Wednesday, November 11, 2009

Software ranking mere opinion, not fact

ZL Technologies, Inc. v. Gartner, Inc., 2009 WL 3706821 (N.D. Cal.)

ZL sued Gartner for false advertising, defamation, and related torts based on its ranking of ZL's software. The court, reasoning in a way that certainly makes Google happy, concluded that Gartner's aggregation of opinions was itself mere opinion, not falsifiable fact.

ZL makes software for large enterprises to store, index, search and purge electronic data. It alleged that it’s avoided seeking large amounts of venture capital in order to retain its independence and make decisions for customers’ long-term benefit. It also alleged that it has the “strongest product offering in the marketplace.” Gartner identifies itself as “the world’s leading information technology research and advisory company,” and it provides analysis of the IT industry to its clients, including product recommendations, advertising that it has the “combined brainpower of 1,200 research analysts and consultants who advise executives in 80 countries every day” and other sources of expertise. Gartner has done research on email archiving, which is a method of storing “large amounts of emails (and attachments) by ... offload[ing] and stor[ing] those emails in a separate repository which is much cheaper to maintain than a primary email server.”

ZL sued over several allegedly false or misleading statements. First, ZL’s ranking in Gartner’s Magic Quadrant (MQ) Report on IT vendors, which allegedly is a “key revenue” driver for Gartner, and heavily influences its customers. The Report claims to accurately rank IT vendors for enterprise buyers, dividing them into four quadrants in declining order of desirability: Leader, Challenger, Visionary, Niche. The axes measure “ability to execute” and “completeness of vision,” which stand for about what you’d think they stand for. ZL alleged that its designation as Niche was derogatory because Gartner’s customers accept that as a “warning.” Since ZL was first ranked in 2005, Symantic has been ranked as a Leader, creating a “perceived vendor gap” which is allegedly false or misleading because of ZL’s superiority, outperforming Symantec by over a thousandfold in search speed and improving accuracy, etc. In fact, ZL alleged, the MQ report is “highly subjective” and lacks mathematical or other sound basis; further, Gartner didn’t engage in any independent testing. Nor does Gartner disclose its criteria or relative weighting, resulting in arbitrary and misleading statements. ZL alleged that Gartner was swayed by Symantec’s puffery; Gartner overweighs good sales and marketing, leading to a bias in favor of larger companies with bigger marketing departments. Real research couldn’t support the statements, meaning that Gartner knew or was reckless as to the falsity.

Along with the quadrant ranking, the 2008 MQ Report warned that, “ZL is primarily a product and engineering-focused company. To remain [a] viable vendor in the market, the company must gain greater visibility and more aggressively expand its sales channels.” In addition, ZL alleged additional negative statements, including that the “ZL Products and Symantec’s Enterprise Vault (EV) ‘were the same.’”

Gartner’s statements allegedly caused ZL to lose business, including from the Department of Veterans Affairs, which relied entirely on the MQ Report; ZL had other specific examples. According to ZL, Oracle Corporation “complains that it gets ‘Gartnered’” when it attempts to resell ZL products.

The Lanham Act claims foundered on §43(a)(1)(B)’s standing requirement. ZL didn’t allege a competitive injury—one that harms the plaintiff’s ability to compete with the defendant. ZL argued for a “reasonable prudential standing approach” such as that followed by the 3rd, 5th, and 11th Circuits (comment: argh). The court declined to adopt such a standard. Even if the court did apply that approach, ZL failed to explain how its alleged injury was one of the type Congress sought to redress in providing a private remedy under the Lanham Act. (The court also noted that without competition, it would be very hard, if not impossible, to show that the statements at issue were “advertising” given the generally accepted judicial test for what constitutes Lanham Act “advertising and promotion.”)

Even assuming standing, ZL failed to identify any actionable (falsifiable) statements. Allegedly false statements that Gartner’s research “is ‘high quality, independent and objective research’, (b) it is a ‘thought-leader’ in information technology, [and] (c) it can ‘show how to get the best return on your technology investment,’” were mere puffery.

The other state-law claims all depended on the conclusion that the challenged statements were false or misleading claims of fact, but the court concluded they were all nonactionable opinions, so the motion to dismiss was granted as to all of them.

An opinion is protected by the First Amendment. In the Ninth Circuit, courts examine “(1) whether the general tenor of the entire work negates the impression that the defendant [is] asserting an objective fact, (2) whether the defendant used figurative or hyperbolic language that negates that impression, and (3) whether the statement in question is susceptible of being proved true or false.”

The court thought that the general tenor of the MQ Report negates the impression of an objective factual claim in the “Niche” assignment. Gartner’s cover page for the email archiving review states “The opinions expressed herein are subject to change without notice.” While not every disclaimer will absolve a defendant, here this does contribute to a general tenor, along with statements that the Report reflects Gartner’s “view” based on “more than 1,000 conversations over the past year with Gartner customers, as part of [its] inquiry service, survey responses and updates from the vendors in the March/April 2009 time frame, and over 70 conversations with vendor-supplied references in March and April 2009.”

Gartner also identifies the bases of its opinion, which are clearly not product performance testing but conversations and surveys. Moreover, the “axes” along which vendors are rated—“ability to execute” and “completeness of vision” contribute to the general subjective tenor. These are fuzzy terms are (sort of) defined in the text of the Report, but attributed again to conversations and surveys. While subcriteria like “quality of goods” and “market responsiveness and track record” might be amenable to objective testing, Gartner nowhere claims or implies it has engaged in such.

ZL argued that Gartner’s claim to offer “highly discerning research that is objective, defensible, and credible to help [customers] do their job better” (quoting Gartner’s website) implied objective assertions of fact. Even so, these terms do not imply factual assertions. (What, then, does “objective” mean? Gartner says it just means its methods are “independent and unprejudiced.” Defensible means “capable of being defended,” and “credible” reflects Gartner’s belief that it’s right but can’t reasonably be understood as a statement of fact.) Anyway, sophisticated readers wouldn’t infer that Gartner’s rankings were more than opinion.

What about the specific content and context, including the use of figurative or hyperbolic language? ZL argued that the absence of hyperbolic language and the presentation of “sober, technical evaluations” supported its position. But the ratings axes are subjective on their face, so the court wasn’t convinced.

Finally, falsifiability: There was no allegation that Gartner actually said that ZL is a bad choice, merely that consumers would infer the same from its placement in the Niche quadrant. This placement can’t be proved true or false, but reflects ZL’s disagreement with Gartner’s weighing of criteria. In fact, Gartner said some very nice things about ZL, including “great product performance as well as good prices and consistent support” and that ZL “has large deployments with customers that are happy with product features, scalability and efficient use of infrastructure resources.”

ZL alleged that its Niche designation was impossible to reconcile with its product performance review, but it didn’t score well in “Product/Offering Strategy ... Geographic Strategy ... Marketing Execution, and Sales.” This difficulty reflected the reality that a MQ rating isn’t a fact that can be proved true or false, but is based on weighing multiple criteria.

The other allegedly defamatory statements were also opinions. “ZL is primarily a product and engineering-focused company. To remain [a] viable vendor in the market, the company must gain greater visibility and more aggressively expand its sales channels,” clearly couldn’t be proved true or false. Nor was the statement that ZL and Symantec’s products were “the same” defamatory given Symantic’s prestigious Leader rating, and anyway that was nonactionable opinion.

ZL argued that liability was still possible if the statements of opinion implied the existence of additional undisclosed facts. But these statements didn’t imply any such thing.

Additional hurdles for the state law claims: California’s UCL only makes restitution available, which requires the defendant to have benefited from the actions that resulted in the plaintiff’s lost. But there was no allegation that ZL’s lost money went to Gartner in any way. Moreover, the court read California case law to require that a plaintiff demonstrate its own reliance on false statements to recover under the UCL, rather than third-party reliance that then hurt the plaintiff.

And finally, there was a question whether MQ reports constitued advertising. Under Kasky v. Nike, courts look to the speaker, the intended audience, and the content of the message. Were the reports commercial speech? They didn’t promote Gartner’s services—they were Gartner’s services. They weren’t factual representations about the speaker’s business, and (though the court for some reason didn’t say this outright) they weren’t commercial speech.

ZL wanted leave to amend because of new facts about board and shareholder overlap between Gartner and Symantec, and allegations that Gartner maintains business relationships with some of the companies it rates, some of whom pay Gartner hundreds of thousands per year for services, promotion, and participation in Gartner trade shows. Though the court thought that evidence of bias could be consistent with allegations of a flawed methodology, none of that changed whether Gartner’s statements were non-factual opinions, even if Gartner is really a gun for hire; under Iqbal and Twombly, ZL didn’t seem likely to be able to make its claim plausible on its face.

This gets to a question I’ve been wondering about with respect to the FTC’s new endorsement guidelines: the endorsement rules don’t exclude puffery. The FTC seems to hold—quite reasonably—that an endorsement from someone paid to puff who doesn’t disclose the relationship may materially deceive consumers. I think this is empirically sound, but it creates a bit of an embarrassment for the general theory that puffery doesn’t affect purchasing decisions. If Gartner really were a mere sockpuppet for Symantec, wouldn’t the appearance of independence make its endorsement material to consumers in a way that, at least, the FTC Guidelines would recognize, and therefore state false advertising law might recognize as well? Whether defamation law would accept the same conclusion, of course, is another question.

Nonetheless, given the 9th Circuit’s strong policy favoring amendment, the court did grant leave to amend with respect to everything but the California statutory (UCL/FAL) claims and negligent interference with prospective business advantage (which requires some sort of duty between plaintiff and defendant, usually related to a contract), as to which amendment seemed futile regardless of additional factual allegations.

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