Wednesday, February 06, 2008

Copywrongs: allleged skullduggery in copier contracts

Newcal Industries, Inc. v. IKON Office Solution, --- F.3d ----, 2008 WL 185520 (9th Cir.)

Five lessors of copier equipment appealed the dismissal of their Sherman Act antitrust, Lanham Act, and RICO claims against IKON, a competitor in the market for leasing name-brand copier equipment to commercial customers and for service contracts for maintaining that equipment.

Plaintiffs alleged that IKON defrauded its customers by amending lease agreements and service contracts without disclosing that the amendments lengthened the terms of the agreement. On the antitrust claims, the court of appeals found that plaintiffs had alleged a legally cognizable relevant market, and thus remanded to the district court. Likewise, the court of appeals found that plaintiffs had standing to bring a RICO claim.

On the Lanham Act claims, plaintiffs identified five allegedly false or misleading statements: (1) that IKON would deliver “flexibility” and lower copying costs; (2) that IKON would provide 95% up-time; (3) that the original contracts were intended to be for a fixed 60-month term and then expire; (4) that IKON’s amendments would not apply to a customer’s entire “fleet” of copying equipment; and (5) that IKON’s practices had been declared legal by a district court in 2004.

The court of appeals agreed with the district court that (1) was mere puffing. It wasn’t quantifiable, just a general assertion. The district court also ruled that (2) and (3) were not false or misleading at the time they were made, and that (4) and (5) hadn’t been made in commercial advertising or promotion. The court of appeals ruled that (2) (95% up-time) was a factual statement whose falsity had properly been alleged and should have survived a motion to dismiss. The court of appeals also believed that (3) could have been false, or true but misleading – the issue here is “intended to be,” since apparently the IKON contracts did state a 60-month term. But plaintiffs alleged that, at the time of signing, IKON intended to extend them fraudulently. Comment: Materiality might be difficult later on – presumably contracting parties often know that the other side would like to extend a contract if all goes well – but again the court of appeals seems right that this was not the proper posture for the court to decide the matter.

As for (4) and (5), plaintiffs alleged that the statements were disseminated in promotional literature to thousands of accounts, and thus they were entitled to an opportunity to prove that the statements were made in commercial advertising. If in fact the statements were made to a handful of consumers, the district could conclude that was insufficient, but plaintiffs had properly pled commercial advertising or promotion.

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