Tuesday, November 07, 2017

Ad intermediary lacks standing under Lexmark to challenge false ads

Congoo, LLC v. Revcontent LLC, 2017 WL 5076397, No. 16-401 (D.N.J. Nov. 3, 2017)

A rare case discussing Lexmark’s proximate cause requirement in some detail. Congoo operates an online ad business as Adblade, an aggregator that serves as an intermediary between advertisers and publisher websites that display native ads on their pages.  Revcontent competes with Adblade.  Advertisers pay aggregators a fee based on the numbers of clicks on their ads. Publishers usually contract with the aggregator who “pays the higher rate, higher guaranteed minimums, or greatest revenue.” An aggregator may pay a publisher a fee calculated by multiplying a negotiated display rate, CPM/cost per 1000 impressions of an of an ad, by the number of times the aggregator’s advertising unit is displayed on the publisher’s website. In the alternative, an aggregator may pay a publisher a percentage of the revenue the aggregator received from advertisers for the display of the ads on the publisher’s website.

Adblade alleged that it avoids business with advertisers using false and deceptive ads, such as negative option membership charges or undisclosed automatic enrollment in expensive membership programs.  This is an issue in direct response advertising, “a subset of native advertising that seeks consumer action, e.g., an online purchase.” When a user clicks on a direct response ad, she navigates to a “landing page” that endorses the good or service, followed by an “order page” where she can buy. 

In 2015, Adblade allegedly discovered that Revcontent was promising Adblade publishers deals with better economic terms through its “use[ ] [of] false and misleading ads that obtain higher CPMs”; Revcontent allegedly also assisted with the creation of such ads.  Revcontent’s algorithm allegedly “automatically” displays “false and misleading” advertisements on publishers’ websites because they “have the highest CPM and revenue to be generated.” Adbeat, a well-known industry data source, allegedly confirmed that the most popular advertisements in Revcontent’s network were “false and misleading.” Its report stated that Revcontent’s top mobile ads included those for diet pills, muscle pills, and skin cream; Adblade provided hundreds of copies of such ads, and alleged that false and misleading ads appeared on five top Revcontent publishers that previously did business with Adblade. (Id. at ¶ 20.)
Lexmark requires plaintiffs’ interests to “fall within the zone of interests protected by the law invoked”:  “an injury to a commercial interest in reputation or sales.” In addition, a plaintiff must demonstrate that its alleged harm was proximately caused by the false advertising, though “the intervening step of consumer deception” does not necessarily break the chain of proximate causation. Economic or reputational injury “flowing directly from the deception wrought by the defendant’s advertising … occurs when deception of consumers causes them to withhold trade from the plaintiff.” By contrast, “[t]hat showing is generally not made when the deception produced injuries to a fellow commercial actor that in turn affect the plaintiff.”

For purposes of their motion for summary judgment, Revblade didn’t contest that Congoo’s interests fell with in the zone of interests protected by §43(a)(1)(A), or that there was a causal connection between deceptive native ads and Congoo’s loss of publisher clients.  However, the court agreed that the purportedly false advertising didn’t have a sufficiently close causal link to Congoo’s alleged harm.

In Lexmark, the connection between the actual competitors in the market and Static Control was very close: because Static Control seemed to be the only relevant supplier, every harm to the competitors was also inflicted on Static Control.  Here, however, there was a disconnect “between the injury to the direct victim”—here, competitors of falsely advertised goods—and Congoo’s own injuries as an indirect victim, “unlike the injuries to companies supporting those competitors in the marketplace.” The loss of publisher clients wasn’t “surely attributable” to injury to a competitor, but could have “resulted from any number of [other] reasons.”

Congoo’s expert stated that false and misleading advertisements deceive consumers into clicking on the advertisements and/or making purchases, thereby “enabl[ing] the unscrupulous advertiser to make high cost-per-click bids to an advertising aggregator, such as Revcontent, who in turn offers higher rates to a publisher to obtain its business. … In addition, native ads that are deceptive and misleading likely have higher click-through rates that also translates into a greater revenue to the publishers.” But this was a too-long chain of causation from higher sales/higher revenues to Revcontent’s ability to pass on more money to publishers.

Congoo’s state common law unfair competition claim also failed because standing wasn’t broader than under Lexmark. To the extent, however, that any allegations of fraudulent representations didn’t relate to consumer products but instead to statements to publishers, such claims survived.

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