Sunday, August 13, 2006

McDonald's is lovin' it: Burger King franchisee lacks Lanham Act standing

Phoenix Of Broward, Inc. v. McDonald's Corp., --- F. Supp. 2d ----, 2006 WL 2147645 (N.D. Ga.)

Beginning in 1995 and continuing until 2001, McDonald's ran games, such as the "Monopoly Game at McDonald' s," "Hatch, Match and Win," and "Who Wants to be a Millionaire Game." Each game had low-, mid-, and high-value prizes. Generally, there were two opportunities to win a $1 million grand prize: (1) by obtaining the $1 million instant winner game piece, or (2) by collecting certain game pieces. McDonald's extensively advertised and promoted each of the games it offered to the public, allegedly representing that all customers had a fair and equal opportunity to win all of the offered prizes. The ads also listed the odds of winning specific prizes.

Allegedly, the games led a lot of people to eat at McDonald’s who wouldn’t otherwise have done so. In early 2000, the FBI began investigating and informed McDonald’s that there were problems with the randomness of the distribution of game pieces, but McDonald’s continued to advertise the games as if everyone had an equal chance to win high-value prizes.

In 2001, the government announced that since at least 1995, certain of McDonald's promotional games had been compromised by a criminal ring led by the director of security at the company McDonald’s used to operate the games. He diverted at least $20 million in high-value prizes from McDonald's games by embezzling game pieces and distributing them to a network of "winners." About 45 people ultimately pled guilty to charges of conspiracy and mail fraud.

Consumers filed several class-action lawsuits against McDonald's alleging consumer fraud, negligence, and unjust enrichment. In 2002, McDonald's settled these lawsuits by, among other things, agreeing to implement a $15 million instant giveaway involving 15 $1 million prizes.

Plaintiff, a Burger King franchisee, sued on behalf of itself and all similarly situated Burger King franchisees, over 1,100 of them. Its only claim was false advertising under the Lanham Act. It argued that McDonald’s conduct was intentional and/or reckless, justifying treble damages as well as disgorgement of the profits associated with sales generated by the fixed games.

No proof of intent or willfulness is required under the Lanham Act. It’s a strict liability cause of action. Still, this is the first identified Lanham Act case about advertising that was false or misleading due to the felonious conduct of third parties.

McDonald’s sought dismissal on three grounds: (1) lack of prudential standing, (2) criminal conduct is an intervening cause preventing McDonald’s from being liable, and (3) plaintiff failed to plead with the particularity required by Rule 9(b).

McDonald’s argued that plaintiff lacked prudential standing even if it had constitutional standing. The Eleventh Circuit hasn’t addressed the issue. Some circuits have a bright-line rule: the plaintiff has to be a competitor and has to allege competitive injury. The Third and Fifth Circuits have adopted a less categorical multi-factor test, based on the Supreme Court's test for antitrust standing, that focuses on the protection of commercial interests and the prevention of competitive harm. The district court chose to follow the approach of Conte Bros. Automotive, Inc. v. Quaker State-Slick 50, Inc., 165 F.3d 221 (3d Cir.1998) (opinion by then-Judge Alito), which assesses five factors: "(1) the nature of the plaintiff's alleged injury, (2) the directness or indirectness of the asserted injury, (3) the proximity or remoteness of the party to the alleged injurious conduct, (4) the speculativeness of the damages claim, and (5) the risk of duplicative damages or complexity in apportioning damages."

Conte Bros. involved retailers who sought to sue manufacturers of products that competed with those the retailers sold. The present case is the currently-rare instance where the defendant wants a multifactor test to apply, since plaintiff plainly has standing under the competitor/competitive harm rule. Really, if we’re going to have standing requirements additional to injury, this test should only be used when there isn’t a traditional competitive relationship but there might still be reason to employ the Lanham Act; Conte Bros. depends on a background assumption that competitors enjoy standing and the only question is how much further that extends. (I think the statute doesn’t limit standing whenever there’s injury, so I’m an extremist on the topic, but I don't think you have to be to think that the district court fundamentally misunderstood the standing test.)

(1) Was this the type of injury Congress sought to redress in providing a private remedy for false advertising? The Lanham Act has two aims: vindicating commercial interests harmed by false advertising, and securing to businesses the advantages of reputation and goodwill by preventing their diversion from those who’ve created them to those who haven’t. Though Congress wasn’t thinking about criminal conduct by third parties, this factor weighed in favor of standing. The parties unquestionably compete, and good faith isn’t a defense to liability.

Still, the weight of this factor is weak, since the ads at issue didn’t tout McDonald’s products or services or disparage those of Burger King. The ads focused on the odds of winning high-value prizes. They didn’t harm Burger King’s good will or reputation; if there’s been any harm, it’s been to McDonald’s reputation. The court here imports a consideration of materiality – because the ads weren’t about products or services, they might not have affected goodwill.

That’s wacky reasoning. Plaintiff alleges – persuasively – that McDonald’s offered to give away prizes to get people to buy its food, and that the offers succeeded even though the games were rigged. That’s materiality, a conclusion supported by the general rule that whatever an advertiser focuses on in an ad is material, since advertisers don’t ask people to buy based on irrelevant characteristics. McDonald’s reputation suffered when the scheme unraveled, but that doesn’t erase the competitive harm done – disclosure didn’t sell any Burger King burgers -- and there’s certainly no evidence at this stage of the case that McDonald’s has lost the competitive advantage it gained over the course of the games. The class action settlements were designed to improve McDonald’s goodwill by offering new prizes, so I can’t see how that fixes things for Burger King.

Factor (2) looks at whether defendant’s conduct directly affected the plaintiff or the market in which the parties participate. Even if customers would have eaten at Burger King, instead of McDonald’s, had they known that “a few of the high-value prizes” in particular games were unavailable, that requires plaintiff to prove a complex causal chain, so it weighs only moderately in favor of prudential standing. Again, I’m not sure how this causal chain is any different from that in a standard false advertising claim. Except in cases of outright fraud, the defendant has usually only exaggerated the superiority of its product, which still provides some of the advertised benefits. Purchasers often have other reasons to buy than ads, but the ads still matter – especially in a case like this, which offered time-limited and therefore highly salient reasons to go to McDonald’s right then. Consideration of the difference between advertised and actual benefit belongs in a materiality assessment, not standing.

(3) Plaintiff’s proximity to the injurious conduct. The court considered whether there’s an identifiable class of people whose self-interest would normally motivate them to vindicate the public interest, diminishing the justification for allowing a more remote party to act as a private attorney general. There’s a better group here, which is the customers who were denied the chance to win prizes. Again: not unique, since the harm of false advertising can only work through deluded and diverted customers. This test is just plain ill-suited for a standard false advertising claim between competitors like this one. Mark McKenna’s paper on how courts have let the consumer harm rationale for the Lanham Act overwhelm its original focus on producer harm, to the detriment of the law, seems particularly relevant here. (Note also that the only reason courts initially denied standing to parties who were harmed by false advertising, but who weren’t direct competitors, was that the Lanham Act focuses on protecting competitors and not consumers; this case stands that rationale on its head – and shakes the loose change out of its pockets.) Another relevant consideration: given how hard it is to get class certification for a consumer protection class, since many courts find that issues of individual causation and reliance preclude certification, it’s unlikely that there is a group that could successfully vindicate the public interest. The fact that McDonald’s decided not to fight the class action should not blind us to the reality that, with increasing barriers to consumer class actions, only competitors have enough of an interest to litigate.

(4) The court found that the speculativeness of the damages weighs heavily against standing. Since the conduct at issue ceased, damages are all that’s at issue. Given that the fraud only affected some of the prizes, the number of fast food competitors of McDonald’s, and the difficulty of figuring out what percentage of customers would have gone to Burger King instead absent the false advertising about the high-value prizes, damages would be speculative at best. This is the most persuasive argument of the bunch, and probably could have been accepted using a more standard assessment of whether plaintiffs could prove they themselves were harmed.

(5) Likewise, the court found that risk of duplicative damages weighed heavily against standing. If the court found that Phoenix had standing, every competitor could bring a copycat suit, and because damages are so speculative, the risk of broad and overlapping damages is great. This illustrates a general point about Lanham Act standing, which is that it’s hard to prove in competitive markets; oligopolistic markets allow more lawsuits.

Result: no standing, no need to address the other arguments. Look, maybe McDonald's has already suffered enough, but this is a very bad reason to dismiss plaintiff's claim. Logically, any false advertiser in a moderately competitive market could argue against standing on the same grounds -- consumer lawsuits to redress consumer injury are always possible, even if they haven't been brought -- and convert questions about measuring damages into an absolute bar to suit.


Anonymous said...

is there any way to find a list of those 1100 franchisees??

RT said...

I'm not sure, but the firm that filed the cert petition on behalf of Phoenix is Robbins Russell, -- you might contact them.