Customer-competitors have standing

Garrett v. Cassity, 2010 WL 5392767 (E.D. Mo.)

As the court explained, this case arose out of an alleged scheme by the owners, directors, officers, and employees of three companies--National Prearranged Services, Inc. ("NPS"), Lincoln Memorial Life Insurance Company ("Lincoln"), and Memorial Service Life Insurance Company ("Memorial")—“to defraud funeral homes and consumers in the sale of pre-need funeral service contracts, and to re-direct the funds received from the sale of those products to other related entities and certain individual parties, with the ultimate result of causing the Texas Department of Insurance to declare these entities insolvent and place them in receivership.” The plaintiffs were the special deputy receiver for the companies, the individual state life and health insurance guaranty associations of seven states, and the National Organization of Life and Health Guaranty Associations ("NOLHGA"). The associations are statutory entities created by state legislatures to provide protection for resident policyholders in the event that a member insurance company becomes insolvent. They have been assigned or are subrogated to the claims of funeral homes and consumers arising out of dealings with NPS.

NPS old pre-need funeral service contracts through funeral homes, and Lincoln and Memorial issued life insurance policies. “NPS marketed its pre-need contracts by assuring consumers that funds paid to NPS would be secured in pre-need trusts and backed by whole life insurance policies issued by Lincoln or Memorial. Depending on the applicable state law, the purchaser applied for the insurance policy at the time of purchasing the contract, or the trust holding the contract funds purchased the policy after obtaining the customer's funds, so ostensibly in both cases, the necessary funds would be available when the pre-need beneficiary died and the claim became due.”

Basically, NPS allegedly held onto funds from consumers instead of putting them in trust or using them to insure the entire amount of the contract, altering signed policies where this was required. In addition, NPS took out loans on insurance policies issued by Lincoln and Memorial, which required NPS to be the named owner or beneficiary of the policies, requiring further alterations and/or violations of state laws prohibiting such arrangements. These were all allegedly concealed from NPS’s sales force, funeral home customers, and pre-need customers. Plaintiffs alleged further financial shenanigans, such as stopping payment of premiums on policies to keep consumers’ money and replacing whole life policies with term policies.

From 1995 through 2007, NPS took out over 400,000 policy loans, totaling more than $130 million, but allegedly never did anything to repay them except through bookkeeping maneuvers. When Ohio regulators began questioning funeral homes about NPS policy loans, some funeral homes contacted NPS sales agents, and NPS denied taking out such loans.

NPS created pre-need trusts in many states, but plaintiffs alleged that the funds were systematically looted through withdrawals in exchange for promissory notes, some unsecured, and debentures; payments were only made in the form of book entries or temporary shifts of money, and cash was allegedly never repaid. Even that wasn’t enough, as the promissary notes were allegedly further manipulated through assignments and through novations changing the face value of the notes either to support an additional payout without additional security or to reduce the obligation.

I will only discuss the Lanham Act claims, though they’re obviously just a part of the case, which includes a large RICO component. One defendant argued that plaintiffs lacked standing to assert Lanham Act claims for want of competitive injury.

The Eighth Circuit has not yet ruled on the matter, but the court here noted that some circuits require competition, while others use a “less categorical” multifactor test (which in practice excludes competitors from suing more than it allows noncompetitors to sue, but that’s a complaint for another day). In this case, plaintiffs’ allegations were sufficient to satisfy even the “more restrictive” categorical test. Plaintiffs asserted claims on behalf of funeral homes who sold NPS’s pre-need funeral contracts, and they expressly alleged that the funeral homes were competitors of the defendants because the funeral homes participated in the market for such contracts. The court found this allegation “at least plausible” in light of the allegation that funeral homes would have provided pre-need contract services themselves had they not chose to market NPS's contracts.

“Thus, because the funeral homes chose to contract with NPS instead of compete with it, based on allegedly false representations from NPS that NPS would safeguard the pre-need funds, the funeral homes suffered competitive injuries when NPS proved unable to satisfy its obligations under those contracts.”

The court also rejected another defendant’s argument that the complaint failed to state a Lanham Act claim against him. Plaintiffs alleged that NPS repeatedly misrepresented to its funeral home and pre-need contract customers that it was not taking out loans on the insurance policies purchased with pre-need funds, and that the defendant was one of several involved in the decision to make these misrepresentations. Although the complaint didn’t allege that this defendant personally made the misrepresentations, §43(a) liability does not require this. “Indeed, it would appear somewhat absurd for false advertising liability to attach only to the actual maker of the misrepresentation; if that were the case, the actor in a television advertisement containing a false statement would be liable, while the corporate executives who commissioned the advertisement and approved its content would not.” Instead, the allegations that false statements were made and that the defendant was personally involved in the decision to make them were sufficient to state a claim.

In a footnote, the court noted that the parties recognized uncertainty as to whether Rule 9(b) applies to Lanham Act false advertising claims, but found it unnecessary to resolve the matter as the pleadings satisfied 9(b) in any event.