Friday, February 24, 2012

Lanham Act false advertising claims not subject to Rule 9(b) in First Circuit, district court says

McGrath & Co., LLC v. PCM Consulting, Inc., 2012 WL 503629 (D. Mass.)
The most broadly relevant bit of this case is the pleading standard issue.
McGrath sued its competitor PCM for state and federal false advertising, and PCM moved to dismiss.  The parties offer project management services for companies undertaking major construction projects.  The current presidents of McGrath (McGrath) and PCM (Lane) used to be partners at McLane Associates, performing the same kinds of services.  In 2007, McLane split up, and the partners agreed not to take on any new projects under its name; it finished providing services in early 2008. McGrath formed defendant McGrath, and Lane went back to PCM, a company he’d formed around 1999.
PCM bid to provide services to Intel, a former McLane customer.  Intel required PCM to prequalify, to ensure it had sufficient resources.  McGrath alleged that PCM submitted false information on its staffing resources and financial condition, combining its own numbers with McLane’s, so that it reported a headcount of 70 employees even though PCM employed fewer than ten people. Likewise, although PCM had only minimal cash on hand, it allegedly reported to Intel that it had in excess of $1.4 million dollars in cash, using McLane's bank account information. McGrath alleged that PCM got Intel jobs—75-80% of all of PCM’s income—based on this false information.
PCM also provided services to another previous McLane client, Wyeth, along with Advanced Micro Devices and the State of New York. McGrath alleged that PCM made similar false statements to them, as well as to other named potential clients, and made other false statements on its website to give the incorrect impression that PCM is a big company, such as that its “workforce is currently consulting on over three billion dollars of active capital construction work.”  McGrath alleged that this was literally false because it referred to past, not current, work performed by McLane, not PCM.  McGrath alleged the same was true of other website statements about PCM's history and capabilities.
In evaluating the Lanham Act claims, the court first looked at whether the statements were commercial advertising or promotion.  At a minimum, a defendant must target a class or category of purchasers, not merely particular individuals.  The court found that the allegations here sufficiently alleged this; the website promotes PCM to any consumer who sees it.  As to the statements to Intel et al., the complaint alleged that PCM made similar statements about its staffing and resources to other potential customers in order to get their business. “That these alleged false statements were made in direct communication with each company, and not in a traditional advertising campaign, does not exclude these communications from amounting to ‘commercial advertising or promotion’ under the Lanham Act.”
The court also found that McGrath plausibly alleged materiality, in that financial and staffing resources affect ability to manage large projects.  For similar reasons, the statements plausibly were false or had at least the tendency to deceive potential customers.
Moreover, at the pleading stage, the allegation that McGrath’s harm “includes but is not limited to, the loss of McGrath's right to fairly compete in the marketplace and the loss of jobs which it would have obtained but for PCM's false statements and misrepresentations” was sufficient to plead the necessary harm, since the parties are direct competitors for the same clients.
The court rejected the idea that Rule 9(b)’s heightened pleading requirements applied to Lanham Act claims; there was no First Circuit authority for the proposition, and the Lanham Act doesn’t establish a traditional fraud cause of action.
McGrath also pled violations of state consumer protection law.  Massachusetts false advertising law requires a plaintiff to show that she was injured by an ad containing “any assertion, representation or statement of fact which is untrue, deceptive or misleading” made by a person who “knew, or might on reasonable investigation have ascertained to be untrue, deceptive or misleading.”  The complaint satisfied this standard as well.
Mass. Gen. L. c. 93A also bars “unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.”  A plaintiff must show a loss of money or property to sue, and competitors who are damaged have standing.  The Massachusetts AG has specifically provided in regulations that “[i]t is an unfair or deceptive act for a seller to make any material representations of fact in an advertisement if the seller knows or should know that the material representation is false or misleading or has the tendency or capacity to be misleading.”  So this claim survived too.
PCM argued that the complaint didn’t properly allege that the conduct occurred “substantially and primarily” in Massachusetts, as required.  The defendant bears the burden of showing that the relevant conduct took place outside the state.  The standard is the “center of gravity” of the circumstances giving rise to the claim. A court will look at where the defendant commits its act or practice, where the plaintiff receives or acts on it, and where the plaintiff sustains losses.  In this case, PCM’s HQ is in Andover.  It was reasonable to infer that PCM disseminated its allegedly false statements from and in Massachusetts through its website and direct communications with potential customers.  This was enough to put the “center of gravity” of McGrath’s claim “substantially and primarily” in Massachusetts.
The court refused to consider documentary evidence that McGrath knew about the false claims for a long time, triggering a statute of limitations bar, because that would require consideration of matters outside the complaint, even though McGrath didn’t dispute the authenticity of PCM’s document. Even if the court considered the evidence, the court noted that it went only to the statements on the website, not the allegedly false and misleading statements made to Intel and other companies, which PCM didn’t argue occurred outside the limitations period.

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