ISO damages for false advertising and commercial disparagement

First Act Inc. v. Brook Mays Music Company, Inc., --- F.Supp.2d ----, 2006 WL 1134484 (D.Mass.)

Previous discussion of the jury verdict here.

Plaintiff First Act manufactures and sells band instruments, including trumpets, flutes, and clarinets. Defendant Brook Mays is a band instrument retailer. In 2003, Brook Mays published an “ISO Alert” warning buyers against buying “instrument shaped objects” sold at big box retail stores. First Act argued that this disparaged their products. In December, a jury awarded $20 million to First Act for violation of the Lanham Act, commercial disparagement, and tortious interference with an existing or prospective contractual relationship. On posttrial motions, the court upheld most of the jury verdict but granted remittitur of damages.

The defendant argued that the jury was improperly instructed on the standard of fault required for commercial disparagement (aka injurious falsehood or trade libel), since that tort requires actual malice and the jury was instructed that negligence was sufficient. Massachusetts law is unclear on this point, but the court found that, even if the defendant were right, the jury’s verdict revealed that any error was harmless.

Under earlier federal district court cases applying Massachusetts law, the standard of fault for commercial disparagement depends on whether the plaintiff is a private figure (negligence suffices) or public figure (actual malice required). This is in conflict with the Restatement (Second) of Torts, which sets forth a general rule requiring actual malice. The Restatement takes no position on whether liability can also be imposed if, instead of actual malice, the defendant had (a) ill will toward the plaintiff or (b) an intent to interfere in an unprivileged manner with the plaintiff’s interests; or on whether liability can be imposed with (a) or (b) plus negligence. Negligence alone, however, is not enough for the commercial disparagement tort. See Restatement §623A cmt. d. The Supreme Judicial Court of Massachusetts hasn’t reached the issue, though it has cited §623A favorably, as have lower courts.

The district court thought that the earlier federal cases were correctly decided, since the public/private figure dichotomy should apply to all injurious falsehood claims. It seems to me this makes the mistake of assuming that liability should go as far as the First Amendment allows – in fact, the cases the court cited were all about protecting speakers by raising the fault standard despite plaintiffs’ attempts to recharacterize their causes of action as non-defamation-based. By contrast, the common-law tort of injurious falsehood developed to require actual malice even in the absence of First Amendment constraints, and presumably there was a reason for this limit. However, with the Lanham Act imposing strict liability on competitors’ commercial speech, which the ISO Alert in this case clearly was, it’s hard to say that there’s something rotten with a negligence standard. (So why fight about commercial disparagement? Good question, especially given what comes next.)

Even if the court were mistaken about Massachusetts law, the jury found the defendant liable for Lanham Act violations, commercial disparagement, and tortious interference with existing or prospective business relationships. It assessed general damages for lost profits, expenses, and harm to First Act’s goodwill. The other two claims allow for the same damages awarded here, so the mistake wouldn’t affect the outcome.

Anyway, the court found any error harmless. The record showed that defendant acted in reckless disregard of the ISO Alert’s truth or falsity. Despite the ISO Alert’s claim to be based on a “careful examination,” the defendant never tested, played, or otherwise examined First Act's band instruments before disseminating the ISO Alert. In fact, defendant’s CEO and the authors of the ISO Alert admitted that they had never even seen a First Act band instrument before the alert was released. At most, defendants’ repair technicians repaired a limited number of First Act instruments shortly before the ISO Alert was released, but it couldn’t produce any witnesses to testify that the instruments had been “carefully examined.”

The court did order remittitur of reputation damages. Plaintiff’s expert witness testifed that plaintiff needed over $9 million to repair damage to its reputation by outreach to band instrument opinion leaders, marketing materials, corrective advertising, and endorsements. The jury awarded $5,125,000. Though valuing loss of reputation is inherently imprecise, the court found this amount irrationally high. In a typical case, a plaintiff acts quickly against a defendant’s false advertising and engages in its own corrective advertising; by the time a trial concludes, the plaintiff’s expenses can be used as a damages baseline. Here, by contrast, plaintiff sought to fund future corrective advertising, which has only been allowed as damages in a few cases.

More than two years have passed since the last dissemination of the disparaging statements. (Well, some copies are still floating around on the Internet, as I discussed last time. But not many.) The passage of time itself acts as a corrective, making affirmative expenditures less important. Moreover, the court pointed to First Act’s victory in the instant suit, and the press release announcing same that First Act immediately put on its website and has kept there to date, as important corrective information. Though the defendant has to bear the risk of the uncertainty created by its wrong, the award can’t be speculative or punitive, as this one was.

The bottom line: First Act can restore its reputation for far less than $5 million. Corrective advertising in trade and consumer press is justified, but the other measures proposed by plaintiff’s expert were unreasonable, unnecessary, and in some cases plainly futile – such as seminars to educate defendants’ sales reps and repair technicians about the quality of First Act instruments. The court was willing to allow $525,000 for reasonable future corrective advertising.