Sunday, January 08, 2006

The definition of commercial speech: hand me my leather

Katzkin Leather, Inc. v. Nissan North America, Inc., 2005 WL 3593999 (C.D.Cal.)

Plaintiff Katzkin makes aftermarket leather seat covers for many different kinds of cars. It sells to restylers, including a co-plaintiff, who install them in cars for auto dealers at customers’ request. Defendant Nissan has an approved aftermarket leather program (ALP) for some Nissan models, allowing Nissan dealers to buy aftermarket leather from approved vendors for installation by the vendors.

In 2003, in response to new federal air bag safety standards, Nissan began installing an “advanced” air bag in some cars. This air bag uses a pressure sensor in the seat to detect whether a child or an adult is in the front passenger seat and thus turns off the passenger-side air bag when a child is present. Nissan soon decided to exclude cars with the advanced air bag from its ALP, based on concerns that installation of aftermarket leather could cause an air bag malfunction, posing a safety hazard. Nissan didn’t conduct any tests to see whether this was true.

To get the word out to its dealers, Nissan issued a series of accessory bulletins on advanced air bags and aftermarket leather. Each bulletin stated that the removal of cars with advanced air bags from the ALP was necessary because the air bag was “specially designed and calibrated” to meet federal standards and modification of the seat could affect the pressure sensor. The bulletins also “strongly recommended” that dealers not install any aftermarket leather seats on cars with the advanced system, cautioning that modifications could require the dealers to have to recertify that the modified cars complied with safety standards.

Plaintiffs, alleging that Nissan’s motive was to sell more cars with factory leather by reducing the number of cars for which aftermarket leather is available, brought state and federal false advertising claims and common-law claims for interference with prospective economic advantage against Nissan.

The court granted summary judgment to Nissan. First, the advisory bulletins were not “advertising or promotion” under the Lanham Act. “Advertising or promotion” requires (1) commercial speech; (2) by a defendant who is in commercial competition with plaintiff; (3) for the purpose of influencing consumers to buy defendant's goods or services; (4) that is disseminated sufficiently to the relevant purchasing public. The first and third elements were at issue.

The bulletins were not classic advertising; nonetheless, they might constitute commercial speech. Important indicators of commercial speech are whether the bulletins (1) were in advertising format, (2) referred to a specific product, and (3) were made with an economic motive.

Notably, the court quoted the controversial Kasky v. Nike case, 45 P.3d 243 (Cal. 2002), holding that the bulletins were not in advertising format because they were not “speech about a product or service by a person who is offering that product or service at a price, directed to persons who may want, and be willing to pay for, that product or service.” Because the bulletins don’t mention Nissan’s factory leather seats, they aren’t in advertising format – they are solely directed at ALP safety concerns.

This seems shaky to me, for a variety of reasons. It seems from the discussion that dealers are either plaintiff's customers or at least intermediaries for car buyers who want aftermarket modifications. To the extent the bulletins disparage competitors’ products they serve the same purpose as bulletins touting Nissan’s own products. If a standard advertising campaign were divided into two parts – (1) ads that just criticize a competitor’s product and end with a sponsorship statement, like negative political ads, and (2) ads that affirmatively promote the advertiser’s product – I think most courts would agree that both (1) and (2) were commercial speech. Especially when Nissan’s speech is targeted to dealers who presumably know of the existence of factory-installed leather seats, it seems just like (1).

The court reasoned similarly that the bulletins didn’t refer to a specific product (Nissan’s factory leather seats). Nissan offered evidence that the reason it issued the bulletins really was a concern for safety, separate from promoting its factory leather seats. I have the same problem with this rationale – by stating that ALP seats could be dangerous, Nissan may have harmed its competition. Nissan’s legitimate concern might well aid the conclusion that its statements weren’t false, but it’s not a reason that its statements weren’t commercial speech. I would hope that most advertisers believe the factual claims they make, like the very scary OnStar ad I heard on the radio claiming that OnStar could save my life in an accident. Perhaps this goes to the “economic motive” factor, but the court is then at least double-counting here.

On to economic motive: The court bizarrely says that the bulletins didn’t recommend against using competitors’ products because they advised against using “any aftermarket leather seat covers,” but many of those are in fact the products of Nissan’s competitors in the seat cover market, so the fact that the bulletins didn’t use the magic words “our competitors” is not critical. Anyway, the court found no material dispute over Nissan’s motivations, which it found were safety-related rather than economic. Here we get into one of the criticisms of Kasky’s reliance on Nike’s motive to make itself look like a good corporate citizen: Almost everything a corporation does has an economic motive – charitable contributions polish corporate image; safety consciousness averts disastrous PR and lawsuits; etc.

But the court finally has a sensible story to tell – Nissan recommended against installing any aftermarket leather, including through Nissan’s own ALP. Nissan lost money by saying that cars with advanced airbags shouldn’t be in its own ALP. Before I was persuaded by this, I’d want to know whether Nissan would make as much or more money through installing factory leather in the non-ALP-eligible cars; it might be the case that factory leather has a high enough profit margin that Nissan – though not necessarily its dealers – profits from this decision even if the total number of leather seats installed in cars goes down. Still, the court goes on to find that there’s no evidence that the bulletins were meant to encourage the purchase of factory leather. The only evidence was offered by Nissan, claiming that the sole reason for the bulletins was safety concern.

Okay, so the bulletins weren’t commercial speech. The court isn’t done; it goes on to hold that the bulletins weren’t made for the purpose of influencing dealers to buy factory leather, which is a second reason they don’t count as “advertising or promotion.”

I’m not aware of much litigation on the “economic motive” aspect of defining commercial speech, but as we continue the post-Kasky expansion of First Amendment standards into advertising law, expect to see more of this – and therefore more arguments over whether discovery should be allowed or whether discovery’s costs would have such a chilling effect on corporate speech that it should be avoided. Frankly, if motive is an issue, I can’t see how discovery can be avoided, but it doesn't seem to have helped here.

Even if the bulletins had been advertising, the court ruled that Nissan would still win because there were no false statements of fact about anyone’s aftermarket leather seats. This is just plain wrong: under § 43(a)(1)(B) as amended in 1988, a plaintiff need only show false statements of fact about someone’s product, whether its own or the defendant’s. In this case, Nissan’s product was its cars and the allegedly false statement was about the safety of its cars combined with anyone’s aftermarket leather seats. Plaintiff and defendant are in competition, though defendant supplies a complement to one of plaintiff’s products. Imagine a supplement manufacturer who says “If you take our multivitamin, you shouldn’t take other iron supplements that aren’t specially formulated to work with our multivitamin because the interaction might be dangerous.” That’s a statement about both the manufacturer’s and competitors’ products. If it turns out that the manufacturer has its own specially formulated iron supplement to sell (as Nissan has factory leather seats to sell), this is a classic Lanham Act false advertising case even if the manufacturer also sells non-specially formulated supplements (like the ALP).

Of course, if the safety concerns are legitimate, Nissan should still win; and arguably plaintiff should have a high burden of showing falsity, given that safety is at issue.

The state law false advertising claims failed for the same reasons as the Lanham Act claim.

The interference with prospective economic advantage claims likewise failed. In order to state a claim for either intentional or negligent interference with prospective economic advantage, a plaintiff must show that the defendant not only knowingly interfered with the plaintiff's expectancy, but also engaged in conduct that was wrongful by some legal measure other than the fact of interference itself. Wrongfulness can include violation of a statute, regulation, rule of common law, or trade standards. Here, plaintiffs’ claims of wrongfulness were premised on the allegations that Nissan’s false advertising violated the Lanham Act and state law, and thus fall along with those allegations.

Note: this was a case where commercial disparagement claims, which are not limited to advertising, could have changed the analysis – but given the heightened fault/scienter requirements imposed on disparagement torts, query whether the outcome was likely to change.

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