Friday, June 29, 2007

McDonald's still lovin' it

Phoenix of Broward, Inc. v. McDonald's Corp., --- F.3d ----, 2007 WL 1791886 (11th Cir.). Discussion of district court opinion here.

Sometimes good lawyering can create new extensions or contractions of law; the latter happened here. The basic facts: due to fraud and theft by a McDonald’s subcontractor, at least $20 million in large-ticket prizes for McDonald’s contests were diverted and customers did not in fact have an equal chance at winning them, despite McDonald’s extensive advertising campaigns. McDonald’s knew there were problems with the games, but continued to advertise them. The resulting consumer class actions were settled in 2002 for $15 million in new prizes. A group of Burger King franchisees sued for false advertising. The court of appeals affirmed the district court’s ruling that the franchisees lacked prudential standing under the Lanham Act.

The court first held that prudential standing applies to the Lanham Act, despite language giving a cause of action to “any person” harmed by false advertising. “[C]onferring standing to the full extent implied by the plain language of § 43(a) would give standing to parties that have not had their competitive or commercial interests affected by the defendant’s conduct.” Thus, the court of appeals adopted a five-factor test for prudential standing, stating that it was doing the same thing as the Fifth and Third Circuits, despite the fact that those courts used the five-factor test to determine whether noncompetitors should also get standing and not to deprive direct competitors of standing.

Basically, the court characterized Phoenix’s argument that direct competition was sufficient to create standing as an argument that direct competition was necessary to create standing, and it’s true that many cases look beyond direct competition in appropriate circumstances. But that wasn’t Phoenix’s argument, and it would have been a silly one since Phoenix only needed to establish that direct competition was sufficient. There is tension between the circuits on whether direct competition is necessary, but until this case the circuit divisions never included sufficiency. As to sufficiency, the court reasoned that a multifactor test “is designed to determine whether the injury alleged is the type of injury that the Lanham Act was designed to redress--harm to the plaintiff’s ‘ability to compete’ in the marketplace and erosion of the plaintiff’s ‘good will and reputation’ that has been directly and proximately caused by the defendant's false advertising.” As we will see, all the work here is being done by “directly and proximately caused” – that is, questions of materiality and effect on consumers that should be addressed at a stage at which evidence can be considered, rather than by judges’ hunches about what fast-food consumers think and do.

The court identified one district court case denying standing to a direct competitor. KIS, S.A. v. Foto Fantasy, Inc., 240 F. Supp. 2d 608 (N.D. Tex. 2002). The court, however, misread KIS. The KIS court held that plaintiff photo booth manufacturer had no standing to assert a false endorsement claim under §43(a)(1)(A) based on defendant’s use of pictures of Tom Cruise to advertise its photo booths. That makes sense, given that the plaintiff had no relation to Tom Cruise. Before the court issued its opinion, the plaintiff had dismissed its false advertising claim under §43(a)(1)(B), which concerned separate alleged misrepresentations about patent exclusivity. The court did say, without further analysis, that the Tom Cruise claim was invalid under either (a)(1)(A) or (a)(1)(B), but the statement of facts makes clear that it was brought under (a)(1)(A) and argued that way.

Still, it’s not as if KIS is binding; I just want to highlight that what we have here is a new limit on the standing of direct competitors. So, on to the multifactor test.

(1) The nature of the plaintiff's alleged injury: Is the injury of a type that Congress sought to redress in providing a private remedy for violations of the Lanham Act? Yes, Phoenix alleged that it lost sales to McDonald’s because of the false advertising of the opportunity to win high-value prizes, and also incurred counter-promotion costs to lure back customers.

The court of appeals managed to reject some even worse arguments by McDonald’s on this factor – e.g., that its conduct wasn’t anti-competitive because it was the victim of fraud. But not only did Phoenix allege that McDonald’s knew about the problems and continued to advertise, the Lanham Act is strict liability; injury and fault are separate things. McDonald’s also argued that there was no competitive injury because its ads didn’t tout McDonald’s products or disparage Burger King’s. But the ads were designed to, and allegedly did, bring consumers to McDonald’s instead of Burger King.

So this factor weighed in favor of standing.

(2) The directness or indirectness of the asserted injury. The court of appeals recognized that the causal chain Phoenix alleged “is similar to that of the typical false advertising claim in which a plaintiff alleges that it lost sales and/or market share as a result of the defendant’s false or misleading representations.” But the court found the causal chain “more attenuated” than that alleged in cases where the plaintiff made false representations about its own products.

The court broke down the causal chain as follows: “(1) McDonald’s advertisements falsely represented that customers had a fair and equal chance to win one of the "rare" high-value prizes …; (2) as a direct result of the misrepresentation regarding the high-value prizes, McDonald’s lured customers who would have eaten at Burger King (as opposed to one of numerous other fast food competitors), causing Burger King to lose sales; and (3) but for this misrepresentation, these customers would have eaten at Burger King, even though the chances of winning one of the ‘rare’ high-value prizes would have been minute had there been no theft, even though only ‘certain’ high-value prizes were stolen, and even though these customers still had a fair and equal opportunity to win all of the other prizes.”

Note that (2) and (3) are the same thing, just restated – that the falsehood diverted customers from Burger King to McDonald’s. Moreover, (3) in particular makes a number of questionable assumptions. Consumers surely know that the chance of winning the big-ticket prizes is low (though they expect it’s fair), but as the lottery ads say, “you can’t win if you don’t play.” And lotteries themselves are good evidence that people are willing to incur costs for small chances at big payouts. Finally, advertising law generally presumes that overt claims central to ads are material to consumers, and the ads here promoted the big-ticket prizes. Nevertheless, the court concluded that “the causal chain linking McDonald’s alleged misrepresentations about one aspect of its promotional games to a decrease in Burger King’s sales is tenuous, to say the least.”

Thus, “[t]aking care not to conflate the prudential standing inquiry with the ‘materiality’ element,” the court concluded that the second factor counseled against prudential standing. Yeah. Just because you say you’re taking care doesn’t mean you are – likewise, apparently, just because you say you’re offering high-value prizes doesn’t mean you have to do so.

(3) The proximity or remoteness of the party to the alleged injurious conduct. Here the inquiry is whether there is an “identifiable class” of other people who are likely to vindicate the public interest by suing. The district court held that consumers who lost the chance to win big prizes were such a class. The court of appeals at least recognized that consumers, who lack Lanham Act standing, shouldn’t be considered in this factor, since otherwise it would always weigh against Lanham Act standing. This factor weighed in Phoenix’s favor.

(4) The speculativeness of the damages claim. The court found that damages were highly speculative, because only certain high-value prizes were stolen, and because the fast food market has many competitors. Nor could Phoenix rely on its request for disgorgement of profits, because any plaintiff can ask for that. This factor weighed against Phoenix.

(5) The risk of duplicative damages or complexity in apportioning damages. For similar reasons, the court found this factor weighed against Phoenix. Otherwise, every fast food competitor would have prudential standing, regardless of its lost sales or market share and “regardless of the impact on the competitor’s goodwill or reputation (as the advertisements made no mention of any competitor).” (I quote this because it repeats language the court used in factor (1), when it said that the lack of harm to Burger King’s reputation alone wasn’t sufficient to tilt that factor against Phoenix. Essentially, the court is edging the Lanham Act towards a product disparagement tort, where we’re more concerned about negative statements than positive ones. In moderation, this is sensible – if the McDonald’s ad mentions Burger King, we want Burger King to have standing – but it’s a bit odd given that the Lanham Act’s false advertising coverage began with positive statements, and had to be amended to overturn several circuits’ rules that disparaging statements weren’t covered.)

In more ordinary false advertising cases, courts often assess whether the ads at issue are likely to have harmed the plaintiff by looking at the plaintiff’s market share. If Starbucks is engaging in false advertising, a single-location coffee shop is unlikely to have suffered sufficient harm. But Burger King franchisees seem like they’re in a much better position to assert harm. And, in the flip side of factor (3), ask whether there is anyone else who’s in a better position than Burger King franchisees to vindicate the conceded commercial interests at stake. Even if consumers have been made whole, that settlement did nothing to redress the harm of the fraud on Burger King and other competitors – indeed, the class action settlement was designed to improve McDonald’s competitive position.

In total, the court concluded that, though it was a close question, Phoenix lacked prudential standing. It cautioned that its analysis might differ “if, for example, the facts were such that McDonald’s had falsely advertised the odds of winning all of its prizes (low-, mid-, and high-value), or if McDonald’s were only giving away a single prize and falsely represented the odds of winning, as these hypotheticals present factual scenarios materially different from the facts of this case.” Note that these hypotheticals have very little to do with the factors that supposedly counseled against standing, especially the two damages factors. The court is relying on its view of materiality.

My prediction: the only reason this decision won’t make a huge mess is that, as with Mead Johnson, future courts will limit it to its facts in application. At least, that’s my hope. For now, look for materiality/causation claims to become standing arguments as defendants cite this case to get rid of false advertising claims without that whole expensive factfinding process.

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