Monday, November 15, 2010

Standing claims another victim

Nature's Earth Products, Inc. v. Planetwise Products, Inc., 2010 WL 4384218 (S.D. Fla.)

Another day, another use of standing to do what the injury requirement should. Plaintiff Nature’s Earth makes Feline Pine clumping cat litter, which it promotes as natural and chemical-free. It sued its competitor Planetwise alleging patent infringement; this was voluntarily dismissed, but Planetwise counterclaimed for state and federal false advertising. Planetwise alleged that Nature’s Earth’s claims for its product’s “chemical-free [and] additive-free composition” were false because the litter actually contains the chemical polyacrylamide.

The court granted Nature’s Earth’s motion to dismiss the counterclaims for lack of standing. It sua sponte considered Article III standing, which requires allegations of actual or threatened injury fairly traceable to the challenged conduct that would be redressed by a favorable ruling.

Here, the only allegation of an injury was the conclusory and formulaic statement, "[Defendant] has been injured as a result of [Plaintiff's] deceptive, false, fraudulent, and misleading advertisements, marketing, and promotion, thereby resulting in damages to [Defendant]." “While Defendant need not plead injury with great detail, it must at least allege some factual matter supporting a reasonable inference that Defendant was injured by Plaintiff.” This didn’t make it under Iqbal and Twombly.

A proper factual allegation of lost sales and diverted customers might satisfy the constitutional standing requirements, so the court granted leave to amend.

Perhaps to guide later pleading, the court went on to find that Planetwise lacked prudential standing. To recap, the factors: (1) Is the injury of a type that Congress sought to redress in providing a private remedy for violations of the [Lanham Act]? (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. (5) The risk of duplicative damages or complexity in apportioning damages.

(1) Competitive harm is typically diversion of customers. Because Planetwise pled no facts describing the nature of its alleged injury, factor one weighed against it. (2) This is a causation requirement, looking for a direct relationship between the accused conduct and the claimed injury; the failure to allege relevant facts also weighed against prudential standing. (3) Is there some other identifiable class of commercial entities with a closer connection to the injury who might sue? The most appropriate plaintiffs are competitors who lost customers, and though Planetwise is a competitor, it didn’t allege a recognizable injury and thus did not allege the requisite proximity to the false advertising. Comment: 1-3 here seem pretty formalistic. Is there any way to interpret the allegation of injury, however general, other than that Planetwise lost customers to Nature’s Earth?

(4) Speculativeness: because Planetwise didn’t allege how it was harmed, its entitlement to any damages would be pure speculation. Its demand for disgorgement of profits was also problematic because discerning the portion of profits derived from deceived customers versus profits derived from those who would have bought anyway would be highly speculative if not wholly unworkable. (5) Risk of duplicative damages (oh, how I hate this factor and its limitation of Lanham Act remedies to markets with few competitors): Because Planetwise failed to allege anything unique about its harm, for example that the ads were directed towards it or its customer base, every competitor in the natural litter market could sue if Planetwise were granted prudential standing. Due to the risk of duplicative damages and the complexity in apportioning them, the fifth factor weighed against a finding of prudential standing.

The court noted that its analysis only applied to the current counterclaim, not to a possible amendment. “Any new allegations should assert a recognizable injury, such as lost sales, that results directly from Plaintiff's alleged false advertising. Defendant should also allege, if it can, that its damages would not be duplicative and apportionment not overly complex, for example by alleging harm unique to Defendant vis-a-vis other natural-litter competitors.” Unanswered question: suppose Planetwise alleges that it has 20% of the market and that the false advertising gave Nature’s Earth a competitive advantage against the whole market. Shouldn’t it then be enough to claim 20% of the damages? Damages experts do this kind of apportionment in other cases—PBM’s case against Enfamil, for example, proceeded to a multimillion-dollar verdict even with the presence of substantial competitor Similac in the market. If the court really means “for example,” Planetwise shouldn’t have to allege that it was targeted. The Lanham Act, after all, covers both false boasts and disparagement, not just disparagement.

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