Friday, June 22, 2018

When is a literally false statement claiming 35% savings immaterial?

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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