Thursday, January 20, 2011

Salons have standing to challenge "salon-only" advertising by manufacturers

Salon FAD v. L’Oreal USA, Inc., 2011 WL 70591 (S.D.N.Y.)

Plaintiffs sued on behalf of a class of salons “which offer for sale products that they allege are falsely advertised by the defendant manufacturers as being available for purchase only at professional salons” but which in fact are widely available outside salons. They alleged false advertising under the Lanham Act. The court denied defendants’ motion to dismiss. (Salon FAD is a nonprofit; FAD stands for Fight Against Diversion.)

As an example of the allegations, the label on Sexy Hair's brand of hair products states "Sold Only in Professional Salons" (compare this review), while other defendants represent that the quality of their products cannot be assured unless they are purchased through salons: John Paul Mitchell Systems' website states that its products "are only guaranteed when sold by a professional hair salon." However, defendants nonetheless have allegedly engaged in widespread diversion to mass retailers, accounting for more than $1 billion of the beauty industry’s $5 billion in annual sales of salon-only products. Plaintiffs alleged that the false "salon-only" advertising damages their reputation with consumers who purchase products at their salons, only to discover that the products are also available at mass retailers.

Defendants moved to dismiss for want of constitutional and prudential standing, as well as failure to properly allege materiality.

Constitutional standing requires injury in fact: an invasion of a legally protected interest which is concrete, particularized, and actual or imminent, not conjectural or hypothetical. There must be a causal connection between the injury and the conduct complained of, and it must be likely that the injury will be redressed by a favorable decision. Defendants didn’t contest the “concrete and particularized” part—damage to reputation and loss of sales when consumers discover that the products marketed as "salon-only" are available at mass retailers. They instead argued that there was no causal connection between the injury alleged and defendants’ false advertising.

Generally, causation exists if the defendant’s actions had a determinative or coercive effect on the action that produced the injury. A plaintiff need not allege that the defendant was the very last step in the chain of causation. Defendants argued that the false salon-only ads don’t cause the harm; instead, the ads actually benefit plaintiffs by encouraging consumers to buy the products in salons. It’s the diversion, rather than the false advertising, that forms the basis of the plaintiffs’ injuries—the injuries would persist even if the false advertising ceased.

The court disagreed. While it was likely true that diversion would reduce plaintiffs’ market share even if the false ads ceased, the complaint identified a separate injury: damage to reputation because consumers associate “salon-only” ads with salons, and penalize the salons when they discover the falsity. Defendants argued that this was too attenuated because it requires (1) consumer disbelief, (2) consumer association of the false advertising with the salons, instead of just with the defendants, and (3) resulting reluctance to patronize the salons. The court thought the causation claims were “fairly straightforward: it is plausible that consumers will associate false advertising claims with the seller of the product, in addition to (or instead of) the product's manufacturer.” Thus, though the consumer’s decision ultimately causes the injury, the false statements had a “determinative or coercive effect” on the consumer’s decision.

Defendants also argued that plaintiffs were free to stop buying defendants’ products, thus allowing them to avoid injury to their reputations. The court dryly commented, “[i]f the defendants have engaged in false advertising it is unlikely that they can successfully defend this action by showing that the plaintiffs could have avoided the effect of that violation of law by exiting the market for the defendants' hair products.” Regardless, plaintiffs sufficiently alleged a causal connection between the false advertising and injury to their reputations. For similar reasons, plaintiffs also properly alleged redressability, since the false statements were the cause of the plaintiffs' injury and thus could be remedied by a court.

Prudential standing under the Lanham Act in the Second Circuit requires (1) a reasonable interest to be protected against the alleged false advertising and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising. Famous Horse Inc. v. 5th Avenue Photo Inc., 624 F.3d 106 (2d Cir.2010). The court tends to require a more substantial showing of injury and causation where the parties are not obviously in competition or the ads don’t draw direct comparisons.

Defendants repeated the same arguments from their constitutional standing challenge, and also argued that plaintiffs, as noncompetitors, lacked standing. Famous Horse was a big problem for that argument, as it concerned a plaintiff-retailer selling brand name jeans who was found to have standing against a supplier who allegedly sold it counterfeit jeans, implicating the retailer’s interest in maintaining customers’ perceptions that its jeans, though discounted, were genuine—a perception influenced not just by direct sales of counterfeits but also by the more general dissemination of counterfeits through the discount market.

“Similarly here, the plaintiffs have an interest in maintaining their reputation for integrity among their customers, including in their sales of beauty products to customers. The defendants' false advertising undermines that perception and results in an injury to the plaintiffs' reputation when customers discover that the products sold at the salons and advertised as exclusively available from salons are widely available at mass retailers.” Specifically, defendants argued that it was consumer disbelief of the advertising, rather than the false advertising itself, that caused the injury, but Famous Horse “recognized that disbelief could constitute injury … when it remarked that consumers who learn of counterfeit jeans on the market will assume that the [plaintiff] ‘similarly peddles counterfeit clothes.’” Prudential standing was properly alleged.

On to substance: defendants argued that the false statements weren’t material, or as we know it in the Second Circuit, didn’t misrepresent “inherent quality or characteristics,” because they relate to the marketing of the products, specifically the channels through which they are sold: an extrinsic characteristic. (Can it be that we are about to hear about the snob effect?)

Defendants relied on Abernathy & Closther, Ltd. v. E & M Adver., Inc., 553 F.Supp. 834 (E.D.N.Y.1982), which denied a motion for a preliminary injunction because the claims of "an exclusive T.V. offer" and "for the first time on TV," while false, did not relate to the inherent characteristics of the jewelry being sold. However, Telebrands Corp. v. Wilton Indus., Inc., 983 F.Supp. 471 (S.D.N.Y.1997), found that "AS SEEN ON T.V." was a material misrepresentation, because it identifies the product as the one the consumer saw advertised on TV, as opposed to some other product of that type. (I would also point out that one influential economic theory of advertising suggests that advertising itself, regardless of content, functions as a sign of quality—the advertiser has the resources and the confidence to spend money on promoting itself. Phillip Nelson, The Economic Consequences of Advertising, 48 Journal of Business 213 (1975). If, as this account suggests, consumers rely on the simple fact of advertising as a signal, then falsely claiming “as seen on TV” is a material misrepresentation.)

The court favored Telebrands. The statements here “imply that the quality of the products is so superior that they are available only through professionals in hair care,” which is an inherent and and material characteristic. These claims were not immaterial “minutiae”: a salon-only claim “differentiates these products from products sold at mass retailers and also indicates the ‘superiority and cache [sic] of the professional products.’ Consumers may be willing to pay a premium for products sold exclusively through salons because they associate these products with professional expertise.”

Motion to dismiss denied.

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