Tuesday, August 18, 2009

First Amendment fails to justify dismissing false advertising allegations

Franklin Fueling Systems, Inc. v. Veeder-Root Co., 2009 WL 2462505 (E.D. Cal.)

A relatively routine motion to dismiss where there seems to have been a relatively serious, but unsuccessful, effort by defendants to import general First Amendment standards into commercial speech law.

In 2000, California required most gas stations to upgrade vapor recovery systems over a ten-year period. In order to comply, these Enhanced Vapor Recovery (EVR) and in-station diagnostics (ISD) systems need to be certified by California’s Air Resources Board (ARB). Franklin bought rights to the ARB-certified Healy EVR. Veeder-Root has a competing ARB-certified EVR system and an ISD; a later Veeder-Root EVR using a substantially cheaper carbon canister was also certified.

Franklin alleged that prior to Veeder-Root’s certification, its Healy System had 100% of the market, which dropped to 95% through early 2009. It claimed that Veeder-Root distributed false marketing materials including statements that (1) one in four (22%) of Healy Systems failed, and (2) that an ARB investigation had concluded that problems with the Healy System were triggering alarms on the Veeder-Root ISD, causing the Veeder-Root ISD to shut down dispensers (and increasing site maintanence costs).

Apparently, gas station owners began reporting problems when they were using Veeder-Root ISDs and Healy EVRs. But the problem, Franklin alleged, was with the Veeder-Root ISDs, which shut down all a station’s fueling dispensers when false alarms occur frequently and thus require a technician to reset the system; other ISDs didn’t have that problem. After a number of complaints, the ARB allegedly did begin an investigation, but warned both companies not to publicize statements about cause until it completed its work. Though it hasn’t reached a formal conclusion, it has released a PowerPoint with tentative findings.

Franklin alleged that it had suffered significant losses, including a reduction in market share from 95% to 75%-50%, resulting in the loss of millions of dollars.

Veeder-Root challenged the sufficiency of Franklin’s pleadings, making the usual claims that its statements were opinion and puffery, not fact, and arguing that its statements were true, as witness the information released by ARB. That last is not appropriate for a motion to dismiss, and the opinion/puffery arguments were equally weak given the specific claims alleged.

Similarly, Franklin’s trade libel claim survived. Franklin sufficiently alleged that (1) Veeder-Root disparaged the quality and performance of the Healy system by falsely stating that ¼ failed and that the Healy system caused the false alarms; (2) the falsity was knowing and with reckless disregard for truth; (3) it was intentionally distributed to customers; and (4) Veeder-Root knew or had reason to know this would damage Franklin, and special damage did occur.

Veeder-Root argued that its statements were privileged under the First Amendment and California law. While opinion is fully protected, falsifiable facts aren’t (subject to the other requirements, of course), and so the First Amendment argument failed. Nor were the statements protected by a competition privilege. California recognizes such a privilege against liability for inducing a third person not to enter into a prospective contractual relation with a business competitor, as long as the actor doesn’t use improper means or illegally restrain competition. Trade libel is, however, an improper means.

So too with Franklin’s state-law false advertising claim, which covers both false and misleading statements. California law treats puffery similarly to federal law. Veeder-Root argued for First Amendment protection because its statements raised issues of public concern. But one may not “immunize false or misleading product information from government regulation simply by including references to public issues.” Kasky v. Nike, Inc., 27 Cal.4th 939, 966. The allegedly false or misleading product information at issue was still actionable. Franklin’s unfair competition and intentional interference with prospective economic relations claims also survived.

No comments: