Monday, July 29, 2013

Misattribution of "insider" status makes website literally false

Corizon, Inc. v. Wexford Health Sources, Inc., No. 4:10 CV 2430 (E.D. Mo. July 23, 2013)

Corizon sued Wexford for false advertising. The parties compete to provide healthcare services to correctional facilities.  Corizon was formed in 2011 from the merger of Prison Health Services and Correctional Medical Services (CMS).  Corizon had a contract with Maryland that extended until 2010, when Maryland issued a request for bids and both parties submitted bids.  In late 2010, Maryland announced its intention to award the contract to Wexford.  Corizon/CMS protested, and though Maryland denied the protest, Maryland informed Wexford that it was withdrawing the award because Wexford didn’t meet certain state requirements.  Corizon then extended its contract with Maryland.

While all this was going on, Wexford directed a PR firm, the CHT Group, to create a website.  CHT’s president Marlin Collingwood registered and, along with Wexford’s CEO, authored its contents.  The website was live from November 2010 to May 2011.  It was purportedly written by a Corizon insider and said many critical things about Corizon and its contract with Maryland.  CHT also created a website about the PHS/CMS merger,, questioning the wisdom of the merger; it was removed when the merger was complete.

Because this is what defendants do now, Wexford argued that Corizon lacked standing, because it alleged no damages other than its demand for attorneys’ fees and investigative costs incurred determining the website’s creator.  Constitutional standing: an injury in fact is an invasion of a legally protected interest that is concrete, particularized, and actual or imminent but not conjectural or hypothetical. In false advertising cases, injury may be shown “by creating a chain of inferences showing how defendant's false advertising could harm plaintiff's business.” Direct competition is strong proof of injury in fact, and the parties agreed that they competed.  Direct competition plus falsity was enough to show likely confusion, which was sufficient for injury in fact.

Prudential standing: one test requires competition plus competitive injury; the other is Conte Bros.  The Supreme Court is going to decide a case on this, but it didn’t matter here.  For the first test, the parties were competitors, and competitive injury involves harm to the plaintiff’s ability to compete, which can be presumed when there’s direct competition plus misrepresentation, which there was here. Likewise, under Conte Bros., the court first considers whether the alleged injury was of a type Congress sought to redress with the Lanham Act, whose focus is on “commercial interests that have been harmed by a competitor's false advertising,” so the answer was yes.  The evidence supported Corizon’s claims for investigative and attorneys’ fees, which were available in false advertising cases, and there was no risk of duplicative damages or complexity in apportioning damages, meaning that Corizon also had prudential standing under the Conte Bros. test.

Corizon argued that the statements at issue were literally false, while Wexford argued that they were mere puffery.  In an argument that is structurally similar to an establishment/“tests prove” claim, Corizon focused on the statement that the website’s author was a “CMS insider.”  Wexford argued that this wasn’t literally false, since an “insider” can be a person who knows facts unavailable to the general public, and Wexford had such knowledge gained from Corizon employees and others involved in the relevant events. However, the context excluded Wexford “insiders” from being the purported “CMS insider,” implying that the author was a Corizon employee: The introduction stated, “I’ve been a [CMS] insider for quite a while now,” and “I decided to start this site to vent a little and give some of my insight into the CMS way of doing business.”  It continued, “[CMS’s] actions in Maryland are now directly affecting me and many of my colleagues and friends.” Colleague means coworker.  The website also said, “Many of us know the security officers in Maryland and even they are looking forward to the change in vendors.”  And it implied lack of affiliation with Wexford by “feigning uncertainty” about Wexford’s location.  Thus, the court found literal falsity.

Was the website a “commercial advertisement” under the Lanham Act?  One question was whether it was disseminated sufficiently to the relevant purchasing public within that industry.  Wexford argued that as few as two dozen people viewed the website, and that there was no evidence that any were from the relevant purchasing public.  But classification as an ad doesn’t turn on whether statements were read; it turns on the defendant’s efforts to make such statements available: the touchstone is whether there was an organized campaign to penetrate the relevant market.  Here, Wexford disseminated the statements to anyone with access to the internet.

The parties also disputed whether the website referred to products or services.  But it stated: “CMS decided to protest the award and they were denied. This was even though their price was lower than the Wexford company, Maryland decided not to go with CMS.”  Wexford argued that this wasn’t a reference to normal “services” (because certainly the well-being of the prisoners being treated is rarely first on anyone’s list!) but rather to Corizon’s practices as an employer and its failure to cooperate with the transition from CMS to Wexford, but that last bit didn’t make sense because the website was about Maryland’s decision to change the contract.  And even assuming that “services” referred to relations with Maryland security officers, not services as a healthcare provider, the website’s context indicated that working with security officers was part of the services.

The speech was also economically motivated. Wexford argued that it only created the website to facilitate the transition after Maryland announced its intent to award the contract to Wexford, and that assisting an incoming vendor to ensure continuity of healthcare is standard in the industry.  Transitioning could include employing existing personnel, buying existing equipment and supplies, and assuming existing leases—but that just meant that Wexford intended to use the website to facilitate multiple economic transactions. Also, the parties’ competitive relationship and the website’s content were circumstantial evidence of economic motivation.  Taken all together, the website was commercial speech.

Literal falsity allows a court to grant relief without evidence of actual deception, but the parties agreed that the presumption of deception was rebuttable.  The Eighth Circuit has used some loose language, once suggesting that proof of willful deception was required to presume deception, causation and injury, though most cases just say literal falsity, which isn’t coexstensive with willfulness.  To resolve the discrepancy, the court here stated that either willful deception or literal falsity would trigger the presumption of causation and injury.  Materiality was different.  (Note that this seems to be overlooking the content for the labels.  Causation is materiality, in false advertising: the deceptive statement is likely to cause a reasonable consumer to behave differently.)  Though some courts have presumed materiality on finding literal falsity, the weight of authority makes materiality separate.  The presumption of deception arose from concerns over the difficulty of proving deception, but “difficulty with obtaining proof is less likely to arise with the element of materiality, which may be determined by reference to the objectionable statements alone.”  (But presuming materiality from literal falsity has its own justification: an advertiser, who by hypothesis straightforwardly said something that turns out to be false, is in the best position to know what claims are likely to influence purchasers.)  The literal falsity here created rebuttable presumptions of deception and injury, shifting the burden to Wexford to prove the absence of deception and injury, but the burden to show materiality remained with Corizon.  (How Corizon would be injured in the absence of materiality is left as an exercise for the reader.)

Wexford argued that there was no evidence that any customer or potential customer saw the website, and that Corizon’s senior VP, its regional VP, and its regional administrator all said they’d never seen the website or knew anyone who had, but that wasn’t Corizon’s burden.  Also, Wexford didn’t produce corroborating evidence for the claim that there were only 20-25 website visitors (mostly representatives of the parties), and a Yahoo! Finance page and a Baltimore Sun article comment section each contained a link to the website.  Wexford had the burden of proof, and though the few-visitors claim would prove a lack of actual deception/tendency to deceive given how long the website was up, summary judgment was improper given the lack of corroborating documentary evidence about the level of web traffic.  Also, one could infer deception of at least one person (though not a consumer) by comparing the timing of the Baltimore Sun post and an email Wexford received from a Baltimore Sun reporter, which requested information regarding the contract and refers to “a source with the current vendor.” Thus, deception represented a genuine issue of material fact.

As for materiality, even if the website was just about Corizon’s conduct during the transition process, that could influence a purchasing decision.  No evidence of consumer decisionmaking was required, only a showing that Wexford misrepresented an inherent quality or characteristic of the product/service.  A reasonable factfinder could find materiality, given the website’s statements that Corizon’s executives said they didn’t care about customer preferences, that Maryland security officers repeatedly complained about Corizon, and that Corizon lied to its employees and to Maryland.

As for injury, Corizon mostly alleged the expenses it incurred finding the website’s author and removing the website.  The court found that damage control expenses were cognizable; they were similar to injunctive relief in the purpose of controlling lost sales and lost goodwill.  As the Sixth Circuit has held, “As is the case with plaintiffs seeking injunctive relief, plaintiffs engaging in damage control are still at a stage where substantial uncertainty exists as to the extent of the business harm being inflicted by the false advertising.”  Wexford argued that Corizon had no evidence of lost profits or goodwill, and that Maryland extended its contract after the website went live. But Wexford had the burden of proof, and it was also possible that Corizon lost profits or goodwill from other customers. Thus both actual and likely injury were disputed issues of material fact.

Wexford argued that Corizon manufactured its damages, because it knew that Wexford authored the website ten days after it went live.  Corizon argued that, though Wexford was a suspect, the true author remained a “mystery” until the deposition of the PR firm’s head. These questions of intent and reasonableness were for a jury.

Also, Wexford’s voluntary cessation didn’t moot Corizon’s request for a permanent injunction.  Wexford’s affiliation with the link postings on Yahoo! Finance and the Baltimore Sun website, plus the creation of, was relevant to the likelihood that it would engage in similar conduct in the future, so it wasn’t “absolutely clear” that no injunction was required.

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