Hey look, a standing case I like

Diascience Corp. v. Blue Nile, Inc., 2009 WL 1938970 (S.D.N.Y.)

Plaintiff does business on the internet as Yehuda Diamond Company. It sells diamonds and diamond jewelry treated with a “proprietary clarity-enhancement process” that masks imperfections in its diamonds, and it alleges that it provides “clear and complete disclosure” of this process. Blue Nile sells colored gemstones and diamonds on the internet. Though Blue Nile’s diamonds are untreated, its colored gemstones are allegedly “enhanced” using undisclosed techniques (including oil filling, glass filling, and flux healing). Failure to disclose processes that each individual gemstone has undergone allegedly contravenes FTC regulations. This information is allegedly intentionally withheld from consumers, leading them to choose Blue Nile over Yehuda. Yehuda alleged that, because these enhancement techniques affect the value and care requirements of the gemstones, but aren’t visible to consumers, these deliberate omissions are likely to deceive consumers.

The crux of the matter: did Yehuda have standing? The court applied the Supreme Court’s most recent statement about the standard on a motion to dismiss: though a court must accept the complaint’s allegations as true, the plaintiff must state a facially plausible claim to relief, and a complaint can’t survive with only “threadbare recitals of a cause of action's elements, supported by mere conclusory statements.” Ashcroft v. Igbal, 556 U.S. ---- (2009).

In the Second Circuit, Lanham Act standing requires (1) a reasonable interest to be protected against false or misleading claims, and (2) a reasonable basis for believing that this interest is likely to be damaged by the false or misleading ads. For (1), a plaintiff must show commercial interests, direct pecuniary interests, or even a future potential for commercial or competitive injury. For (2) likely injury and a causal nexus to the false advertising is required. A presumption of harm is disfavored if there’s no comparative advertising and the parties’ products are not obviously in competition. The court agreed with Blue Nile that Yehuda was therefore required to make “a more substantial showing of injury and causation” to establish standing.

At this early stage, Yehuda’s allegations were sufficient. “Even with the requirement for a heightened showing of injury and causation, courts seldom dismiss Lanham Act claims without first permitting plaintiffs to conduct discovery and present evidence of competitive harm," in part due to the overlap between the showing necessary to establish standing and the proof required to succeed on the merits of a Lanham Act claim, i.e. a reasonable interest and a reasonable basis for believing that interest has been harmed. The court examined a few cases decided in defendants' favor on motions to dismiss, and found that they presented quite different circumstances: where, for example, there is no overlap between the parties’ consumers, making a causal nexus between false advertising and harm implausible, or where any harm would be contingent on future commercial activity a plaintiff failed to initiate.

The court couldn’t yet say that Blue Nile and Yehuda didn’t share consumers. Diamonds and colored gemstones are not necessarily substitutes, but it’s possible that the markets overlap sufficiently for Yehuda to show a commercial interest and a causal nexus between the false advertising and harm. Yehuda would thus be allowed discovery limited to the issue of standing, focusing on the causal nexus between the alleged false advertising and lost sales. The court noted in a footnote that standing could be shown by market studies.

For the same reasons, Yehuda’s state law claims survived. The court also refused to stay the case pending resolution of a case brought by Blue Nile against Yehuda in Washington state, because that case involved separate allegations of copyright infringement and false advertising against Yehuda.