Wednesday, July 09, 2008

Insurance contract copying lawsuit proceeds

MDM Group Associates, Inc. v. Emerald Isle Realty, Inc., 2008 WL 2641271 (E.D.N.C.)

MDM, which sells insurance and other financial products and services, sued a number of North Carolina realty businesses. It alleged that it developed an “original product,” the “Peace of Mind Security Deposit Waiver Program.” It’s a type of insurance: Vacation renters would pay a small fee of $30-$50 instead of a much larger security deposit, and if damage occurs, they’d be protected up to $3000. To implement this, MDM drafted a form contract, and registered a copyright on the contract.

MDM alleged that some defendants did business with them, then stopped but kept using the contract, while other defendants copied the contract without ever having a business relationship with MDM.

The court denied defendants’ motion to dismiss the copyright infringement claim on grounds that it was inadequately pled, and their motion for a more definite statement. Allegations that defendants’ “marketing materials” infringe MDM’s copyright were sufficient to allow defendants to answer the complaint. Defendants’ motion to dismiss for lack of copyrightability was also premature—the complaint alleged originality, and the court can only consider a limited universe of documents and allegations on a motion to dismiss. Likewise, defendants’ merger argument was not appropriately resolved on a motion to dismiss. MDM’s civil conspiracy claim was also dismissed as preempted to the extent it relied on the copyright claims.

MDM’s Lanham Act claim fared worse. MDM alleged that defendants violated the Lanham Act and North Carolina law because their ads “inherently” include the representation that their products were “legal” insurance products, but the North Carolina Commissioner of Insurance had not approved those products. Sua sponte, the court declined to resolve defendants’ challenges to the claims, and ruled on an issue it considered dispositive: Under the Lanham Act, “neither an implied statement nor a failure to state constitutes a ‘description of fact’ or ‘representation of fact’” § 1125(a)(1).

This is, of course, entirely wrong. There is a rather large body of case law, in fact, devoted to analyzing when an implied statement violates the Lanham Act, and a smaller but robust cohort of cases discussing when the context of a statement creates implications that require disclosure of a relevant qualification in order to avoid misleadingness. (Perhaps the court’s egregious misstatement is simply evidence that courts would do better to ask the parties to brief issues that the judges believe are crucial even if the parties didn’t raise.)

There is, however, a more specific rationale here: For prudential reasons, courts have often refused to consider failure-to-disclose or implied falsity claims based on the theory that a regulator’s approval for a product or service was required but was not obtained, and that consumers inherently expect that advertisers will only advertise approved products or services. And it was to this rationale, mercifully, that the court turned.

Mylan Laboratories, Inc. v. Matkari, 7 F.3d 1130 (4th Cir.1993), held that an allegedly false implication that drugs were FDA-approved was not actionable. It was insufficient to allege that merely placing a drug on the market implies that the drug has been properly approved by the FDA. (I do not buy this rule as a statement about consumer expectations; it seems to me entirely reasonable for consumers to make precisely this inference. As a rule for managing the spheres of authority of the FDA and the courts, however, I see its place. I would simply call it what it is—an exclusion from the Lanham Act’s scope, rather than a conceptually problematic unrebuttable presumption of lack of deception.)

The court viewed MDM’s argument as identical to that in Mylan. The claim was that defendants put a product on the market without proper regulatory approval, and therefore falsely advertised its approval. Mylan precludes such a claim.

(In a footnote, the court discussed MDM’s original invocation of “false designation of origin,” which it apparently abandoned in the briefing—and properly so; as the court noted, Dastar was an insurmountable barrier to that theory.)

MDM also asserted a North Carolina Unfair and Deceptive Trade Practices Act claim. Its theory was the same—defendants sold unauthorized insurance products, which was “unfair and deceptive.” The court denied defendants’ motion to dismiss for lack of standing, though it noted that MDM’s UDTPA theory was somewhat unclear. I find it interesting that the court didn’t discuss the tension between sustaining MDM’s UDTPA claim and dismissing its Lanham Act claim. It’s certainly possible—maybe even likely—that North Carolina has chosen a different way of dividing responsibility between courts and regulators for insurance than Congress has for the FDA, but I would have thought the issue deserved a mention.

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