Monday, September 28, 2009

Rare champerty ruling in false advertising case

Del Webb Communities, Inc. v. Partington, 2009 WL 3053709 (D. Nev.)

Okay, I admit it: I was excited by the case name because of the famous Del Webb nuisance case. Del Webb still builds homes. The defendants operated M.C. Mojave construction, which offered Del Webb’s customers at an age-restricted community in Clark County free home inspections and provided them information about their rights and ability to file complaints for defects in their homes. Mojave had a Nevada B-2 contractors license, and expanded the scope of its operations over time beyond its initial room additions/patio covers to building new homes, renovating homes, and operating an inspection division that specialized in identifying building violations.

To solicit business for the home inspection division, Mojave employees went door to door in Del Webb’s Sun City Anthem development offering a free home inspection. One flyer, citing Nevada statutory law, told homeowners that they had a right to be reimbursed for costs associated with construction defects, explained how they could notify their builder about defects, and explained how they could hire a lawyer to pursue their claims. The flyer said that Mojave would be paid only if the homeowner succeeded in getting reimbursed, and that even if the homeowner was unsuccessful, s/he would assign the right to reimbursement to Mojave. One law firm Mojave worked with provided a retainer letter stating that if the client ended its representation, but recovered from the builder, the client would be responsible for all fees and costs. Del Webb’s warranty covered certain structural elements for up to ten years, and provided that unresolved disputes had to be submitted to mediation.

Del Webb sued defendants for champerty and maintenance (!), false advertising under state and federal law, and intentional interference with the contracts between Del Webb and its customers. The court earlier granted a preliminary injunction against defendants barring them from performing home inspections or soliciting related business.

Maintenance “is officious intermeddling in a suit which in no way belongs to the intermeddler, by maintaining or assisting either party to the action, with money or otherwise, to prosecute or defend it,” in other words, helping another prosecute a suit, while champerty is a species of maintenance “in which the intermeddler makes a bargain with one of the parties to the action to be compensated out of the proceeds of the action,” in other words maintaining a suit in return for a financial interest in the outcome.

Though other states have abolished these torts, Nevada still recognizes them. Here, the claim is really champerty: defendants would make money from clients’ recovery against Del Webb. The elements: (1) the party must have no legitimate interest in the suit; (2) the party must expend its own money prosecuting the suit; (3) the party must be entitled by bargain to share in the suit’s proceeds. Here, the defendants had no interest in any lawsuit—Del Webb already provided its homeowners protection for certain defects. Defendants also spent their own money instigating complaints—providing the necessary home inspections and related reports. And by contract they were entitled to be reimbursed for the home inspections, or to the assignment of the homeowners’ rights against Del Webb. The court thought this situation “particularly problematic” because defendants didn’t just offer a free home inspection, but also guided homeowners to file complaints against Del Webb under Nevada law, told them the role of the home inspection in filing a complaint, and advised them how to hire a law firm to assist. The defendants were liable for champerty.

Nevada consumer fraud law protects against deceptive trade practices, defined as including conducting a business without all required licenses. Defendants argued that their general contractor’s license was sufficient, but Del Webb argued that a special license was required to perform home inspections. Interpreting state law, the court agreed with Del Webb. Defendants argued that only the state had the right to enforce licensing requirements, but the consumer fraud law generally provides for a public cause of action for deceptive trade practices.

The strongest argument seemed to me to be causation. Was Del Webb’s injury caused by the deceptive trade practice? Defendants argued that a third party business can’t be a victim under state law, but the statute specifically provided that evidence of a deceptive trade practice was prima facie evidence of intent to injure competitors, implicitly defining competitors as “victims” and proper plaintiffs under the statute. And Del Webb’s Home Protection Plan meant that, upon receiving notice or complaint of a defect within the scope of the plan, Del Webb would have inspected the home and repaired the defect, which means that the parties competed. Anyway, Del Webb was still a victim, because the defendants were suggesting/encouraging lawsuits against it, and the defendants should have known that their practices were “inevitably” going to be adverse to Del Webb.

But Del Webb still needed to prove its damages. It submitted depositions that certain homeowners relied on the defendants’ misrepresentation that they were licensed or working in conjunction with Del Webb to allow the inspections. Thus, customers put themselves in breach of their warranties with Del Webb, precluding Del Webb from communicating with them or being able to repair their homes under the warranties. This was sufficient to create a genuine issue of material fact on damages, but not enough to warrant summary judgment in Del Webb’s favor because the extent of actual damage was unclear.

For its Lanham Act claim, Del Webb identified three false statements: (1) the home inspections were free; (2) the defendants were licensed to perform the inspections; (3) the defendants were performing inspections in collaboration with Del Webb.

Here again, defendants argued that they weren’t in competition with Del Webb. Under 9th Circuit precedent, “competitive injury” is the key to standing, rather than “exact identity” between the parties’ businesses—did the statements at issue tend to divert business from the plaintiff to the defendant? (Would there have been “business” at all without defendants’ acts here?) The court pointed out that defendants also build and renovated homes, putting them in direct competition with Del Webb no matter what. Moreover, even if defendants just did home inspections, false advertisements about that would have inflicted competitive injury on Del Webb. As noted above, under Del Webb’s warranties, homeowners were supposed to contact Del Webb with problems, and Del Webb would be entitled to inspect and repair if necessary. Thus, the home inspections diverted customers away from Del Webb. Unnecessarily (and probably insufficiently), the court noted that “to the extent the Mojave Defendants were finding and reporting defects that were either trivial or non-existent, the Mojave Defendants could have injured Del Webb’s reputation and taken future business away from them.”

On to falsity: was “free” literally false when forms signed by customers stated the “cost” of the home inspection services, to be collected if the builder reimbursed the customer, and when the notices that defendants had customers submit to Del Webb notified Del Webb of the “expense” customers had incurred in the home inspection? The court agreed that if homeowners took the time and resources to pursue a complaint and actually recovered, this conduct was a cost to them, and they’d have to apportion part of the recovery to the defendants—indeed, knowing this would likely affect their settlement amounts. Thus, the inspection wasn’t “free.” Homeowners had to pay if they recovered, and even if they didn’t, they had to assign their right to recover to the defendants.

Likewise, the licensing statements were false.

The final set of false statements mainly dealt with placards the defendants left at homes after an agreement was made for an inspection. They stated: “As a courtesy, we are informing you that, due to a ‘Builder’ home inspection, you may experience a few hours of extra vehicular traffic in your neighborhood. These vehicles belong to representative & experts from both MC Mojave Construction & your Builder, his subcontractors and agents.” (Is this advertising? It’s post-deal as to the specific customer, but may count as advertising to the neighbors.)

The court thought this issue wasn’t as clear-cut, because a builder’s inspection could be a generic home inspection, though capitalizing “Builder” made it more likely that the reference was to Del Webb. The court found it ambiguous. (Really? Even with the stuff about vehicles from “your Builder”? Aside from vague deposition testimony by someone who wasn’t sure she’d seen the placard, there was no evidence of actual deception, so there was no genuine issue of material fact as to the placards. However, other homeowners testified to personal representations to them that defendants were working with Del Webb. Del Webb also presented testimony that these misrepresentations were material.

Finally, defendants contested whether the false statements were made in “interstate commerce.” The court found that the best evidence for Del Webb was that the defendants created a website at to advertise their services, claiming (future) divisions in Southern and Northern California; the internet is an instrumentality of interstate commerce, but Del Webb would have to prove that the false statements of fact were made in connection with defendants’ website, which meant that summary judgment had to be denied on the record before the court. But defendants’ fliers and placards didn’t leave the state or even Del Webb’s development. Nevada consumers calling defendants within Nevada to inspect their Nevada homes don’t reach interstate commerce. Nor did the court find that home inspections of Nevada homes have a substantial impact on interstate commerce. (Whoa. I’m not sure the Supreme Court would agree.) It wasn’t entirely clear to me whether Del Webb could submit evidence on this at trial, or whether all the false advertising claims except those made on the website were dismissed—given what the court then said about damages, the former is the logical conclusion.

Given the evidence, once could reasonably conclude that defendants’ claims were deliberately false, creating a presumption of actual deception and reliance. That, along with testimony from deceived/reliant homeowners about the misrepresentations of alliance with Del Webb, allowed Del Webb to show injury, and Del Webb could explain at trial the basis for a monetary award, which under §43(a) could include an award of defendants’ profits on an unjust enrichment theory.

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