billion of the $5 billion in annual sales of “salon-only” products are from diverted products.

Last week, the SDNY denied defendants’ motion to dismiss the suit. Defendants had challenged plaintiffs’ standing under both Article III and the Lanham Act, arguing that it is the diversion of the product by wholesalers that is the cause of plaintiffs’ injury, not the alleged false advertising. With respect to Article III constitutional standing, Judge Cote rejected defendants’ arguments on the grounds that the salons’ reputations could be harmed if consumers, after purchasing these “salon-only” products from salons, later discovered that they were also available through non-professional channels. Under the Lanham Act, defendants also argued that plaintiffs did not have standing to sue because there is a heightened standard for showing causation and injury where the products are not in obvious competition. The Court, however, relied on its recent decision in Famous Horse Inc. v. 5th Ave. Photo, and held that even where retailers and manufacturers are not in direct competition, the retailer still has a “reasonable interest” and a “reasonable basis” for believing that the manufacturers’ false advertising could cause the retailers reputational harm.

Despite the win on this motion, is this a “be careful what you sue for” situation? While an injunction preventing defendants from using the phrase, "salon-only," may be a win on the docket for plaintiffs, it could lead to an outcome inconsistent with their stated goal of keeping professional products out of retail chains like CVS and Walgreens. After all, if defendants are forced to choose between altering their distribution practices or dropping the “salon-only” marketing slogan, they could decide that mass retail distribution is more valuable.

- Amy Mudge and Daniel Stuart