Thursday, October 18, 2007

Lost market share isn't irreparable injury

IDT Telecom, Inc. v. CVT Prepaid Solutions, Inc., 2007 WL 2980181 (3rd Cir.)

Plaintiff-appellants sued for false advertising under the Lanham Act and various state consumer protection laws. The parties compete in the market for prepaid calling cards; plaintiffs allege that defendants falsely advertise the number of minutes available through their cards, causing plaintiffs a disadvantage because they deliver 100% of the promised minutes and defendants only average 60%, allowing them to promote apparently low-priced cards with misleadingly large numbers of minutes.

There was an issue, not resolved, of whether the voice prompts a consumer hears after buying a card are covered by the Lanham Act. The post-purchase messages probably aren’t “advertising or promotion.” In any event, the court didn’t need to decide the issue because plaintiffs also challenged the initial poster-based advertising, and it’s the interaction between the posters and the prompts – minutes claimed versus minutes allowed – that is at issue. If a sealed package says “6 toaster pastries” and you open it up and it only contains 4, there is false advertising – the inside of the packaging isn’t misleading you, but then it’s not what got you to make the purchase.

The district court denied the plaintiffs’ motion for a preliminary injunction, and the court of appeals affirmed. Plaintiffs failed to show they’d suffer any harm other than financial loss or loss of market share. Moreover, regardless of the type of loss, they failed to prove causation. And they may have had unclean hands by engaging in the same type of conduct. The court of appeals relied on the first reason – failure to show irreparable harm.

Comment: Denying relief on this ground is pretty unusual, absent delay in seeking relief.

The court agreed that loss of market share can be irreparable harm. Nonetheless, a preliminary injunction shouldn’t issue if the moving party can be made whole by monetary damages. At the hearing, plaintiffs “implicitly admitted” that their harm could be calculated: “After explaining that some loss of market share was caused by factors other than the Appellees’ alleged false advertising, counsel for the Appellants stated: ‘We’re going to have a real hard time. I'm not saying we won’t be [sic] able to put forward damage numbers, but our ability to fully capture the damages is going to be severely undermined by the fact that the [Appellees] are going to tell you there may be a number of other factors that may be causing this loss also.’” This, the court of appeals thought, was a concession that money damages would suffice to recoup the market losses (and also bolstered the district court’s finding that plaintiffs wouldn’t be likely to succeed on causation). So in other words, damned if you do have good damages numbers, damned if you don’t.

Loss or reputation or goodwill may also constitute irreparable harm, but that’s limited to “the special problem of confusion that exists in cases involving trademark infringement and unfair competition.” Acierno v. New Castle County, 40 F.3d 645, 653-54 (3d Cir.1994). The harm here is “not analogous” – though the court didn’t explain why, and I find it hard to see why; false advertising that creates loyalty to a direct competitor, as this well might, seems likely to impair an advertiser’s goodwill.

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