Fresh as paint or false as paint?

National Services Group, Inc. v. Painting & Decorating Contractors Of America, Inc., 2006 WL 2035465 (C.D. Cal.)

Defendant is a nonprofit trade organization of painters and decorators. Plaintiffs are (1) a group of companies that provide college students with internships managing painting companies in various states (College Works Painting or CWP), (2) a company that offers painting contractor services to Home Depot customers (New Image Painting or NIP), and (3) a company that’s the majority shareholder of (1) and (2).

In June 2006, defendant published two articles on its website. The first, "Dad, I'm Running a Paint Company ... for the Summer," ("CWP article") sets forth a fictional conversation between a father and his college-age daughter, Lindsey, who has just been accepted into CWP's internship program. The father expresses concern about the CWP entities' legitimacy and professionalism, and asks his daughter twenty fictional "questions and answers" about them. The second article, "New Image Painting, A Decision for Independent Painting and Decorating Contractors" ("NIP article"), characterizes NIP's practice of contracting with independent painting companies to provide services to Home Depot customers as an unsuccessful business model that "cannot produce a reasonable profit for any legitimate and qualified contractor."

Plaintiffs sued for state and federal false advertising, trade libel, and intentional interference with business advantage. Because the state section 17200 claim was predicated on a business practice in violation of another law, the court analyzed it in the same way as the Lanham Act claim.

Defendant PDCA argued that plaintiffs lacked standing under §43(a) because they’re not in commercial competition with defendant, which is a nonprofit trade organization. The court rejected this argument. Under 9^th Circuit precedent, the issue is not direct competition but whether the plaintiffs have suffered a “competitive injury.” Even if the parties aren’t in the exact same business, if the statements tended to divert business from the plaintiffs to the defendant’s members, that’s good enough. The court also pointed out the sensible policy basis for this holding: A contrary result would allow trade groups to escape the Lanham Act on behalf of their members, tainting the market.

Next, defendant argued that the two articles weren’t “commercial advertising or promotion.” The Ninth Circuit follows the general four-part test requiring (1) commercial speech, (2) by a defendant who is a commercial competitor of the plaintiff, (3) for the purpose of inducing customers to buy defendant's goods or services, and (4) disseminated sufficiently to the relevant purchasing public to constitute "advertising" or "promotion" within the industry. Defendant fought over (1), claiming that its articles weren’t proposals to engage in commercial transactions, but statements by a nonprofit about services provided by nonmembers. However, the case law is clear that the Lanham Act applies to nonprofits, and defendant is a trade organization representing commercial interests.

The CWP article made repeated negative references to plaintiffs’ specific commercial services and positive references to defendant’s members’ services. For example, the fictional dad says he was “very impressed” by a painting job done by PDCA painters – the sort of thing you’d expect to find in a standard ad or testimonial. Thus, even though the article wasn’t a traditional ad format, the specific references and clear economic motive led the court to find commercial speech.

The NIP article, by contrast, was non-commercial speech. It wasn’t a typical advertising format, but a discussion of issues affecting the painting industry. Specifically, it characterized NIP’s setup as an attempt to “roll up” a decentralized market full of family-owned firms into a concentrated, franchised market, and argued that this would be a money-losing proposition for NIP’s licensees. Unlike the CWP article, the NIP article didn’t promote specific services provided by PDCA members. It only mentioned the PDCA in promoting the PDCA itself as an organization qualified to tell the truth about the painting marketplace and to represent painting contractors’ interests. I would think that made the article commercial speech at least with respect to the contractor audience – since NIP doesn’t require its licensees to be accredited, either by PDCA or anyone else, NIP and PDCA seem somewhat competitive.

Nonetheless, the court found that the article was only indirectly economically motivated. Rather than promoting PDCA members’ services to end consumers, the article was directed at members and targeted their economic interests. The discussion of NIP is intertwined with discussion of an issue of public importance – an effort to concentrate the painting industry. Thus, the relevant factors counseled against treating the NIP article as commercial speech.

Only the CWP article was subject to Lanham Act analysis, but plaintiffs’ trade libel and libel per se claims still covered both. Falsity (and therefore some specific factual statement or implication) is a necessary element of all those claims. Except for a single statement that falsely implied that the CWP companies deliberately avoided operations in states that regulated and licensed painting contractors, the court found that the statements in both articles were either nonspecific opinions or that plaintiffs failed to offer evidence of falsity, because the plaintiffs’ affidavit was from a person without actual knowledge of the practices described. As for the false implication about licensing, the court found that plaintiffs were likely to succeed on their Lanham Act and defamation claims, because PDCA offered no basis for believing its statement to be true, and thus plaintiffs were likely to be able to show malice.

PDCA tried to call all of its CWP article statements “opinion” because “Lindsey” was plainly a callow youth and prefaced all her statements about her supposed job with “I think.” The court was somewhat sympathetic to the “callow youth” idea, suggesting that reasonable readers might not assume that Lindsey knew all the details of the business because she was just an intern.

This is a mistake. Consumers probably don’t think the actor touting the virtues of a detergent’s cleaning power knows the science behind it, but the actor stands for the company, as the FTC has long held. Here, Lindsey stands for the PDCA, and readers would understand that this is PDCA’s position, not that of a callow youth. The court seems to have forgotten that Lindsey is neither a real intern nor a real person.

The addition of “I think,” however, did not take Lindsey’s falsifiable claims out of the realm of factual representations; it never does. PDCA largely escaped liability because of a failure of proof, not because its statements about CWP were unprovable. By contrast, the court treated the statements about the painting business in the NIP article mostly as statements of opinion, perhaps because they were more general and market-based rather than addressing the capabilities of specific painting companies.

Of note: The father in the CWP article asked about safety, and his daughter reassured him that she gets a week of training. Plaintiffs alleged this was false because interns are also required to attend meetings every two weeks at which safety is always on the agenda. The court found that the difference between that and “one week of training” would not be material to a reasonable consumer, because the consumer’s overriding concern would be that interns only have one week of training (while traditional contractors have much more experience). The reason this is notable is that materiality has traditionally been assessed by type of claim, rather than claim magnitude: That is, a claim about safety is material because consumers care about safety.

Perhaps the court’s approach makes sense applied to negative statements about a competitor – and it’s consistent with libel law’s tolerance for statements that are basically true – but the traditional false advertising rule works better for statements about one’s own product. Consider whether plaintiffs would have been engaged in false advertising had they falsely represented that, along with initial training, contractors received safety refreshers every two weeks. I’d care that the contractors had been reminded of safety issues rather than just told once. But the issue is one of baseline. If, as the court suggested, consumers think of one week as a ridiculously short amount of training time, then refreshers wouldn’t be that important to defendant’s point. Still, if the plaintiffs used their refresher meetings as a selling point, I think such claims would be material. (It may also be significant that the court just eyeballed materiality, rather than looking for record evidence about what people in the market for painting services want.)

Plaintiffs secured a preliminary injunction requiring the removal of the licensing statement from the PDCA website, but nothing else. As far as I can tell, the PDCA has removed the entire CWP article for the moment, but an edited version might come back up – especially since plaintiffs blame the PDCA for an apparently significant slowing of their business growth since the article appeared.