Plaintiffs alleged they’d lost market share and millions in sales from defendants’ misleading ads for prepaid phone cards. Though cards are sold in dollar denominations, the number of minutes available depends on the rate per minute to a particular destination, plus fees and charges. It’s uncontested that STi, the defendant implementing/providing the minutes, used fees and charges that reduced the number of minutes and that varied according to destination and call duration. Ads focus on the number of minutes to key destinations, e.g., “250 minutes to the Dominican Republic.” The minute claims were displayed on posters at the point of sale and in voice prompts before a call was made (heard only after purchase). Defendant Telco’s posters told consumers about the gross number of minutes, but also contained a disclaimer that “[a]pplication of surcharges and fees will have the effect of reducing total minutes actually received on the card from the minutes announced ... Prices and fees ... are subject to change without notice.”
Defendant IDT lost market share in 2006-2007. One card, for example, declined from $5 million in sales to $5000. Meanwhile, defendant STi went from $2.3 million to $5 million in sales. Other factors contributed to IDT’s losses, such as a shift in demand to wireless phones and losses to other competitors such as AT&T and Sprint. Defendants STi and Telco had a complicated corporate relationship, meaning that they disputed who was responsible for any mismatch between ads and minutes delivered.
Defendants argued that the plaintiffs lacked standing to bring a Lanham Act claim for failure to show that defendants lured customers away from them; plaintiffs’ damages were too speculative. The court disagreed: the alleged injury was of the “exact nature” the Lanham Act targets—sales lost due to a competitor’s false advertising. Speculative damages might weigh against standing in the Conte Bros. test, but that’s just one factor. Outweighing it is the nature of the injury, the relative directness of the injury, and the fact that plaintiff IDT was not at all remote from the injurious conduct. Nor was there a risk of duplicative damages: defendants wouldn’t be forced to pay double if IDT wins.
Plaintiff UTA, however, is a distributor of prepaid phone cards (majority owned by IDT), while STi is a provider. Under Conte Bros., it was in the wrong part of the distribution chain to have Lanham Act standing.
The court also refused to extend standing to the plaintiffs under New Jersey law, which protects “consumers,” though no New Jersey court had explicitly rejected competitor standing. And the court dismissed the California-based CLRA claims, for which only restitution was available, because plaintiffs had not lost money or property by purchasing defendants’ cards, as well as an Illinois claim for which damages were not available.
On the merits, defendants argued that the Lanham Act claims had to fail. The critical issue was causation: a link between the allegedly false ads and plaintiffs’ damages. Here, defendants argued that a survey was required. IDT argued that it provided evidence that STi deliberately targeted false advertising toward IDT; evidence that customers, including distributors in major markets, were relied on and were confused by the ads about available minutes; evidence that the false ads were correlated with an increase in STi’s market share and a decrease in IDT’s; and evidence that the ads created a perception that IDT’s price wasn’t competitive with STi’s. The court concluded that this was sufficient to avoid summary judgment. There is no Third Circuit case requiring a consumer survey to establish damages. (The court rejected similar causation-based arguments against the California FAL, Florida, Illinois Consumer Fraud Act, and New York consumer protection law claims.)
Aside from causation, defendants argued that the ads weren’t false. The posters, they argued, contained a disclaimer (above). Given that courts have enjoined ads with small disclaimers before, and given plaintiffs’ argument that the posters were inherently misleading because customers could never use the card in a way that would produce all the minutes advertised, the court found issues of material fact.
What about voice prompts? Are they ads? They’re only heard after purchase, but they might still be “promotional” and therefore “commercial advertising” for Lanham Act purposes. The court concluded that the prompts were informational, not promotional, “and have nothing to do with promoting or furthering the sales of more prepaid phone cards.” (Really? If a consumer believed the prompts, and if they falsely inflated the minutes—how time flies, one might say!—then that would seem to increase the likelihood of repeat purchases. If a consumer was not intended to rely on the prompts—and thus naturally to form an opinion about the cards’ performance—why were the prompts (allegedly) false?)
Defendants also contested materiality, arguing that the number of advertised minutes was “completely immaterial” to purchasers. Instead, they argued that “[a]mong the most important factors for consumers are: (a) the number of minutes actually delivered by a card, rather than the advertised minutes; (b) the clarity of the connection; and (c) the connectivity of the card.” Defendants offered a survey in which only 2 of 401 respondents said that ads/posters/flyers are how they “generally decide” which card to buy, and only 3% “look at the printed material in the store.”
I am not entirely sure about this, but it seems to me that defendants are arguing that their industry is so pervaded with false advertising that nobody believes factual representations about numbers of minutes available, perhaps relying on trial and error to figure out the real numbers. This does not seem to be a very good argument. Indeed, the court was not convinced. The ads “go so clearly to the purpose of the product” that they were material as a matter of law.
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