statements to trade journal may be actionable false advertising

Design Resources, Inc. v. Leather Industries of America, 2012 WL 4580982 (M.D.N.C.)

Plaintiff DRI is in the “leather products” business, selling bonded leather products under the NextLeather brand.  Defendant LIA is a trade association of American leather tanners and suppliers.  Defendant Cory (dismissed for lack of personal jurisdiction) is the technical director/editor of LIA and director of the Leather Research Lab at the University of Cincinnati; LIA and the LRL share the same website and allegedly present themselves to the general public as affiliates with identical interests.  Defendant Ashley Furniture Industries is a big furniture manufacturing company; defendant Wanek (also dismissed) is its president and CEO.  The complaint centers around defendants’ alleged false advertising and disparagement of DRI’s bonded leather products.

Statements by Dr. Cory, allegedly made for and on behalf of LIA, formed the basis for DRI’s Lanham Act claims against LIA.  Whether the statements were in fact made as an agent was a factual issue inappropriate for resolution on a motion to dismiss; the allegations that this was so were sufficiently plausible.  There were two sets of statements at issue: first, statements made in an article published in the trade journal Furniture Today, and second, alleged comments to Ashley Furniture.

The Furniture Today article, “Chemist fears confusion over imitators may hurt category,” described Cory's concerns over a new form of bonded leather and said he was “crusading to educate people about this new leather imitator.”  The “original form of bonded leather” was said to consist of “a sheet of ground-up leather fibers embedded in a latex matrix, bound together with a fixative,” compared to the “new bonded product,” which “features several layers of laminated material.”  According to Cory, “[t]hese layers include a polyurethane finish; a thick layer of non-woven polyurethane-type material; a woven synthetic textile; and a thin layer of leather fibers that have not been bound to each other but glued to the underside of the laminate.”  He continued, “To call it ‘leather’ is outright deception, outright fraud.... It's not leather.... It's a synthetic that has leather fibers glued to the underside…. If tanned hide or skin has been disintegrated mechanically and/or chemically into fibrous particles, small pieces or powders, and then with or without a bonding agent is made into sheets or forms, such sheets or forms are not leather.”  The article didn’t mention DRI or NextLeather by name, but DRI alleged that it was the first to market and that the article was carefully timed to coincide with important market shows, thus harming DRI to the benefit of LIA’s members.

DRI alleged that Cory also communicated to Ashley—DRI’s largest competitor—and other competitors that DRI was misrepresenting NextLeather as bonded leather in order to fool consumers.  This “supported” Ashley’s own “smear campaign.”  Among other things, Cory allegedly falsely told Ashley that DRI forged emails between him and DRI.

In 2007, Cory received a swatch of material from Ashley, which requested “a ‘ruling’ on whether the material [could] be marketed as ‘Bonded Leather.’”  He prepared a report finding that it represented a “clear departure from the recognized description of ‘bonded leather,’” and Ashley that the material “should not be described as [bonded leather] because it would misrepresent the product and confuse the customer…. Overall, this product represents a fresh marketing opportunity that can only be maximized by emphasizing its differences to bonded leather.” While DRI argued that this was NextLeather, the report just said it was material received from Ashley.

DRI argued that Cory’s statements and Ashley’s campaign deprived it of a unique opportunity to capitalize on its position as the first to market this novel bonded leather product and create a new market niche.  It alleged that defendants were jointly and severally liable for false advertising.  The court had serious reservations that DRI’s allegations were sufficient on joint and several liability, but that wasn’t challenged at this stage.  In a footnote, the court suggested that sharing the same legal counsel wasn’t close to supporting the claim that the Leather Research Lab and LIA were a conspiracy or joint venture, and that sharing a website might support a reasonable inference as to a joint venture “as to the matters specifically addressed on the website, but not as to other matters.”

LIA argued literal truth, lack of commerical advertising or promotion, and lack of materiality.  For purposes of the motion to dismiss, the court rejected each argument.  First, a statement might be literally true but misleading; this was better addressed on summary judgment, given that DRI had identified specific statements and provided some context to support its allegation of deceptiveness.  Second, using Gordon & Breach (as other circuits and district courts in the Fourth Circuit had done), Cory’s statements were plausibly alleged to be commercial advertising or promotion, given Cory’s role in LIA, which allegedly represents the leather industry, including by performing marketing services.  Though LIA doesn’t itself sell leather goods, it is an industry organization, and its marketing services might be sufficient to meet the Gordon & Breach requirements—that too would better be addressed on summary judgment.  Though defendants argued that Cory’s statements were protected by the First Amendment, false and misleading advertising isn’t shielded by the First Amendment, and further factual development was required to figure out whether they fit in that category.  As for materiality, DRI sufficiently alleged damage to its reputation and market share, which allowed the reasonable inference that the statements were both likely to influence and did influence purchasing decisions.

The state law claims also survived, in part given unresolved choice of law questions; the court noted that this would not be burdensome because the Lanham Act claims would require discovery anyway.