Dastar defeats stealth marketing claim

Wellnx Life Sciences Inc. v. Iovate Health Sciences Research Inc., 2007 WL 2789469 (S.D.N.Y.)

The parties compete in the market for dietary supplements. Canusa, another defendant, is a publisher that has about 40% of the market for bodybuilding periodicals that advertise supplements. Canusa solicits advertising from bodybuilding supplement makers, who use bodybuilding periodicals as a key method of marketing to this niche group. Wellnx alleged that since at least 2000, Iovate and Canusa have had an agreement: In addition to paying for ad space, Iovate pays Canusa 10% of its gross from direct purchases. As a result, Wellnx alleged, Iovate receives (a) preferential ad treatment; (b) prepublication review of competitors’ advertisements; (c) a right to reject competitors’ advertisements and the opportunity to disparage competing new products or beat them to the market with the same or similarly formulated products; and (d) a right to publish Iovate-written editorial content that falsely appears to be written by Canusa editors.

Wellnx further alleged that Canusa intentionally failed to disclose this arrangement to Iovate’s competitors when Canusa solicited ad sales, misleading ad customers into believing its space was sold on a “fair and equal basis,” and intentionally failed to disclose the arrangement to readers, misleading them about Canusa’s neutrality.

The court found that the complaint failed to state a claim that defendants made any false, misleading or confusing statements of fact; there was therefore no need to consider whether such statements were made in “commercial advertising or promotion” or whether Wellnx had standing.

Wellnx did not identify any Iovate-authored statements that were false or misleading. Though it’s conceivable that Iovate could author deceptive content, there were no facts alleged to provide sufficient notice of what Wellnx claimed to be false.

In addition, Dastar held “that the mere act of publishing a written work without proper attribution to its creative source is not actionable under the Lanham Act.” Wellnx was really alleging reverse passing off, not false advertising. “[T]he failure to properly name contributors to a written work does not provide a basis for liability under the Lanham Act.”

Comment: No, though the court is in the mainstream in refusing to take up Dastar’s suggestion that false advertising claims remain available for material misattributions made in commercial advertising and promotion. The copyright concerns underlying Dastar are just not applicable here. Consider a consumer lawsuit alleging that failure to disclose advertiser sponsorship – stealth marketing -- violated consumer protection laws, since whether an endorsement is independent or concocted by the seller is material to consumers. Copyright preemption would be a ludicrous defense in such a case. Nonetheless, this case is closer than some others to Dastar because the content here is at least apparently editorial – that’s the relevance of §43(a)(1)(B)’s commercial advertising and promotion limitation.

Separately, Wellnx alleged false advertising by defendants’ failure to disclose their arrangements to consumers of (1) Canusa’s publications, (2) bodybuilding supplements, and (3) ad space in bodybuilding publications. But omissions are not actionable unless relevant to an affirmative statement made false or misleading by the omission. For the first two categories, Wellnx didn’t identify any relevant statements to those groups. As to the third, Wellnx alleged that Canusa represented to advertisers that it had rates, publication schedules and ad specifications, and that this led advertisers to believe that space was available on a fair and equal basis. This is an implicit falsity claim. But the court found the complaint did not plead facts sufficient to support an implied falsity claim: “The mere act of truthfully communicating rates, schedules and specifications does not reasonably suggest any facts regarding the existence, vel non, of special access agreements with other advertisers or preferences between advertising consumers.” I’m not so sure – it seems to me that setting forth rates, schedules and specs implies – perhaps even necessarily – that the publication is an ordinary one, with ordinary rules for all its advertisers, and not the captive of a competitor.

The court also held that the complaint failed to state a Sherman Act claim because the alleged vertical restraints did not raise a plausible inference of harm to competition.