Monday, June 20, 2016

Certification nonprofit engaged in commercial speech when it badmouthed uncertified seller

Handsome Brook Farm, LLC v. Humane Farm Animal Care, Inc., 2016 WL 3348431, No. 16-cv-592 (E.D. Va. Jun. 15, 2016)
Nice thorough opinion playing out the interaction between Lexmark and the definition of “commercial advertising or promotion.”  The USDA has the National Organic Program, for eggs “Certified Organic.” The American Humane Association has a standard for pasture-raised eggs allowing those who use it to claim “American Humane Certified™” or “Pasture Raised.”  Humane Farm Animal Care, a nonprofit, certifies eggs as “Certified Humane®.”  Handsome Brook sells egs with the USDA organic and AHA pasture-raised and humane labels, but not the HFAC Certified Humane label.
Producers that pass HFAC’s inspection may use the Certified Humane® logo on their eggs; the licensing agreement is renewable annually and application/inspection fees must be paid annually to renew, as well as $.05 per case of thirty dozen eggs.  HFAC’s largest source of revenue in 2013 and 2014 was the licensing fees paid based on the quantity of product sold with the HFAC logo.
Handsome Brook doesn’t use the HFAC logo.  Some of its eggs are packaged in Illinois, at Phil’s Fresh Eggs, which packages eggs from three farmers, each of which is certified organic under the USDA program and also AHA-certified, as is Handsome Brook.  None of Handsome Brook’s eggs are HFAC-certified, though HFAC does certify other farmers whose eggs are packaged at Phil’s Fresh Eggs.
In May 2016, Phil’s Fresh Eggs’ Vice President contacted HFAC to update its certification. During the resulting inspection, the inspector observed that Handsome Brook’s USDA certification was from 2013 and an annual update was not on file, and though Handsome Brook had an AHA certification on file, the three source farms did not. The inspector stated that she could not verify that Handsome Brook’s eggs were “American Humane Certified” because the AHA had not inspected Phil’s Fresh Eggs.
However, Handsome Brook and its three suppliers were in fact all appropriately certified  under the USDA and AHA programs; Handsome Brook emailed the suppliers’ USDA certifications to Phil’s Fresh Eggs five months before the audit, and the AHA’s publicly viewable website listed Handsome Brook’s three suppliers as “currently considered certified under the umbrella of Handsome Brook Farm, LLC.”   HFAC’s VP believed that the audit report confirmed a complaint she received about a month earlier about Handsome Brook mislabeling its eggs, so she drafted an email titled “Unverified Pasture Raised Label Claims”:
I am writing you to share some potentially troubling news about one of your egg suppliers, Handsome Brook Farms. Based upon a whistleblower complaint we recently conducted a traceability inspection of a packaging plant that packs Certified Humane® eggs and also packs Handsome Brook Farm’s (HBF) eggs. It came to our attention that the “Pasture Raised” claims on the Handsome Brook cartons could not be verified. In fact, of the three producers whose eggs were being packed into HBF cartons, none were pasture raised. These eggs had tags that stated, “Certified Organic” but our auditors found that the organic certification was not current.
The email continued that the auditor found “there was no validation that the eggs going into HBF cartons were from [AHA] certified farms,” that there was no update of Handsome Brook’s USDA certification on file at Phil’s Fresh Eggs, and that the “veracity” of Handsome Brook’s American Humane Certified labeling claim “could not be substantiated.”  It ended:
I hope you will reconsider changing suppliers. Producers who are Certified Humane® undergo traceability audits to verify that every egg that goes in every carton that has claims such as “free range” or “pasture raised” are verified by our inspectors to be exactly that. This in turn protects you.
She sent the email to 69 people at 39 companies, including the top 10 conventional grocery chains in the United States. She chose them because they were all “retailers who were thinking of switching from actual pasture-raised laying hens to the Handsome Brook eggs.”  “The email had the intended effect,” causing Handsome Brook to lose customers; Whole Foods temporarily pulled Handsome Brook’s eggs from its shelves, while a large group of retailers indefinitely pulled the eggs, and a prospective customer indefinitely delayed plans to launch HB’s eggs in its stores.
Handsome Brook sued for false advertising, tortious interference, and trade libel.  Previously, the court granted a TRO against further dissemination of the email; in this opinion, it granted a preliminary injunction.
The court used the Gordon & Breach test to determine whether this was “advertising or promotion.”  HFAC argued that the email did more than propose a commercial transaction, because its primary purpose was to support humane animal treatment.  It also argued that its certification fees didn’t provide a sufficient economic incentive for the email to be commercial in nature.
The court disagreed.  HFAC pursued its anmal welfare objective through “distinctly commercial means.”  It sought to leverage consumer demand for humane treatment to encourage producers to adhere to its standards.  “Thus both the achievement of HFAC’s public interest objective and its economic survival critically depend upon its licensing agreements with producers.”  In light of that economic reality, the email was primarily commercial in nature.  In the VP’s own words, she sent the email to protect the interests of her own licensees. The context additionally supported calling the email commercial, since the VP intentionally sent it “to retailers who were thinking of switching from actual pasture-raised laying hens to the Handsome Brook eggs.”  
Gordon & Breach also asks whether the parties are in commercial competition.  The court, citing Lexmark, rejected the idea that the parties have to compete at the same level of the distribution chain.  Although Lexmark expressly disclaimed any comment on whether the communications before it constituted “commercial advertising or promotion,” the court here sensibly pointed out that
it would be a perplexing decision by the Supreme Court to conclude that indirect competitors had standing to bring a Lanham Act claim, but those same plaintiffs’ claims would necessarily fail on the merits due to lack of direct competition. Many post-Lexmark cases have seized on that intuitive conclusion and the absence of a direct-competitor requirement in the plain language of § 1125(a)(1)(B) to conclude that such a relationship is not necessary to show commercial advertising or promotion.
Indeed, the court noted, no post-Lexmark case finds the absence of a direct-competitor relationship to be dispositive in a Lanham Act claim. The competitive relationship in this case was sufficient: HFAC-certified eggs compete directly with Handsome Brook’s eggs.
HFAC argued that its speech wasn’t made “for the purpose of influencing consumers to buy defendant’s goods or services,” as required by Gordon & Breach, because it only promoted a class of goods and would only tangentially raise revenue for HFAC.  But this wasn’t a nonprofit fundraising letter to prospective donors.  Further, the email promoted HFAC’s product: the license it offered licensees.  “It is true that the license promotes a public interest, but it is commercial nonetheless.” s
And the email was disseminated sufficiently to constitute advertising and promotion within the relevant industry, even if “many national and countless regional and local retailers” weren’t included: the top ten conventional grocery chains, over 16,000 stores nationwide, were included.  HFAC argued that it only targeted retailers that already carried Humane Certified eggs, but a targeted ad is still an ad.  HFAC specifically chose retailers that were considering switching to Handsome Brooks eggs, which “clearly demonstrates an attempt to penetrate the relevant market.”
As for falsity, the email falsely stated that (1) “of the three producers whose eggs were being packed into HBF cartons, none were pasture raised,” (2) “[b]ased upon a whistleblower complaint we recently conducted a traceability inspection of a packing plant that packs Certified Humane® eggs and also packs Handsome Brook Farm’s (HBF) eggs,” and (3) Handsome Brook eggs inspected at Phil’s Fresh Eggs were being mislabeled as certified organic. This last was stated by necessary implication: the email said that Handsome Brook’s organic certification documentation was issued in 2013 and “no annual update was on file” and also that “our auditors found that the organic certification was not current.” In fact, Handsome Brook sent its suppliers’ current certificates several months before the inspection, and even if the auditor didn’t find them in the file, the statements created the impression that Handsome Brook was mislabeling its eggs.
There was no dispute about materiality, which was supported by intuition, HFAC’s own business model, and HFAC’s own statements about the importance of reputation “[i]n the ethically-sourced products space.”  HFAC’s VP testified that she sent the email, in the court’s words, “hoping retailers would find the allegations of mislabeling relevant in their purchasing decision.”  There was also no dispute about actual deception and injury.
Handsome Brook also showed irreparable injury:
Plaintiff is a young, but quickly growing company. The email had a clear effect on that growth and Handsome Brook’s goodwill, causing Handsome Brook to lose one customer temporarily and two large customers indefinitely. Those injuries are irreparable and would likely compound if the email is disseminated further.
Nor was prohibiting further dissemination enough.  Handsome Brook offered evidence that the information in the email “has now seeped even beyond the initial recipients,” having been forwarded among its competitors.  A broker reported that rumors have been repeated at an industry trade show that “Handsome Brook Farm had failed a Certified Humane audit.” Each forward or word-of-mouth communication threatened “additional loss of goodwill, customers, and growth opportunities,” which were irreparable injuries. Handsome Brook estimated that the monthly loss of revenue from even one grocer pulling Handsome Brook eggs was in the hundreds of thousands of dollars. “Even if this number could be sufficiently estimated so as to be recoverable at trial, there is a very small likelihood that HFAC could satisfy such a judgment if the injuries continue to swell, as HFAC is a nonprofit operating at a [deficit].”
Handsome Brook’s own defense of itself wasn’t sufficient.  “HFAC’s email directly impugns Handsome Brook’s credibility, such that an email from Handsome Brook is not likely to have the intended palliative effect.”  HFAC’s accusation gave the claim credibility; the same credible source was required to halt the harm.
Thus, the balance of the equities favored ordering HFAC to issue a corrective email.  Though that might harm its reputation, that was HFAC’s self-inflicted injury, by sending the email after performing only a cursory investigation.  The auditor or the VP “could have made some effort to contact Handsome Brook, Handsome Brook’s suppliers, AHA, the USDA, regional certifying organizations, or publicly available information to verify the conclusions reached in the audit.” However, an order requiring HFAC to post a corrective statement on its website was too much; it would just be public shaming.  The corrective email would also further the public interest in avoiding false advertising.

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