Harold H. Huggins Realty, Inc. v. FNC, Inc., --- F.3d ----, 2011 WL 651892 (5th Cir.)
Four residential real-estate appraisers sought to represent a class under the Lanham Act. The district court dismissed for want of prudential standing, and the court of appeals reversed.
FNC develops mortgage software, including AppraisalPort and the National Collateral Database.AppraisalPort is a conduit between lending institutions and appraisers for ordering and receiving appraisals in industry-standard format. Plaintiffs are customers of FNC’s AppraisalPort service. FNC allegedly claimed that the data was confidential, secure, and private, and that only the lending institution would have access to the data transmitted via AppraisalPort. FNC allegedly further represented that it was not building a database with or otherwise using the data the appraisers transmitted via AppraisalPort. As a result, plaintiffs alleged, they provided FNC with data from residential appraisals they had performed.
However, as FNC's chief executive officer stated in an October 2005 interview, "when an appraisal is transmitted to the lender [via AppraisalPort], we are able to pop it open and suck all the data out." Thus, FNC copied and stored the data and used it to build the National Collateral Database. This is a real estate valuation service used as an alternative to paying an appraiser for an appraisal. The plaintiffs thus compete with the National Collateral Database.
FNC thus made misrepresentations to the plaintiffs as customers and caused them injury as competitors.
The court began with the now-familiar test for prudential standing: (1) the nature of the plaintiff's alleged injury: Is the injury of a type that 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 party to the alleged injurious conduct; (4) the speculativeness of the damages claim; and (5) the risk of duplicative damages or complexity in apportioning damages.
Intriguingly, the court began by noting that “[w]hile a multifactor test such as this one inevitably entails some measure of internal redundancy, it is nonetheless a valuable heuristic. These factors do not pose five wholly distinct inquiries. Instead, each turn of the prism illuminates a slightly different facet of a single underlying question.” That question: whether there was a sufficiently direct link between the asserted injury and the alleged false advertising.
The nature of the injury favored standing. Alleged loss of profits from a weakened competitive position caused by a competitor’s false advertising is squarely within the scope of §43(a). Plaintiffs also alleged that FNC wrongfully diverted to itself plaintiffs’ goodwill and reputation. “By using the plaintiffs' appraisal data to build the National Collateral Database, FNC was able to misappropriate to itself the good will and reputation associated with the superior quality of in-person, on-the-ground appraisals. This injury, too, is a core concern of § 43(a).”
FNC argued that consumers lack prudential standing, and that its alleged misrepresentations were directed to plaintiffs in their capacities as consumers. But this factor focuses on the nature of the injury, not the identity of the message recipients. Consumers don’t have standing because their injuries—higher prices or lower quality—aren’t the kinds of injuries the Lanham Act was intended to redress. But a commercial interest in generating new clients is precisely the kind of injury the Lanham Act covers.
Factor two favored FNC: the relationship between plaintiffs’ injuries and FNC’s misconduct was relatively indirect. The paradigmatic case of directness is when the defendant’s false advertising about its own goods influences customers to buy its products instead of the plaintiff’s. This requires only three steps: (1) false ad, (2) which causes customers to switch, (3) which harms the plaintiff. (The quoted case, by the way, adds in “literally” in front of “false advertising,” for reasons that have never made sense to me: if the ad is misleading, then (2) and (3) follow in the same way. There’s some underlying distrust here of implicitly false claims, but implicature is a standard feature of human communication and anyway that distrust should at least be out in the open.)
On the other end of the spectrum are injuries suffered only by virtue of the intervening acts of a third party. In one case, Russian vodka distillers who didn’t sell in America alleged that they were injured by Smirnoff’s misrepresentations that its vodka was distilled in Russia because those misrepresentations made the American market for Russian vodka less profitable and importers less willing to import real Russian vodka. This was too indirect.
This case was in the middle. In the typical direct injury scenario, the false ad necessarily pertains to the same good or service as to which the parties compete; not so here. Moreover, loss of business because lenders choose to use FNC’s database was directly caused by FNC’s misappropriation of plaintiffs’ data, not by FNC’s false ads. “Without FNC's second, intervening wrongful act of misappropriating the plaintiffs' appraisal data, FNC's alleged violation of § 43(a) would have caused the plaintiffs no injury at all.” The court of appeals counted this out in six steps, which I’ll spare you. However, the injuries were more direct than in the Smirnoff case because the same entity that made the misrepresentations ultimately caused the injury.
(There’s something going on here about the consumer, and her belief in the false representations, disappearing from the analysis. In a very real sense, the competitive injury from false advertising is never direct, which is why the “direct” scenario involves three steps. Only the consumer is directly harmed by believing the falsehood. But if we acknowledged that, we’d have to consider giving consumers standing. We also might have to face up to the fact that the harm here comes from communication, which is why the rigid doctrinal distinction between false and misleading messages is so reality-distorting.)
In the end, the plaintiffs' injuries were only slightly more direct than the injuries of plaintiffs who have been held to lack prudential standing, and substantially less direct than the injuries of those plaintiffs who have been granted prudential standing. The second factor weighed against prudential standing.
Factor three, proximity or remoteness of plaintiffs to the alleged injurious conduct, favored the plaintiffs. There was no identifiable class of persons more immediate to the injury whose self-interest would normally motivate them to vindicate the public interest; customers are irrelevant because they lack standing. Here, the plaintiffs’ alleged injury was not derivative of an injury to some other party’s competitive position. “No identifiable class of persons can be more immediate to the misappropriation of work product than the persons to whom the work product rightfully belongs.”
The plaintiffs’ damages claim was not speculative. What’s required is pleading that the defendant’s anticompetitive conduct “either has caused the plaintiff to lose profits or has caused the defendant to gain profits in a definite and ascertainable amount.” The ‘or’ is important because proof of the plaintiff’s lost profits is not a prerequisite for recovery. As long as a plaintiff adequately pleads some kind of injury, defendants’ profits due to false advertising are a sufficiently non-speculative measure of the plaintiff’s damages (as long as the plaintiff doesn’t claim damages that any member of the public would be equally well-suited to claim).
Here, the plaintiffs pled lost business and profits from lending institutions that used the database instead of their services. In addition, they alleged that FNC earned substantial profits from the database that would have been unavailable if not for its misrepresentations about AppraisalPort. Both of those were personal to the plaintiffs because they allege unjust enrichment at plaintiffs’ expense.
The district court had concluded that the damages claim was too speculative, because each plaintiff would have to establish that (1) FNC used that plaintiff’s AppraisalPort data in building its National Collateral Database; (2) one or more lenders subsequently needed information pertaining to the same property and opted to use the database rather than an appraisal; and (3) had the information not been available in the database, the lender would have chosen him to provide an appraisal (rather than another appraiser). The district court thought that (3) was too tenuous.
The court of appeals found fault with this analysis. (1), while true, is about liability, not damages. (Note that this point conflicts with several (badly decided) prudential standing cases, where the courts have made exactly this mistake—see, e.g., Phoenix of Broward.) (2) omits half of plaintiffs’ allegations: the database competes with plaintiffs by enabling lenders to use an existing appraisal of a piece of property or by allowing them to use comparable properties in the same neighborhood to estimate. Thus, (2) understates “both the extent to which the plaintiffs suffered a personalized injury and the number of occasions on which the plaintiffs were injured.” And (3) “primarily speaks to the complexity of apportioning damages among the class members, not the speculativeness of the very existence of those damages,” so it should be considered in factor five.
In a footnote, the court pointed out that Iqbal and Twombly didn’t alter the rule that all well-pleaded facts must be accepted as true, and evaluated in the light most favorable to the plaintiff, on a motion to dismiss. The Iqbal/Twombly emphasis on plausibility “does not give district courts license to look behind those allegations and independently assess the likelihood that the plaintiff will be able to prove them at trial.” Plaintiffs pled that FNC caused them to lose business and profits because more lenders would have used plaintiffs’ services if the database had not been available. This was plausible and non-speculative. The plaintiffs alleged that FNC’s misrepresentations induced them to give FNC their data, that FNC used the data to build the database, and that lenders now use the database instead of the plaintiffs. Accepting those allegations as true, “it requires no speculation to conclude that FNC's conduct caused the plaintiffs to suffer damages in the form of lost business and diminished profits.”
The fifth factor considers duplicative damages/apportionment. This weighed in favor of standing, because there was little risk of subjecting FNC to a risk of duplicative damages or complex apportionment. The risk of duplicative damages comes from granting standing to remote plaintiffs at each level in the distribution chain who could assert conflicting claims to a common fund. This factor “takes stock of where the plaintiff is situated in the market vis-a-vis the defendant.”
The inquiry is “vertical, not horizontal. In other words, we are not concerned with whether there is a large number of potential claimants who occupy the same position in the market as the plaintiff.” (As the court noted, Phoenix of Broward said otherwise. But it was wrong, not least because its outcome rewards false advertising in competitive industries and makes it easiest for dominant firms in highly concentrated industries to sue for false advertising, not something you want from a competition law.) “This factor does not weigh against standing merely because the defendant competes in a crowded market in which its false advertisements might cause injury to multiple--or even numerous--direct competitors. As long as each plaintiff has suffered a distinct economic injury, we need not inquire into how many other similarly situated persons might also have prudential standing.”
Factor five “urges caution when there are other potential claimants who are closer in the market to the defendant than is the plaintiff. Under such circumstances, conferring standing on the plaintiff would a fortiori entail also conferring standing on any entity that has a more direct competitive relationship with the defendant.” That’s where the risk of duplicative damages comes in. By contrast, the risk is low where the plaintiff is the market participant most directly injured, and allowing the suit to proceed wouldn’t necessarily require allowing other differently situated plaintiffs to sue. “The fifth factor thus overlaps substantially with the third factor, which inquires into the proximity or remoteness of the plaintiff's injury to the defendant's misconduct,” as prior cases have implicitly recognized.
Given that the third factor favored standing, so did the fifth. “Residential real-estate appraisers were the only targets of FNC's misrepresentations, and the members of the putative class were the only appraisers who acted on those misrepresentations. Because there are no other potential claimants who are more proximate to FNC in the marketplace than the plaintiffs, there is no risk of FNC incurring multiple liability or of disparate groups of plaintiffs making conflicting claims to the common fund of FNC's profits from the National Collateral Database.
The court noted that a class of appraisers who never used AppraisalPort might also have lost business, but they weren’t injured by the false advertising, only by the response of other appraisers to the false advertising, which is too indirect.
The district court weighed factor five against standing because it was "too tenuous" to suggest that the plaintiffs would be able to show that "had the information not been available in the database, the lender would have chosen [that particular appraiser] to provide an appraisal (rather than another appraiser)." That is, it was concerned with allocating damages to particular appraisers. “But the fifth factor concerns itself with the complexity of allocating damages among differently situated claimants, not within a group or class of claimants who are similarly situated.” Allocation issues can be addressed in the motion for class certification.
On balance, the factors favored standing, which would promote the Lanham Act’s goal of ferreting out unfair competition and protecting unjust erosion of goodwill. Though the injury was less direct than is typical, it was critical that there was no market participant more directly injured. Moreover, each additional step in the causal chain involved a wrongful act by FNC. “FNC's decision to couple its false advertisements with other forms of anti-competitive conduct does not make false advertising any less unfair as a method of competition.”
The court concluded with a caution that the Lanham Act is not a general-purpose anti-fraud statute, and that it viewed the case as falling “just within the outer limits of the zone of interests protected by the Lanham Act.” But here, plaintiffs had a direct pecuniary interest at stake, a zero-sum competitive relationship between them and FNC’s database. There was a but-for relationship between the false advertising and the database’s ability to compete with plaintiffs.