False claims to retailers violate Lanham Act

Oreck Direct, LLC v. Dyson, Inc., 2008 WL 544230 (E.D. La.)

Though this case turned on res judicata, the analysis included some general statements of interest about false advertising liability under the Lanham Act.

Oreck sued Dyson for false advertising in marketing a model of vacuum cleaner. Both parties sell vacuum cleaners to consumers. Oreck primarily uses its own retail stores, but also sells through chains such as Bed Bath & Beyond and JC Penney and the shopping channel QVC. Dyson sells through chains such as Sears, Target, Bed Bath & Beyond, Circuit City, and JC Penney. Unsurprisingly, though crucially, Dyson first promotes its new models to retailers, and advertises to the general public after retailers have agreed to carry them.

The current case concerned allegedly false claims that the Dyson model DC18 doesn’t lose suction and that it is the “most powerful lightweight” vacuum cleaner. This suit was filed four months after an earlier false advertising suit was settled and dismissed with prejudice. That case was based on ads for Dyson vacuums claiming that they “do not lose suction.” Those claims covered all models. When Dyson began to advertise its DC15 model during the pendency of the first suit, Oreck requested and obtained discovery about the DC15.

Oreck settled for a confidential amount. The settlement included a release from all advertising claims related to the case, and an agreement that Dyson could use claims it was making about any product “existing in the United States marketplace” as of the effective date of the settlement without incurring any further liability.

While the first case was pending, Dyson pitched the DC18 (under a different name) to a number of nationwide retailers using the “most powerful lightweight” and “doesn’t lose suction” claims. Dyson produced in discovery multiple documents dealing with its plans to market the DC18. The DC18 was not, however, advertised to the general public before the settlement date; when the public campaign began, it included the same “no loss of suction” claims.

Dyson defended on grounds of res judicata. The court agreed that Oreck’s claims with respect to the DC18 were part of the same cause of action as the earlier lawsuit. The statements to retailers were “substantially of the same sort and similarly motivated as the claims that it made about other vacuum cleaner models.” Oreck had the opportunity to find out more about the DC18, but didn’t do so, even as its false advertising claims were not limited to any particular Dyson model. Dyson’s promotion of the DC18 began months before the first settlement, and Oreck could have known this had it investigated diligently.

Oreck argued that it couldn’t have brought its claims against the DC18 earlier because Dyson hadn’t begun advertising and selling the model to end consumers. The court disagreed, because statements to people other than ultimate consumers are actionable. Specifically, some of the retailers to whom Dyson pitched the DC18 also sold Oreck vacuums; thus, the parties competed with respect to retail customers. The Lanham Act covers claims made to intermediate purchasers. Retailers are a necessary part of Dyson’s business, and they constituted a relevant purchasing public. (It’s not entirely clear whether the court considered retail competition necessary; it might have been sufficient that the parties competed for end consumers, even if they sold to different retailers.)

Oreck then argued that it couldn’t have tested the truth of Dyson’s claims about the DC18 before it was on the market. But, because Dyson was already promoting the DC18 to retailers during the first suit, and because hundreds of test units were in the US, Oreck could have requested that a DC18 be produced in the earlier litigation. The DC18 was not “merely a concept” during the first action.

Oreck also claimed that it would have lacked standing to challenge the DC18 claims earlier because its injury would have been too speculative. But, the court reasoned, if Oreck is now likely to suffer harm because of Dyson’s ads to end consumers, it was then likely to suffer harm because of Dyson’s pitches to retailers. This is so because (1) Dyson “relies on sales to retailers to create a platform from which it can reach the individual consuming public” and (2) the parties compete for shelf space. Because Oreck alleged literal falsity, consumer deception would have been presumed. (I’m not sure why this matters, since a survey could test claims about to be put on the market as well as claims that are already on the market, but ok.)

Moreover, to enjoin literally false ads, Oreck wouldn’t have had to show actual lost profits or sales diversion. “[T]he mere solicitation of sales with false advertisements is sufficient to place goods into interstate commerce and thus expose a defendant to liability for false advertising under the Lanham Act.” At least it would have been able to get an injunction. “Clearly, then, a direct competitor has standing to challenge false advertisements that threaten it with injury. ... If Dyson’s false claims help to place its products in the market, then they would likely threaten lost profits to Oreck not only on its sales to retailers, but also on sales to ultimate consumers because the false statements help make it possible to reach individual consumers through retailers.”

Thus, all the elements of a false advertising claim with respect to the DC18 were in place during the first action. As a result, res judicata barred the present claims.