False advertising case succeeds as TM claim

Neighborhood Assistance Corp. of America v. First One Lending Corp., 2012 WL 1698368 (C.D. Cal.)

It is interesting to see how TM has become so much more muscular than other false advertising law that this case against odious defendants succeeds as a TM case, even though the core wrong is the fraud on the public (as the resulting injunction makes clear).  I don’t think TM should generally be used this way, primarily because real TM cases might cite it, which would be a mistake.  That’s what false advertising laws at the state and federal level are for, and they clearly cover all defendants’ misconduct, not just the TM confusion part.  That said, it’s hard to work up any sympathy for defendants whose deception proceeded in part by pretending to be affiliated with plaintiff.

NACA, a nonprofit community advocacy organization, sued First One and John Vescera for cheating homeowners by facing foreclosure, charging them $1000-$2000 based on false claims to provide mortgage modification services.  In fact, NACA provides these services for free as part of its activities originating loans and advocating for low and moderate income homeowners; after the financial crisis, it expanded its services to help homeowners facing foreclosure.  NACA has registered incontestable service marks for NACA; it also has a heavily promoted “Home Save Program” for homeowners with unaffordable mortgage payments, and uses “Save-the-Dream” events, held in large meeting spaces throughout the country, to promote its programs.

First One allegedly does business under a variety of different names such as National Mortgage Help Center (“NMHC”) and National Mortgage Assistance Center (“NMAC”), two “entities” with nearly identical websites and the same phone number.

First One made a number of allegedly misleading statements creating confusion over affiliation with NACA.  E.g., it claimed to be “a member of NAHCA.”  Other claims: “First One coordinates each client's financial analysis submission to the Home Save Program of the Neighborhood Assistance Network of HUD Housing Counselors to assist you with your lender to achieve a result. HUD (Dept. of Housing and Urban Development) Housing Counseling assistance is provided at no-charge and is not contingent on you hiring First One for any other service”; First One had been “Helping to Save the American Dream since 1995”; First One was a nonprofit organization that educates the general public and is “a Housing Counseling Public Benefit Corporation,” with the purpose of expanding “affordable housing opportunities to the public,” and providing “housing counseling services” and assistance to “homeowners to avoid default and foreclosures.; First One has a “national network of foreclosure prevention specialists” that will negotiate directly with the homeowner's bank to obtain lower monthly payments through a “Mortgage Modification Plan.”  First One falsely implied it was approved by HUD for counseling and mortgage modification services, claimed to have relationships with “all major lenders & loan servicers,” purported to obtain “Actual Modifications” through its “National Mortgage Help Center Program,” claimed already to have contacted the relevant lender, claimed to protect its customers’ personal information, and purported to offer free counseling. 

Other allegedly false and misleading statements on First One websites: “Only State approved attorneys may legally modify your loan with your lender”; “Do not give out your information with other Websites” (allegedly deterring direct contact with NACA); “Homeowners who have benefited from our services have received mortgage payment reductions that bring their mortgage payment debt ratio to within 31 % [of] their gross income. Mortgage principal balance reductions have also been achieved and are possible when your current mortgage balance exceeds the value of your home”; its staff was “comprised of case managers, loan processors, and housing counselors working on your behalf”; and so on.

NACA submitted five declarations from confused First One customers who stated they thought they were dealing with NACA and sent First One money (typically $1850 or $1450) but didn’t receive help.  One customer stated that, instead of contacting his lender, First One sent him a letter reinforcing his belief that First One was affiliated with NACA.  It stated his financial analysis had been submitted to his “Housing Counselor of the Neighborhood Assistance Network of HUD Housing Counselors,” and included a NACA identification number, a password, and directions to check the status online at NACA's website, www.naca.com.  After he was unable to log on, he went to NACA’s office, and then learned that First One wasn’t affiliated with NACA.  NACA alleged that over 240 homeowners fell for this scheme.

Apparently, what First One did was take customers’ money and then use their personal information—which it had promised not to share with third parties—to register a NACA account for the homeowner through NACA's website. Then it told customers that they should call the housing counselor assigned to their file at NACA.  When customers complained, First One took the position that it only provided documentation services, and NACA provided the “free of charge assistance phase of the service.”  On at least two occasions, employees allegedly responded to complaints by falsely stating or implying a NACA affiliation.  California’s Department of Real Estate sent a C&D to First One telling it to stop collecting advance fees for loan modification or forbearance services.

Defendants moved to dismiss, arguing that the complaint failed to allege use of NACA’s registered trademark, that there was no advertising or promotion, and that the parties didn’t compete because NACA doesn’t charge homeowners for its services.  The court found that NACA was bringing a false association claim, not a false advertising claim.  Such a claim doesn’t require use of NACA’s TM, as long as there’s a “word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which ... is likely cause confusion ... as to the affiliation ... or ... misrepresents the nature, characteristics, qualities ... of his or her ... services or commercial activities.”  Plus, NACA’s claim could be understood as one for reverse palming off: First One was marketing NACA’s services as its own, and that doesn’t require use of NACA’s mark.  Thus, NACA wasn’t required to plead any use of its registered or unregistered marks.

Also, a false association claim doesn’t need to be in “advertising or promotion” as a false advertising claim does.  Nor was NACA required to be a competitor to have standing.  “Defendants' rule would exclude from the Lanham Act those most deserving of its protection: non-profit organizations that help the neediest members of society and organizations whose operations are so beyond reproach that their reputations survive others' destructive schemes. Fortunately, the law is not as mean-spirited as Defendants would wish.”  The alleged damage to NACA’s goodwill was sufficient to satisfy the Lanham Act requirement that a commercial/competitive interest be harmed.  “Because consumers are likely to feel ripped off by Defendants and are likely to conflate Defendants and Plaintiff, Defendants' scheme damages and will continue to damage Plaintiff's reputation and good will with the public.”  In addition, NACA gets compensation from mortgage servicers for each successful Home Save, and harm to its reputation would likely diminish its ability to attract participants, resulting in lower revenue.

The court also rejected First One’s affirmative defenses that “facts” outside the complaint established the truth of three of the “numerous” false or misleading statements alleged in the complaint and that one defendant was immune from liability under the federal Volunteer Protection Act (one of those “news to me!” statutes).  The court refused to consider the claimed facts that First One was (1) a registered NACA referral agent; (2) a HUD approved lender; and (3) a not-for-profit 501(c) corporation, since these were not appropriate for judicial notice.  Even if the court could take judicial notice of the existence of certain documents (e.g., a letter from the IRS to First One), that wouldn’t justify judicial notice of the disputed facts in the documents.  And also, the documents didn’t even support the purported facts, which were themselves misleading!  For example, the printout from NACA’s website stating that First One was a “registered NACA referral agent for NACA” created a dispute over the meaning of “referral agent,” and seemed to confirm the allegation that First One used customers’ personal information to register NACA accounts in their names.  Likewise, a HUD letter showing that First One was approved as a lender doesn’t mean that HUD approved First One for counseling/foreclosure avoidance, an allegedly separate program, and thus First One’s claim of HUD approval might be misleading in the foreclosure avoidance context.  Even the 501(c)(3) claim was held up by the IRS’s official notice, stating that First One was a 501(c)(4), and the California Secretary of State has a record indicating that First One is “For Profit.”  Anyway, even if it’s all true, nothing would entitle First One “to create confusion in the marketplace by passing Plaintiff's services off as First One's services,” or to make the other alleged misrepresentations.

The court turned to NACA’s request for a preliminary injunction, which could be granted either using the Supreme Court’s Winter factors or the 9^th Circuit’s serious questions going to the merits/balance of hardships sharply favoring the plaintiff/irreparable injury/public interest test.  Under either test, NACA was entitled to a preliminary injunction; it was likely to succeed on the merits of its false association/reverse palming off claim.  The following words etc. were likely to mislead consumers into thinking First One was NACA: the acronym NAHCA; the acronym NMAC; the acronym NMHC; slogans such as “Helping to Save the American Dream since 1995” and “Helping Homeowners to Save Their Dream”; and phrases such as “Home Save Program of the Neighborhood Assistance Network of HUD Counselors.”  The acronyms were likely to be confused with NACA, and NACA’s phrase “Home Save Program” and full name “Neighborhood Assistance Corporation of America” was likely to be confused with First One’s “Home Save Program of the Neighborhood Assistance Network of HUD Counselors”  NACA’s slogan “Save–the–Dream” was likely to be confused with First One’s “Helping to Save the American Dream since 1995” and “Helping Homeowners to Save Their Dream.”  (This is why bad cases make bad law: these highly descriptive terms should generally be free for others to use, and ordinarily there’d be a strong fair use defense.  Oh, and also the court called NACA “the strongest kind of mark” because it’s registered and incontestable.)  The court found intent the “most telling[]” factor—First One’s use of all four of NACA’s marks, combined with its likely illegal conduct towards its customers, indicated bad faith.

Irreparable harm could be presumed from likely success on the merits, and was shown to be likely in any event because loss of good will or ability to control one’s reputation is irreparable harm.  (I’ve never understood why this second statement isn’t exactly the same as the first: what is there behind it other than a presumption?)  First One argued that there was no irreparable harm because NACA’s reputation remained good and because NACA, a nonprofit, by definition couldn’t suffer lost profits.  The court rejected these arguments as a matter of law.  Declarations from five homeowners who were confused about the relationship between the parties and angry at First One sufficed. 

Because First One charged money while NACA promotes its free program, “any perceived affiliation between First One and Plaintiff will give consumers the false impression that Plaintiff is being deceptive.”  Moreover, even if the homeowner eventually learns the truth, NACA still suffers.  “Homeowners who have paid a third party a fee before working with Plaintiff are much more likely to view the entire mortgage modification business, including Plaintiff's Home Save Program, as a scam.”

Unsurprisingly, the balance of the equities and the public interest favored a preliminary injunction:

All too frequently, intellectual property disputes between two faceless entities can make the judiciary appear to the public like a mere handmaiden to corporate interests, blessing corporations' efforts to commodify an ever-growing swath of the nation's intellectual capital. This case is a refreshing reminder that the policy justification for trademark law is to protect human beings, not corporations.

Here, a preliminary injunction would be “extremely beneficial” to the public.  First One’s scheme appeared to violate a number of consumer protection laws and had caused significant harm.  So the court granted the injunction, which notably covers both false association and false advertising type claims.  On the TM side, defendants were enjoined from: making any statements likely to create an impression of affiliation etc. between the parties; using the word NACA or its web address in any website, advertising or promotional materials, or written materials provided to customers or potential customers; using “Home Save,” “Home Save Program,” “Neighborhood Assistance”; or referring anyone to NACA or its phone number or registering anyone through NACA’s site.  On the false advertising side, the injunction also barred making any statements likely to create the impression that First One provides loan modification or housing counseling services, or that it’s approved by HUD to provide such services; advising consumers not to provide information to other websites or that only attorneys can provide loan modification services; or stating a consumer has been pre-qualified for a loan modification in the absence of a written statement from the lender to that effect.  These remedies, of course, are only justified by the false advertising, which was aided and abetted by the TM confusion but still distinct from it.