Plaintiff MRS sued Xspand and Bear Stearns for violating the Lanham Act, unfair competition, defamation, commercial disparagement, and tortious interference with prospective contractual relations. MRS bought delinquent tax liens from municipalities and school districts in Pennsylvania, and Xspand was its competitor. MRS alleged that Xspand told potential customers that MRS-facilitated transactions produced debt, not revenue, which could have a negative impact on the customer’s credit rating, and that Bear was in a joint venture or agency relationsihp with Xspand.
Xspand first argued that the Noerr-Pennington doctrine, which is grounded in the First Amendment right to petition the government, barred the entire complaint. Petitioning activity covers attempts to influence the passage and enforcement of laws, efforts to influence administrative agencies, and efforts to access the court system. Here, the “petitioning activity” was the distribution of information to persuade government entities to choose Xspand’s services over MRS’s. The court held that, even if this qualified as petitioning activity (and my guess is that addressing the government as market participant does not), the “sham exception” would apply, which strips protection from a defendant who’s simply using the petition process as a means of harassment or as an anti-competitive weapon. A reasonable juror could find that Xspand’s marketing was designed to harass MRS.
For example, in 2004, James Florio, former NJ governor and a founder of Xspand, contacted Clive Corner, a former executive at Commerce Bank, Harrisburg, which was the institution MRS used to finance its tax lien purchases. Florio expressed concerned about the legality of MRS-facilitated transactions. Corner consulted lawyers, who ultimately concluded that there was no issue, which Corner told Florio. But Xspand proceeded to distribute its claims about MRS transactions producing debt, not revenue. This communication could reasonably indicate that Xspand’s intent was to “cripple MRS, and not necessarily to acquire business for itself,” since it wasn’t designed to convince customers but to stifle MRS’s financing. (I’m not sure why an intent to acquire business for itself would be a better motive, if the method used was falsity, but that’s probably why I would think that dealing with the government as market participant instead of as regulator isn’t subject to Noerr-Pennington.)
Moreover, Xspand acknowledged at least two factual errors in its ads. In its FAQ about MRS, it falsely said that the Harrisburg School District had actually accounted for the funds received from its MRS-facilitated transaction as debt rather than revenue. In another letter letter, Xspand falsely represented that it had entered into lien-sale contracts with several municipalities, including Allentown, Pennsylvania.
Xspand also argued that MRS couldn’t show falsity because its statements that “MRS-facilitated transactions are borrowings and cannot be budgeted as revenue” were intended to convey that MRS could not properly book proceeds of tax-lien transactions as revenue, whereas MRS argued that the statements were intended to say something about how MRS customers actually booked the revenue, thus making the claims literally false. The court found that the statements were not literally false. MRS’s reasoning was “circular,” positing that the proceeds were revenue because MRS customers said they were revenue. Xspand’s statements could not reasonably be interpreted to assert that the transactions physically couldn’t be booked as revenue. Any reasonable person would interpret the statement to address how the proceeds should be booked. Therefore, to prove falsity, MRS needed expert testimony.
Comment: The court’s conflation of literal falsity with statements that require no expertise to disprove reflects some confusion. The court’s reasoning (which in itself makes sense) just means that literal falsity has to be shown with further evidence, as it would always have to be in the absence of a concession from the defendants. This situation doesn’t make the statement implicitly false in the Lanham Act sense. The question is not, “what message did the consumer audience take from the materials?”—a matter the court already resolved, as a matter of law, when it held that the message was about proper accounting. The question is, “was that message false?” The court correctly recognized that the statement wouldn’t be false if MRS customers improperly booked proceeds as revenue (and would be false if they properly did so), but that’s not something that can be resolved with survey evidence about consumer perception, which is what the literal/implicit divide is supposed to measure. From the rest of the opinion, it seems that the court was clear on the issue at stake—what the proper accounting procedure was—but I’d call this opinion another casualty of the somewhat counterintuitive way in which Lanham Act doctrine has developed with respect to rigid categories for extrinsic evidence.
The court noted in a footnote that the statement about Xspand’s business with Allentown was false, but hadn’t been shown to influence any other transactions. As for causation on the basic claim, MRS’s principal testified that “everywhere” he went clients and potential clients wanted to discuss Xspand’s letter, and he named specific school districts that had slowed down negotiations with him. This was a matter of credibility for the jury to decide; the testimony was allowed under a hearsay exception, since it went to the state of mind of the clients/potential clients. Xspand argued that this was still hearsay, since the ultimate decision about doing business with MRS rested not with a single individual but with a group. The court deemed this argument “innovative” but unavailing. The exception applies to statements by individual customers; “we fail to see why it would not apply to an individual who is an official representative of a corporate or governmental customer.” The court did not believe that the Federal Rules of Evidence were designed to distinguish between a corporate entity and a sole proprietor in this fashion.
Xspand had some specific arguments against each of the claims, too. On defamation, it argued that MRS couldn’t prove that its statements were of a defamatory character. Commercial disparagement targets the goods (or services) of a business; it doesn’t cross the line into defamation unless “without the aid of extrinsic evidence” it imputes fraud, deceit, dishonesty, or reprehensible conduct in relation to the goods. Xspand’s letter explicitly stated that MRS-facilitated transactions were not sales but borrowings. It didn’t say that MRS advertises itself as producing revenue, not debt. So, for this letter to impugn MRS’s integrity, the recipient would have had to have heard MRS describe its own services. This would be extrinsic evidence, and can’t be considered; thus the letter was incapable of a defamatory meaning.
However, Xspand’s letter could be found to denigrate the quality of MRS’s product, and thus could give rise to liability for commercial disparagement. In Pennsylvania, the elements are: “(i) the statement is false; (ii) the publisher either intends the publication to cause pecuniary loss or reasonably should recognize that publication will result in pecuniary loss; (iii) pecuniary loss does in fact result; and (iv) the publisher either knows that the statement is false or acts in reckless disregard of its truth or falsity.”
Xspand argued that there was no evidence of knowledge or reckless disregard. Xspand’s president Scura, who oversaw the drafting of Xspand’s letter, had extensive experience in municipal finance and reviewed a copy of the purchase and sales agreement used in MRS-facilitated transactions; Xspand argued that this level of care prevents a finding of recklessness. The court, however, found that a reasonable jury could infer that Xspand was aware that lawyers at two prominent firms had examined the structure of MRS transactions and concluded that it was legal. Scura himself testified that he did not consult any lawyers or certified public accountants regarding the truth of the statements in the letter, relying on his 20 years of structured finance experience instead. The reasonableness of this conduct was a jury question.
Similar reasoning preserved the tortious interference claim.
The court also refused to dismiss the complaint against Bear Sterns. There’s probably some interesting stuff in here for people following the complicated sleight-of-hand used to structure relationships between Bear and its allies. What I took from this: the term sheet proposed for the parties (including an intermediary) was never signed, so Bear didn’t obviously have an ownership interest in Xspand. But Bear jointly marketed itself with Xspand by putting its logo and name through Xspand’s marketing materials; Bear people attended marketing meetings with prospective Xspand clients and were regularly updated on Xspand’s efforts; and Bear allegedly made a large profit from Xspand. Scura testified that a “joint venture” agreement existed. A reasonable jury could conclude that Bear was involved in a joint venture with Xspand and was therefore jointly and severally liable. “Vigorously as Bear may argue otherwise, it is possible that it did not fully remove itself from Xspand's operation despite the structural machinations ….”
MRS cross-moved for summary judgment on literal falsity. Aside from what was addressed above, the court considered paragraph 18 of Xspand’s FAQ about MRS, which said:
The Harrisburg School District is currently participating in a borrowing plan associated with [MRS]. This plan has recourse to the Harrisburg School District if the liens are not sufficient to repay the borrowing. The liability appears on the balance sheet of the Harrisburg School District, and the advance of the borrowed funds is not revenue for budgeting purposes. The debt 'does' affect the School Districts credit rating, and may be limited by any debt limitation tests in bond indentures.
The court found this language unambiguous: a reasonable person could only read it to mean that the district actually booked the transaction as a borrowing that created debt, not as revenue. But in fact the district booked it as revenue. Xspand admitted that this statement was incorrect, but called it a “typographical error” of “no moment.” Xspand argued that the statement was intended to read “The liability should appear on the balance sheet ….” The court didn’t think this was a typo; at least the jury was entitled to determine the “nature of the error.”
To get money damages, MRS would have to prove actual deception, even for a claim based on literal falsity, and no Third Circuit authority supported varying that rule even in the case of willfully false advertising. However, there was testimony from a representative from a school district that she was actually deceived. On the other hand, the testimony also provided reasons to believe that the district might not have done business with MRS anyway. Causation was for the jury. Thus, summary judgment was granted in part finding literal falsity on the Harrisburg and Allentown claims, but not on liability for the literal falsity.
MRS then argued that the Tax Injunction Act prevented the court from finding that the transactions were improperly booked as revenue rather than debt, which would turn the court into an auditor. The court found this argument, too, novel but unpersuasive. The TIA is designed to stop state taxpayers from getting federal court orders enabling them to avoid paying state taxes, and that’s it. Xspand was not attempting to force the government to alter its books, and even if Xspand wins, the entities that booked MRS transactions as revenue won’t be forced to adjust their books.
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