Thursday, May 01, 2014

Disparagement creates Lanham Act standing post-Lexmark

First Mariner Bank v. Resolution Law Group, P.C., 2014 WL 1652550, No. MJG–12–1133 (D. Md. Apr. 22, 2014)

FMB sued RLG for false advertising, unfair competition, and defamation, based on ads send to FMB customers.  The ads stated “that RLG was investigating First Mariner, suggested (at minimum) that First Mariner was engaging in illegal and improper banking practices, and indicated that some banks were in settlement negotiations with government agencies.”  They also said that the government would seek money damages and favorable mortgage modifications, and urged recipients to contact RLG. FMB contended that these claims were false, and that RLG was engaged in a “mass joinder mortgage reduction scam,” seeking to scare recipients into “engaging RLG (and paying a retainer) for non-existent mortgage reduction services and representation in a scam-lawsuit which RLG has no bona fide basis for filing.”

During 16 months of discovery, the magistrate judge found (echoing earlier findings), defendants engaged in “repeated and ongoing discovery misconduct,” including spoliation of a computer and cellphone that were the only identified sources of records pertaining to whether RLG ever intended to pursue or was capable of pursuing “a bona fide lawsuit on behalf of the recipients of the mailers it distributed.”  Given the extent of the misconduct, the waste of judicial resources, and the expense and delay to FMB, the magistrate recommended judgment by default as to liability on all counts of the amended complaint as “necessary to uphold the integrity of the judicial process and squarely within the Court’s discretion.”

Defendants argued that FMB lacked standing to bring its federal and state false advertising/unfair competition claims, which would preclude entry of default judgment. The district judge already ruled that under Maryland law, a plaintiff need not be in competition with the defendant to have standing to pursue an unfair competition claim.

As for the Lanham Act, Lexmark changed the ground rules.  Despite Justice Scalia’s unhappiness with the term, the magistrate still called the concept at issue “standing,” since what else are you going to call it?  As the magistrate explained, “(1) the statutory cause of action only extends to plaintiffs whose interests fall within the ‘zone of interests’ protected by the Act; and (2) the statutory cause of action is limited to plaintiffs whose injuries are ‘proximately caused’ by violations of the Act.”  The zone of interests prong requires a plaintiff to allege an injury to a “commercial interest in reputation or sales,” and proximate cause ordinarily requires “economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising,” particularly when “deception of consumers causes them to withhold trade from the plaintiff.”

The claim here “fits snugly within the Lexmark framework.”  FMB alleged that it lost sales, market share, and damage to reputation because of defendants’ false advertising and disparagement.

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