SourceOne Dental, Inc. v. Patterson Cos., No. 15-cv-5440,
2018 WL 3038503 (E.D.N.Y. Jun. 19, 2018)
This is an interesting case to contrast to yesterday’s
Seventh Circuit case finding that “monster” imagery making no specific
health claims was false advertising. Here we have literal falsity, but the
court finds that the gap between the truth and the falsehood wasn’t material,
even though it was pretty big. Perhaps
these are the correct rules, insofar as they don’t incentivize advertisers to
avoid specifics, but I feel nervous about this one. It’s also worth noting that
the two materiality standards—the FTC’s “whether this is the kind of topic that affects
purchasing decisions,” applied in many a Lanham Act case as well, and the standard
applied here, “whether the difference between the truth and the claim about this topic
would affect purchasing decisions,” is rarely articulated.
The parties compete in the market for dental supplies and
equipment. SourceOne sells manufacturer-direct products directly to dentists.
The key falsity issue: SourceOne sought endorsements by state dental
associations (state-based trade organizations for dentists), making numerous
statements that dentists’ savings were about 30-35%, either in general or on
average; its attempts to gain endorsements were successful in some states. The parties’ experts, however, calculated an
average of 19-19.5% savings, making these claims literally false (under 6-10%
of customers, depending on which expert you credit, saved 35% or more).
SourceOne argued that
its claims could mean that such savings were possible, rather than that such savings were standard. (The FTC has a lot to say about this, none of
it in agreement with SourceOne.) “A reasonable purchaser reading the statement ‘save
more than 35% on dental supplies’ would not read it to mean that the purchaser
may, but is highly unlikely to, save 35% or more.” The “average” savings claims were even more
obviously literally false. SourceOne
apparently argued that it believed
that its customers would save that amount in the future, but that did nothing
to render the statement true or even ambiguous.
Also, it didn’t matter that the statements didn’t disclose methodology;
“a reasonable consumer would have no basis to infer that the stated ‘average’
referred only to certain products.”
Given these facts, it was also literally false to say that SourceOne’s
programs were “projected” to save dentists an average of more than 35%, and
even to say that they were “projected” to save 35% (without the
“average”). The full statement
necessarily implied that “more than a negligible number of members will save
35% or more.”
However, SourceOne prevailed on materiality. Patterson failed to show that average savings
of 19-20% as opposed to SourceOne’s advertised savings of 35% would be likely
to influence dentist consumers’ or organizations’ purchasing decisions. [I
sense a counter-advertising campaign possibility: a federal court found they
overstated the savings by nearly double…] [Another way of framing the issue:
though courts impose a materiality requirement, material compared to what is
the real question. Had SourceOne advertised itself without making savings
claims at all, it seems inarguable
that it would have made many fewer sales.
Usually, courts assessing materiality ask whether the presence of the
false claim made a difference, implicitly assuming a null there. Once you start positing alternative factual
claims, things get a whole lot more difficult.]
Here, there was testimony that a discount of 5% to 10% could
induce dentists to switch suppliers. So
the extra promised discounts were “just gravy.” The court continued:
[I]t is not sufficient for
defendants to presume materiality simply on the basis that purchasers generally
like to spend less instead of more. This is because price sensitivity turns on
the marginal price difference and the nature of the product at issue.
Purchasers who see a product that they have purchased advertised for 33% less,
but who have received excellent customer service from their current seller,
might be well inclined to take an “if it ain’t broke, don’t fix it,” approach.
On the other hand, the same or other customers might also decide that it would
be worth switching to a new distributor for even a 10-15% savings.
Perhaps there is some level where
materiality can be found as a matter of law – e.g., where customers were
promised 90% savings over a competing product. But in the absence of that kind
of obvious disparity, defendants were required to introduce some form of
evidence – usually, although not necessarily, survey evidence or expert
testimony based on it – to raise a factual question as to whether the
differential between advertised and actual prices was material in this market.
Kudos to the court here for thinking about the issue, but this
approach seems to create real problems when there aren’t specific numbers
involved. Consider, for example, how one
could possibly judge the “materiality gap” in the rBST monster case using the
standards applied here. The FDA has said
that rBST doesn’t affect human health/safety, but lingering questions remain
about compositional differences in the milk, not to mention effects on the
treated cows. How would you measure exactly
how scary the monster claims were, and how would you reliably measure whether
they’d affect purchase intentions more than the more nuanced truth? With respect to non-numerical claims, the
obvious comparator seems to be “no claim about the issue at all,” with the
likely effect of making materiality easier
to find when claims are vaguer. Maybe
this is the right approach, but it seems to me we could use some more thinking
about it.
Remaining claims had even less success: Patterson argued
that SourceOne’s claims about “leveraging” buying power of dentists’
associations to create savings were untrue because SourceOne didn’t have contractually
volume-based pricing agreements. But these were ambiguous claims. SourceOne’s prices on its websites branded
for state dental associations were approximately 5% lower than the prices it
charged for the same products on its publicly available website. SourceOne
argued that its suppliers agreed to provide this additional discount for
members of state dental associations based on the suppliers’ expectation that
their sales would increase through SourceOne’s affiliation with state dental
associations. Thus, the prices were “leveraged” based on the predicted increased sales volume of
association members. It was also ambiguous whether the leveraging statement was
a cause-and-effect statement about lower prices; without evidence of deception,
Patterson couldn’t win.
Patterson also challenged statements (1) that a particular
person was “VP [of] Product Sourcing and Supplier Relations” of SourceOne, when
that hire was contemplated but never happened; and (2) that SourceOne has 14
full-time support personnel and 10 part-time support personnel, when it had
only between six and three employees in 2013-2014 and added two more by 2017.
These were literal falsities, but Patterson didn’t show materiality for (1) and
there was a genuine fact issue on (2) based on testimony about
contractors.
Still, the (2) statements weren’t “commercial advertising or
promotion” within the meaning of the Lanham Act: they weren’t sufficiently
disseminated, but made only to a single person representing a single state
dental association. “[M]aking a
statement to one of fifty potential customers does not qualify as widespread
dissemination.” Even if it were, Patterson again didn’t show materiality.
Though the representative asked about employees “[t]o make sure that they had
the infrastructure in place to be able to take orders [and] deliver products as
promised,” none of the materials ultimately considered by the assocation’s
board mentioned the number of employees as a consideration. Instead, they mentioned things like the
royalty rate the association would receive on gross receipts from the platform,
SourceOne’s projected savings for dentists, and which other dental associations
had endorsed SourceOne.
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