Lanham Act doesn't cover competition with customers

Harold H. Huggins Realty, Inc. v. FNC, Inc., 2009 WL 2449888 (N.D. Miss.)

“Plaintiffs are real estate appraisers who provide appraisal reports to mortgage lenders as part of the process of originating mortgage loans. Defendant FNC also provides services and products to mortgage lenders, including a web-based service called AppraisalPort, which allows mortgage lenders to request written appraisals from appraisers and ‘allows appraisers to transmit information ... contained in appraisal reports, to lending institutions....’”

Plaintiffs alleged that FNC misrepresented that it didn’t have access to the appraisal data that passed through AppraisalPort and that it wasn’t building a database from that data. They sued for false advertising, conversion, misappropriation, and related claims.

The court found that plaintiffs had constitutional standing under the Lanham Act, but not prudential standing. The Fifth Circuit test requires assessment of 1) the nature of the plaintiff’s injury; 2) the directness or indirectness of the asserted injury; 3) the proximity or remoteness of the party to the alleged injurious conduct; 4) the speculativeness of the damages claim; and 5) the risk of duplicative damages or complexity in apportioning damages.

The nature of the plaintiffs’ injury was not at the core of what Congress sought to redress in the Lanham Act—commercial interests harmed by a competitor’s false advertising, specifically the diversion of business. The injury here was not competitive: the misrepresentations were directed at plaintiffs as potential consumers of AppraisalPort, “not against them in a competitive capacity,” and consumers don’t have standing to sue under the Lanham Act. Likewise, under the second factor, the ultimate loss of business alleged when lenders use FNC’s database instead of a tradiational appraiser isn’t directly attributable to the challenged conduct.

The third factor “arguably” weighed in favor of standing, given that, on the facts alleged, it was very hard to figure out who else would be in a position to sue other than clients-turned-competitors.

Factors four and five are about damages, and the court found that the damages claim was speculative and created risks of duplication/apportionment. Each plaintiff would need to show that FNC used the data it submitted through AppraisalPort to build FNC’s database, that a lender subsequently needed information on that property and opted to use the database instead of an appraisal, and that the lender would have chosen the plaintiff instead of another appraiser in the absence of the database; this last bit is “simply too tenuous” to support standing.

Lanham Act claim dismissed. Under current standing doctrine (and where is that textual basis in the Act, again?) some false advertising just can’t be redressed under the Lanham Act.

FNC also argued that the fraud-based claims should be dismissed for failure to plead with sufficient specificity. The court agreed, but dismissed without prejudice to allow plaintiffs to meet Rule 9(b)’s heightened requirements.