Monday, July 25, 2011

Critic or competitor? Conspiracy allegation preserves Lanham Act claims

1524948 Alberta Ltd. v. Lee, 2011 WL 2899385 (N.D. Ga.)

This case concerns penny auction websites. Consumers purchase bids, usually for fifty cents or a dollar each, and place bids on individual items until a clock runs out and there’s a winner; bids extend the clock. Unsuccessful bidders must normally pay for the bids they placed. Plaintiff, doing business as Terra Marketing Group, runs the penny auction site SwipeBids.

Defendant Lee runs (PAW). Lee says the site is "a clearinghouse of information, comments and education on the penny auction industry" that "posts news, reviews and other reports of penny auction websites," while Terra calls this "a marketing gimmick[; i]n reality, Defendants generate revenue[ ] ... by selling advertising space ... to other penny auction site operations and third party affiliates ...." Lee admits that the site accepts advertisers, but says that it "does not endorse any advertiser and will remove advertisers who are found to engage in unfair or fraudulent practices."

SwipeBids didn’t like content posted on the site about it, and alleged a conspiracy against SwipeBids between PAW and other penny auction sites. Terra argued that PAW is a “fake gripe site,” purporting to be neutral but in fact a tool for disparagement of a competitor. PAW allegedly made defamatory statements about SwipeBids to divert potential customers to other sites. Terra also alleged that PAW “directs” customers to buy “bid packs” from PAW’s sponsors, who then pay PAW a fee. Moreover, PAW allegedly fills its message board with posts that purport to be from consumers but are mostly from defendants (including multiple John Doe defendants) themselves. Finally, Terra alleged that PAW uses SEO (which it calls “spam”) to improve its place in search results when people search for Terra’s trademark.

Terra alleged that defamatory statements on PAW caused lost business and caused Terra’s credit card processor to cancel its contract with Terra, resulting in millions of dollars in damages. Most importantly, PAW contains accusations that Terra engages in “bot bidding,” “in which the penny auction operator runs a program to artificially increase the numbers of bids on a product to the detriment of legitimate bidders.” Bot bidding is fraud, and can damage a penny auction site’s reputation. Other allegedly defamatory statements included that SwipeBids consists of "THIEVES" and that customers never receive products even if they win an auction.

Terra sued for false advertising, unfair competition, and trade libel under the Lanham Act, along with defamation, intentional interference with contractual relationships, negligent interference with contractual relationships, and tortious interference with potential business relations.

The court first held that Georgia’s anti-SLAPP statute didn’t apply because the requirement that a plaintiff file a written verification containing several certifications was a procedural requirement that directly conflicted with, and was therefore precluded by, FRCP 8(a).

Lee argued that it was improper for Terra to sue Lee and 50 unidentified defendants without specifying who is supposedly liable for what in seven causes of action, each purportedly incorporating every previously stated fact and count. Terra responded that it intended to amend its complaint once it found the identities of the Doe defendants, and that its pleading was ok.

Shotgun pleadings are unacceptable; they make it difficult to discern which allegations of fact correspond to which defendant or claim for relief and can make it impossible to frame a responsive pleading. The court found that this complaint was ok. Though it would be better if the complaint specifically cited facts in support of each count, Lee was able to frame a responsive pleading.

But did the complaint survive Iqbal? Lee argued that Terra offered no factual support for the allegations that PAW engaged in false advertising as a competitor, caused consumer confusion, contains defamatory statements “too numerous to include,” and induced others to terminate their contractual relations with Terra.

False advertising under the Lanham Act requires commercial advertising or promotion, which itself requires (1) commercial speech by (2) a defendant in commercial competition with plaintiff (3) for the purpose of influencing consumers to purchase the defendant's goods (4) disseminated sufficiently to the relevant purchasing public in such a way as to constitute advertising or promotion. (Compare to today's other case, from the same circuit, pointing out much more variation in the tests.) The court found this test satisfied by the allegations that Lee and others were involved in a conspiracy to defame SwipeBids “and thereby attract customers to penny auction websites in competition with SwipeBids.” PAW targeted penny auction customers and disseminated the allegedly false statements to anyone who visisted.

Terra also sufficiently pled facts to support the rest of its false advertising claim: false statements impugning SwipeBids’s trustworthiness that deceived consumers and had a material effect on their purchasing decisions.

What about trademark infringement? Terra sufficiently pled rights in SwipeBids. But does pleading “search engine spam” adequately plead likely confusion? More specifically, Terra pled that Lee uses the SwipeBids trademark “to cause search engines to make PAW one of the top search results for ‘SwipeBids.’” Lee argued that the allegation of confusion was unsubstanted and conclusory, and PAW on its face was not confusing.

Because N. Am. Med. Corp. v. Axiom Worldwide, Inc., 522 F.3d 1211 (11th Cir. 2008), held that including trademarked terms in metatags to influence search engines may result in a likelihood of confusion, Terra adequately pled infringement.

Comment: sigh. The other counts may or may not be valid; the fact that PAW allegedly defames SwipeBids should be enough to defeat the trademark infringement claim—under Iqbal, how could it be plausible that a site saying SwipeBids is populated by THIEVES causes confusion over source or sponsorship? Even assuming Axiom’s validity, the allegations here are very different.

Trade libel: as the court pointed out, this isn’t a separate cause of action under the Lanham Act. It’s §43(a)(1)(B), and thus this count was dismissed.

Defamation has four elements: (1) a false and defamatory statement concerning the plaintiff; (2) an unprivileged communication to a third party; (3) fault by the defendant amounting at least to negligence; and (4) special harm or the actionability of the statement irrespective of special harm. This was unproblematically alleged—even if you don’t think that the alleged conspiracy with Terra’s competitors justifies a Lanham Act claim, defamation applies to everybody, competitors or not, and has correspondingly higher barriers to recovery. Accusations of fraud and theft injure a business’s reputation; even if claims of lawbreaking are privileged because they’re related to petitioning the government, actual malice defeats the privilege and was properly alleged; the court didn’t need to determine whether Terra should count as a public figure for purposes of fault because Terra alleged the highest level of fault, actual malice; and allegations of fraud are per se actionable without requiring special damages to be shown.

Negligent interference with contractual relationships: this count was dismissed because the claim was not recognized in Georgia. Tortious interference with potential business relations is a viable claim, though, and the allegations were sufficient to cover the elements: a defendant must (1) act improperly and without privilege, (2) purposely and with malice with the intent to injure, (3) inducing a third party or parties not to enter into or continue a business relationship with the plaintiff, (4) causing some financial injury. For inducement, Terra would need to show that, absent Lee’s interference, business relations were in fact reasonably likely to develop. If the complaint’s allegations that SwipeBids was “the preeminent and most successful penny auction site[ ] in the world” were true, one could fairly infer that PAW might have dissuaded prospective customers.

As to interference with existing contractual relationships, Terra failed to plead how Lee knew about the contractual relationship with the credit card processor or acted with the intent to interfere with that relationship. Since knowledge and intent are required elements, Terra’s claim with respect to the credit card processor was dismissed, but not with respect to existing customers.

Note: obviously, being able to allege that a critic is really a competitor is pretty useful, and if you can allege only that the critic is in league with a competitor and survive a motion to dismiss, even better. I’m a bit disturbed by the potential scope of the principle here: suppose GM makes known to the NYT that GM will give it more ads in the future if the NYT reviews other manufacturers’ cars poorly, and the NYT goes along—is the NYT now in the same position as Ford with respect to a Lanham Act suit from GM? On the other hand, fake grassroots sites are a real problem, and if there’s in fact a very tight connection between PAW and Terra’s competitors then I think Lanham Act treatment (which only requires falsity, not malice) would be appropriate. Perhaps the potential risks should be policed by aggressive imposition of fee awards on plaintiffs who claim they’re suing competitors when they’re only suing critics.

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