Empire down

Empire Today, LLC v. National Floors Direct, Inc., 788 F. Supp. 2d 7 (D. Mass. 2011)

Empire and NFD compete to provide on-site carpet and flooring. Empire sued NFD for tortious interference and trademark and false advertising Lanham Act violations as well as violations of M.G.L. chapter 93A, the state consumer protection law. Empire settled with three former sales reps for breaching their agreements with Empire before the end of trial. NFD counterclaimed for defamation, tortious interference, false advertising under the Lanham Act, and abuse of process. A jury found against plaintiff on all its claims, except for the 93A claims the court had reserved for itself. The jury found in favor of NFD on the abuse of process claims and awarded NFD $500,000.00.

The parties’ business model relies heavily on TV ads and salespeople. Roughly 10 managers and 20 sales reps left Empire to work for NFD, “some under acrimonious conditions.” The evidence around whether NFD induced these employees to leave was hotly disputed.

NFD has long run a “15% or it’s free” promotion promising to beat anyone’s price by 15% “or it’s free.” Empire alleged that NFD didn’t provide the advertised discount. It offered evidence of a customer order containing less than that discount, and orders in which one NFD principal, Dan Rosenberg, reduced the prices by only 13%, despite claiming that he was offering a 15% discount. In one case, a customer complained and Rosenberg then reduced the price by 15%.

Customers were only entitled to the 15% off if they had a written quote from another company for the same quality and quantity of flooring. The first customer order Empire showed hadn’t satisfied those prerequisites. Only about 10% of NFD’s orders beat competitors’ prices. As for the others, Rosenberg testified that he sometimes took 15% off by dividing the competitor’s price by 1.15—that is, he took 13% off, not 15%. He should have multiplied by .85. Rosenberg’s calculation was used in about 10% of the orders that beat competitors’ prices. NFD, in a move that would make some politicians proud, cast Rosenberg’s calculations as “an issue of internal disagreement,” and also as a method that NFD’s software used. (Argh. This is math. Getting it wrong doesn’t mean there’s relevant disagreement; it means there’s right and wrong.)

As for NFD’s counterclaims, NFD alleged that Empire targeted it as a threat to Empire’s market. Empire performed at least eight “secret shops,” when a competitor’s employee pretends to be a customer to learn more about the target, including its pricing. Though the parties hotly contested the causes of changes in market share, NFD grew at least in part because of its low prices. Empire also reduced its ad spending in the Boston area and suffered from management problems in the Boston office. Indeed, Empire initially planned to close its Boston office, but cancelled the plan partly because it didn’t want to leave NFD without direct competition, which would ease NFD's expansion into other areas. Because Empire felt NFD was poaching its reps, Empire began sending C&Ds to NFD.

In one email chain featuring key figures at Empire, one of several possible strategies mentioned was: "We should aggressively work on the legal front. (non-competes and potentially their advertising/disclosures/disclaimers) This could be an expensive distraction at a time where [NFD is] investing in a new facility and heavy advertising." Another said that one key figure would like to see if it would be feasible to get a "large amount" of damages and take the "most aggressive" legal position, including "appropriate suing individuals [sic]." This garnered a reply: “[If Plaintiff] truly want[ed] to hurt [a competitor in Chicago] and NFD (including in this conversation at this point as to looking to expand the legal actions to them) we should leverage the profit in other markets to offset loses in Chicago and Boston. The competitors do not have this advantage and [in] losing money they will need to continue to dig into their own pockets versus leveraging other profitable markets....” The court viewed this as top management discussing legal action “seemingly as a tactical means of competition against NFD and as a tool to force NFD to incur legal fees.”

Empire also filed at least one complaint with the BBB about the 15% promotion. Months after Empire filed its initial lawsuit, it decided to close the Boston office because of a mix of price competition from NFD, leadership troubles, and generally poor economic conditions. It reversed its decision after a sales rep pointed out that this would give NFD “free reign [sic],” and that Empire would only be able to get back into the Boston market by underselling NFD.

Empire moved for judgment as a matter of law on NFD’s abuse of process counterclaim, arguing that NFD didn’t meet its burden to provide the jury with an evidentiary basis on which to award any fees because it mentioned those fees only in general and unsubstantiated ways, without any specifics for hours, charges and rates. NFD argued that the award was based not merely on attorneys’ fees but also on the financial harm caused to NFD’s business as a result of the lawsuit, which Empire argued was also never quantified by documentary or expert evidence.

The court found that the jury’s award was based on sufficient evidence. NFD’s president testified that NFD incurred more than $1.5 million in defense costs, which had to be diverted from advertising, resulting in lost revenue. This testimony was corroborated by the president’s relative, NFD's consultant with over forty years of experience in the carpet business. Also, testimony throughout the trial explained how the Rosenbergs' diversion of time, attention, and financial resources was a result of Empire’s suit. Though Empire argued that these claims weren’t supported by sufficient evidence, the court declined to disturb the jury’s verdict: the testimony of a company’s president is not insufficient as a matter of law, and Empire didn’t provide any evidence disputing NFD’s calculations. Also, NFD provided specifics in some instances, and there was no authority that more quantification of general financial harm was required. Moreover, though NFD’s financial condition improved after it was sued, that didn’t undermine the jury’s finding that it suffered damages that prevented it from realizing more profits.

Turning to NFD’s Chapter 93A counterclaim: NFD claimed that the abuse of process also violated Chapter 93A, constituting unfair and deceptive conduct. Empire waited for two years to file suit, didn’t seek injunctive relief, and sued individual employees. The court ruled that, though abuse of process could constitute a violation of Chapter 93A, it wasn’t bound by the jury’s finding on abuse of process.

Unfairness generally requires “rascality”: the "'objectionable conduct must attain a level of rascality that would raise an eyebrow of someone inured to the rough and tumble world of commerce.'" Abuse of process means that "'[1] process was used, [2] for an ulterior or illegitimate purpose, [3] resulting in damage.'" More than intent to cause a party to spend substantial time or money is required; there must be an intention to use process for coercion or harassment to obtain something not properly part of the suit.

The court found that NFD was not entitled to judgment on its abuse of process Chapter 93A claim. The emails weren’t enough to convince the court that Empire engaged in abusive litigation unfair enough to violate Chapter 93A. Empire discussed using its deep pockets offensively, but the court didn’t find that the lawsuit was motivated by a desire to injure NFD’s business. The lawsuit was filed 8 months after the first email, and the second was part of a conversation about various legitimate business practices, including leveraging profits in other markets and recovering market share by generating and closing more leads. Even though one participant suggested a desire to “hurt” NFD, that didn’t show that Empire sued to hurt NFD’s finances or drive it out of business. The court read the emails to refer to “(1) the legal fees that NFD would incur as a result of a legal action and (2) beating NFD by various legitimate practices, including providing different financing offers.” Indeed, Empire’s primary investor and ultimate decision maker replied to the second email by endorsing only the improvement of financing offers and increase in advertising. “In sum, mere conversation among interested individuals about a possible lawsuit does not constitute abuse of process.”

The other conduct was also insufficient, even in conjunction with the emails. Chapter 93A has been violated when parties raced to litigate unmeritorious claims without knowing all the facts or failed to make a reasonable settlement offer in the face of a meritorious claim. Here, by contrast, Empire attempted to resolve the issues out of court for two years, sending multiple C&Ds. It went to the BBB. It sued only as a last resort, and the court found that NFD itself may not always have enaged Empire in good faith. Moreover, Empire engaged in settlement discussions. This was not sufficient rascality to surprise people inured to the world of commerce: NFD failed to show that other corporations don’t discuss suing “as one of many means of competing against companies that they believe are engaging in illegal conduct.”

Empire’s Chapter 93A claim: Empire argued that NFD’s 15% promotion was literally false because (1) one of the principals confirmed that NFD only provides a 13% discount (remember that testimony about how the computer program does it), and (2) NFD has never given a free job. The second was easily disposed of: there was no evidence that NFD had ever been in a situation when it couldn’t give 15% and would thus have to do the job for free, yet refused to do so. Empire pointed to inconsistency in testimony on NFD’s side, such as at one time alleging that the promotion accounted for very little business and at other times claiming that the promotion was used "all day long" and "on every single customer."

A Chapter 93A claim requires the same elements as a Lanham Act false advertising claim. (Really? Chapter 93A requires that a statement be made in interstate commerce? This seems unlikely and shows the silliness of relying on such general, casual equations of state and federal false advertising law, which are generally tossed off in circumstances where people aren’t paying attention to the differences.) So Chapter 93A also uses the false/misleading distinction.

The court held that Empire didn’t show literal falsity. It didn’t prove that NFD didn’t honor the 15% discount as a standard practice, given the conditions (which were disclosed in the offer). Even the customer orders showing Rosenberg’s “alleged” miscalculations weren’t definitively established as qualifying for the 15% promotion. (Hmm—so why did the customer who complained get the 15%?)

And here the court adds an intent requirement: the “different ways” of calculating 15% didn’t mean the advertising was literally false. NFD and the Rosenbergs (there were a number of them involved) generally thought they were providing 15% when the customers qualified. “At worst, the 15% Promotion more likely suggested an internal disagreement at NFD over a mathematical calculation.” Argh again! Anyway, this disagreement only affected a small percentage of sales, none of which were clearly established as qualifying for the 15% Promotion. “Such a reasonable but incorrect interpretation of a matter does not alone constitute unfair and deceptive conduct.” Even if this was negligent, negligence alone doesn’t support Chapter 93A liability. (So, not so much like the Lanham Act, is it?) Also, NFD told the BBB its method of calculating 15% (which was, at least as to Rosenberg, actually a method of calculating 13%--look, if I told you that I was measuring in liters and I was actually measuring in gallons, even if I was honestly mistaken about what a liter was I’d be—no, forget it). The BBB apparently didn’t accuse NFD of falsity specifically about the 15% calculation, and anyway the court wasn’t bound by the BBB’s views (citing Timothy Noah, Busted Watchdog: Is the Better Business Bureau a Protection Racket?, Slate (December 7, 2010, 7:38 PM); David Lazarus, Better Business Bureau Grades Companies on a Peculiar Curve, L.A. Times, Jan. 21, 2009, perhaps to suggest why).

Empire didn’t have consumer surveys or other evidence of misleadingness, so without literal falsity its claim failed.

Empire also failed to show causation and damages. A precise showing of harm isn’t required and sales diversion may suffice, but some causal connection between misrepresentation and harm is necessary. Empire lost sales for many reasons, including its own management issues and NFD’s generally low prices. Empire’s decline during NFD’s rise showed only correlation, not causation. Empire didn’t identify any consumers who chose to purchase from NFD over Empire because of the 15% offer. Given the inconsistent evidence, the court found it appropriate to agree with the jury, which is best suited to resolve such a dispute. (Perhaps there was a special verdict form indicating that the jury found that Empire hadn’t shown causation.)

NFD requested a fee award under the Lanham Act. The Seventh Circuit has held that abuse of process makes a case “exceptional” for fees purposes. The court found, however, that NFD hadn’t met the more relevant First Circuit standard, which requires that a defendant show something less than bad faith, “such as a plaintiff's use of groundless arguments, failure to use controlling law, and generally oppressive nature of the case.” NFD didn’t satisfy that standard. Empire’s suit wasn’t completely lacking in merit; it presented a substantial amount of evidence on its false advertising and trademark claims, and both went to the jury. The factual situation was very different from that in the Seventh Circuit case, in which defendant won early summary judgment on a meritless and disingenous claim. The Seventh Circuit described an exceptional case as one in which the party's claim is "objectively unreasonable"--a claim that a rational litigant would pursue "only because it was extortionate in character if not necessarily in provable intention." But the court already found that Empire wasn’t extortionate in its Chapter 93A analysis.