Saturday, August 12, 2006

Broken glass: Lanham Act and defamation duel between glass repair companies

Diamond Triumph Auto Glass, Inc. v. Safelite Glass Corp., --- F. Supp. 2d ----, 2006 WL 2129498 (M.D. Pa.)

Diamond and Safelite are competing glass companies. They each repair and replace damaged vehicle glass. Safelite also runs a customer service program for various insurance companies, by which it refers insurance policyholders to Safelite or unaffiliated glass companies. Unaffiliated glass companies have to sign an agreement to be part of this insurance company network; Diamond was part for several years, but then left, partly because it believed Safelite was steering customers to Safelite shops over other network shops.

Diamond brought state and federal claims based on Safelite’s statements to policyholders who called the service program. Diamond argues that Safelite customer service representatives: 1) falsely conveyed in their greetings that they were representatives of the insurance companies; and 2) falsely warned policyholders that they could not guarantee Diamond's pricing or service after it left the network. Diamond also alleged that the CSRs falsely stated that Diamond was not a member of the network, though these statements were not provided by the scripts, and Diamond’s evidence was that they occurred on fewer than twenty occasions. Businesses harmed by isolated disparaging statements don’t have recourse to the Lanham Act and must rely on state law, so the court found that these statements weren’t “commercial advertising or promotion” given that Safelite handled millions of calls during this period and referred over 93,000 claims to Diamond. (As for the state-law claims, the court found that the CSRs could take advantage of the conditional privilege between insured and insurers, as long as Safelite acted without malice, but denied summary judgment on this issue – a victory for separate argument of state and federal claims!)

The court found no literal falsity. When greeting callers, the CSRs would state, "Thank you for calling the ABC Insurance Glass program. This is [name]. How may I help you?" Given Safelite’s agreements with insurers and insurers’ approval of the CSR scripts, the CSRs were affiliated with the insurance companies and authorized to represent themselves as insurance company representatives.

The warnings about Diamond's pricing and services after it left the network were also not literally false. Diamond argued that Safelite's warnings were literally false because it never charged more than the insurance companies could pay, it informed Safelite and the insurance companies that it agreed to their pricing, and it provided its own warranty in its invoices to all customers. The scripts, however, did not represent that Diamond's pricing would exceed the coverage, or that the workmanship would be of lower quality, or Diamond would not provide a warranty. After Diamond terminated its Network Agreement, it had no contractual arrangement with Safelite or the insurance companies and it was free to change its pricing, services, or warranty at any time without notice.

Diamond offered evidence of implicit falsity, which the court rejected. Specifically, Diamond’s expert testified that, based on her research into general consumer behavior, her review of a number of customer depositions, and her review of recorded conversations with CSRs, that the greeting led callers to believe the CSRs were insurance representatives and that the warning on non-network pricing and services caused “uncertainty,” which cased many callers to choose Safelite because it was guaranteed. Without ruling on admissibility, the court found that the expert report wasn’t enough evidence of falsity to survive summary judgment.

The CSRs were insurance representatives, given Safelite’s agreements; to the extent consumers believed the CSRs were insurance company employees rather than authorized third party administrators, there was no evidence this was material.

Independently, the court found sufficient basis for summary judgment in Diamond’s unclean hands, because it used the same type of script, telling customers they’d reached an insurer’s glass program rather than disclosing they’d reached a third party administrator, when it processed claims for two other insurance companies. This is a fairly rare application of unclean hands to false advertising, whose consumer protection rationale usually overwhelms any assessment of unclean hands; the judgment here is probably that Diamond’s acts didn’t really do harm either.

Diamond’s expert testified that the CSRs created “uncertainty” about non-network shops. But the Lanham Act doesn’t require that ads educate the consumer about all options, and using the calls to persuade people to use network companies was legitimate. Any doubt and confusion was simply the result of CSRs’ failure to disclose all positive information about Diamond. The Lanham Act doesn’t require Diamond’s competitors to do this. Diamond only found one customer who was deceived by the script into believing that Diamond’s prices would definitely be higher.

Diamond’s claims for tortious interference with prospective business relations failed to the extent they relied on truthful statements, but Diamond had other evidence, such as that Safelite serviced customers who had appointments with Diamond when those customers didn’t consent to Safelite’s service. Diamond lacked a sufficiently solid prospective relationship with customers who called and merely expressed a preference for Diamond, but it did have such a relationship when there were scheduled appointments – a pretty logical finding.

Safelite brought counterclaims against Diamond based on Diamond’s letters to Safelite’s insurer-clients complaining about Safelite’s alleged steering practices (false advertising), and on Diamond’s practice of giving gift cards to insurance agents who directed their policyholders to Diamond (violation of the Robinson-Patman Act, intentional interference with business relations, unfair competition, deceptive trade practices and commercial bribery, breach of the network agreement with Safelite).

Though the court’s description of the counterclaims mentions only the Lanham Act, it first analyzed Safelite’s “defamation” counterclaim. This probably occurred because the Third Circuit has some weird caselaw surrounding the defamation-Lanham Act intersection. Diamond argued that Safelite is a public figure and thus subject to the rigorous NYT v. Sullivan standard. The court disagreed, finding that merely running a nationwide call center doesn’t make a business into a public figure. Moreover (though this really shouldn’t fit into public figure analysis), Diamond’s allegedly defamatory statements weren’t part of a news broadcast, so they don’t get extra protection. The court denied summary judgment.

On the Lanham Act counterclaim, Diamond argued that its letters weren’t commercial advertising or promotion, because they weren’t sent to influence customers to purchase Diamond’s services. They don’t reference any effort to sell claims administration services. The court found a genuine issue of material fact, given that Diamond did seek to establish a call center and made sales presentations to insurance companies within a few months of sending them the letters at issue. (Comment: an unusual situation – because Safelite was both a competitor in glass installation and a participant in a different market segment, Diamond’s complaint about Safelite’s treatment of glass installers falls under the Lanham Act only because it also administered claims sometimes. If a pure glass installer had complained about Safelite, it seems that the Lanham Act would not have applied.)

Safelite might have difficulty proving particular lost sales or lost goodwill later on, but at this stage it didn’t have to do so. For the defamation claim, if Diamond acted with actual malice, Safelite need not prove loss of sales but may recover solely for damage to reputation. After Diamond sent its initial letters, several of the insurance companies responded to Diamond to rebut the claims. Even after receiving these letters, Diamond sent another round of letters including the same accusations. Thus, there’s a fact issue on actual malice.

Safelite also established a fact issue on whether it suffered losses from Diamond’s gift card program. Customers with no preference could be steered to Diamond by gift-card-incentivized agents, whereas the service agreements provided that Safelite would perform the work for customers with no preference.

Because Diamond took business from Safelite, the court refused to dismiss the deceptive practices/commercial bribery claims, though it did knock out the Robinson-Patman Act claims.

General commentary: The lawsuit doesn’t seem to have helped Diamond very much; this bitter and prolix battle seems unlikely to benefit anyone but the lawyers.

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