Synygy, Inc. v. ZS Associates, Inc., --- F.Supp.3d ----, 2015 WL 5818510, No. 10-4274 (E.D. Pa. July 30, 2015)
Wow, this one’s been going on for a while. Note that evidence of damages is key to the traditional, non-commercial-speech bounded torts, but not to the Lanham Act false advertising claim.
Synygy and ZS compete in the marketplace for incentive compensation or “IC” services. In 2007, Synygy sued ZS, and in 2009 it amended the complaint, adding, among other things, a theory of copyright infringement. Synygy also issued a press release. The CEO, in an email to marketing staff, explained that “[t]he goal ... is to get our prospects and clients to have pity on us and to believe that we are right and ZS is wrong.” The press release was titled “Synygy Files Suit Against ZS Associates for Copyright Infringement and Misappropriation of Intellectual Property,” and it went on in that vein. A quote from the CEO said, “The lawsuit we filed today contends that ZS knowingly copied our software and other confidential information with the intent to use our intellectual property in direct competition with us. Our position is that ZS continues to use our software and other confidential information, causing us to lose substantial revenue, profit, and company valuation, while they profit from its use.” The Synygy press release was republished on websites such as Reuters, Yahoo Finance and Intellectual Property Today.
ZS issued its own press release saying that Syzygy’s allegations had no merit. The press release cost ZS $5100 from a PR firm. ZS argued that it had to reassure a client about its software, creating “a certain amount of discomfort with the client that we had to resolve.” ZS “had to include language in its contract that specified that in the event that the Javelin software became unavailable that [ZS] would still have other systems as backup systems available.” ZS’s revenue from work for this client increased after this event. Likewise, ZS had to reassure another “concerned” client and direct it to ZS’s press release. However, ZS did enter into contracts with that client.
ZS argued that the press release was defamatory, commercially disparaging, and in violation of the Lanham Act. An expert witness, Dr. Richard Gering, concluded that “ZS suffered economic damages in the form of internal costs of ZS’ personnel and fees paid to [the PR firm]” of $76,753, for damage control.
Defmation: Although the court previously found that “there is sufficient evidence of copying to require that Synygy’s copyright claim with respect to the incentive compensation report scorecards be submitted to a jury,” that didn’t mean that it was true that, as accused in the press release, ZS “knowingly and improperly copied and misappropriated components of Synygy’s sales compensation software and other intellectual property.”
However, ZS didn’t show damages. Starting with defamation per se: “Statements by a defendant imputing to the plaintiff ... conduct incompatible with the plaintiff’s business constitute slander per se.” With such statements, Pennsylvania law holds that “only general damages, i.e., proof that one’s reputation was actually affected by defamation or that one suffered personal humiliation, or both, must be proven; special damages, i.e., out-of-pocket expenses borne by the plaintiff due to the defamation, need not be proven.” Pennsylvania ordinarily doesn’t allow presumed damages even in cases of defamation per se, unless actual malice is shown. (The court noted that it didn’t think that corporations should be eligible to claim defamation per se. Synygy, Inc. v. Scott–Levin, Inc., 51 F.Supp.2d 570, 581 (E.D. Pa.1999) (“A corporation ... cannot be embarrassed or humiliated. A corporation’s analogue to humiliation would be damage to reputation—an injury that should translate into a pecuniary loss. If a corporation cannot point to loss of revenues or profits, for what are we compensating it? Should the law allow corporations to avoid showing special harm by taking advantage of an exception so clearly created to protect individuals? The rule of defamation per se as it applies to corporations has outrun its reason.”), aff’d sub nom. Synygy, Inc. v. Scott–Levin, 229 F.3d 1139 (3d Cir. 2000)).
Actual malice requires at least reckless disregard for the truth, meaning that Synygy either “in fact entertained serious doubts as to truth of” the Synygy press release, or had a “high degree of awareness of ... probable falsity.” “[O]bjective circumstantial evidence” may be sufficient to show actual malice. There was insufficient evidence of actual malice here. The CEO testified that he didn’t know how long it had taken to write the software macros, despite having been quoted in the Synygy press release as saying that Synygy’s software was the result of “many years” of investment in product development. Though he didn’t have personal knowledge of the development time, that wasn’t evidence that he knew that his statement that ZS continued to use misappropriated software was false or entertained serious doubts as to its truth. At most, his testimony could show negligence. Nor did emails showing a desire to portray Synygy as a victim show malice—personal spite, ill will, and intention to injure are not “actual malice,” a term of art. The CEO wrote that the “goal is to get our prospects and clients to have pity on us and to believe that we are right and ZS is wrong”; that his “goal [was] to create a public battle and put all companies on notice that ZS cannot be trusted”; and that “I want Synygy to be perceived in the press as the ‘good guy’ which has been wronged by the ‘bad guy.’ I would want our current clients to empathize with us and our former clients to be concerned that they might be dragged into the legal mess.” Given the record, these emails were just as plausibly expressing the CEO’s firmly held belief that ZS had in fact wronged Synygy.
Given the unavailability of presumed damages, there wasn’t enough evidence of general damages, defined as “proof that one’s reputation was actually affected by the slander, or that [the plaintiff] suffered personal humiliation, or both.” Such damage must be measured by the perception of others, not that of the plaintiff itself, because reputation “is the estimation in which one’s character is held by his neighbors or associates.” Although ZS presented evidence that the Synygy press release prompted inquiries from customers, it didn’t provide testimony from any employee of those customers, or from any third party who “altered its opinion of ZS as a result of the Synygy press release.” Even assuming that ZS employees’ testimony was not hearsay, that wasn’t enough. Although the testimony showed that the Synygy press release prompted “many more discussions” between ZS and identified customers, ultimately relations continued and grew. ZS didn’t identify any cancelled sales or sales process from the press release. No reasonable jury could conclude that the Synygy press release had the requisite reputational effect.
Even if ZS could show general damages through this evidence, it wouldn’t suffice to show special damages, which are dollar-denominated losses. ZS couldn’t satisfy its burden by relying solely on evidence of remediation costs, as its expert calculated. Such costs might be recoverable once liability for defamation was established, but couldn’t be used to establish defamation. “[S]pecial harm must result from the conduct of a person other than the defamer or the one defamed and must be legally caused by the defamation.” If ZS’s own expenditures were enough, any internal response to an allegedly defamatory publication would satisfy the standard.
This conclusion also defeated the cause of action for commercial disparagement, which requires “pecuniary loss.” Mitigation costs aren’t sufficient, “because unless other pecuniary loss was occasioned by the [press release]], the ‘rehabilitation’ was not reasonably necessary.”
As for the Lanham Act claim, it was possible that the press release was literally false. If ZS proved literal falsity at trial, it would be entitled to a presumption of actual deception presumption and appropriate injunctive relief. But monetary damages require proof of actual deception, even in literal falsity cases; individualized loss of sales need not be shown, but some customer reliance must be. That usually requires a consumer survey, which wasn’t present here. Nor was any other appropriate evidence. ZS’s principal testified that the director of sales operations of a pharma company showed him a copy of the Syzygy press release and asked for assurances that ZS could provide the relevant work in the event the accused software became unavailable. But this was inadmissible hearsay [not state of mind evidence?]. In any event, that wasn’t evidence of a tendency to cause a substantial portion of consumers to believe that ZS copied the software. (Not clear to me that substantial portion is the right measure once we’ve established literal falsity and are just looking for damages—if some number of consumers are affected, wouldn’t that be enough, especially in a smaller market? But that doesn’t matter here, since it seems that the assurances were duly provided.)