overstating competitor's relationship with FTC target could be defamatory

Broadspring, Inc. v. Congoo, LLC, 2014 WL 4100615, No. 13–CV–1866 (S.D.N.Y. Aug. 20, 2014) (by my classmate, the Honorable Jesse Furman)

“This is a lawsuit between bitter rivals in the online advertising industry.” Broadspring sued Congoo and two of its executives, CEO Nashed and Senior VP of Business Development Cosentino, principally alleging a defamatory campaign against it. Congoo counterclaimed for false and misleading statements to Congoo’s clients.  The court dismissed the counterclaims and a tortious interference claim against Nashed, but let other claims proceed.

The parties operate online ad networks that connect advertisers with websites (publishers).  They put their advertisers’ ads on publishers’ websites, taking money from the advertisers and paying publishers for the space.  The networks pay either on a CPM basis—a fixed amount for every thousand impressions  an ad receives—or on a revenue share basis, giving the publisher a percentage of the network’s revenue.

Cosentino created a webpage in 2013 on squidoo.com, which allows users to create pages, aka “lenses,” on subjects of their choice.  Using the pseudonym “Recruiterman,” and using personal details that didn’t match Cosentino’s actual details, he created a page about online advertising and marketing businesses.  The page provided his commentary on 13 different ad networks, including Broadspring and Congoo, without disclosing his relationship to Congoo.  Initially, the page stated that “many of [Broadspring’s] advertisers appear to be continuity programs (re-bill offers) where the advertiser gets the customer to enter their credit card for a free trial and the[n] makes it tough to cancel. I’d be careful here.”  

Cosentino emailed Nashed a link to the page, generating Nashed’s response “Ingenious!”  Later, Nashed sent another email with negative statements about Broadspring: “it looks like Broadspring was formerly Mindset Interactive, a notorious spyware company. Mindset was eventually shut down by the [FTC] and Sanford Wallace, their founder, known as ‘Spamford Wallace’ was banned from online activity for 5 years.”  Nashed concluded that “[o]ur publishers should know about [Broadspring’s] background.” Cosentino performed some “Google searches of [his] own,” and then revised the Lens that same day, with text nearly identical to that of Nashed’s email:

A simple Google search shows that Broadspring was formerly Mindset Interactive, a notorious spyware company. Mindset was eventually shut down by the FTC in 2005 and Sanford Wallace, their founder, known as “Spamford Wallace” was banned from online activity for 5 years. In Nov 2006, Broadspring’s shareholders then launched the notorious ringtones company, New Motion, dba Atrinsic. Atrinsic had $17mm in financing (from various unknown investors), became public through a shady reverse-merger. They settled 3 years ago with 6 million users scammed: [link to FTC site no longer works; FTC proceeding here.]

Cosentino disseminated the page, and similar statements, in various ways: he posted links to it in discussion threads on other sites under false names; he emailed links directly to publishers, including Intermarkets.net, the New Hampshire Union Leader, the New York Daily News, and Geology.com; and he pseudonymously reposted many of the statements on the page in a discussion thread on another website (concluding that “Publishers who work with these guys simply have zero critical thinking or care[ ] about their audience”) even though Squidoo “locked” the page, making it inaccessible to the public.

Previously, Congoo and Geology.com had agreed that Congoo had the exclusive right to serve ads “with a thumbnail image and/or a title and/or a description and/or a call to action” on Geology.com, terminable on 90 days notice. But in early 2013, without either party terminating the agreement, Geology.com began to run Broadspring ads as well as the Congoo advertisements. Cosentino called Geology.com’s principal Hobart King and told him that he could “get in trouble running those ads,” that Broadspring had “gotten in trouble for spyware” and that it had been “in court over something.” Cosentino emailed King a link to the Squidoo page, which he told King he could read to “get a review on Broadspring ads and other ad networks.”  Geology.com then terminated its dealings with Broadspring; King testified that this was “mainly” because he was “concerned about what he had read [on Squidoo, and [because he] was concerned about spyware.”

The court first found that, under relevant choice of law principles, California’s law supplied the rule of decision for Broadspring’s defamation claim, given Broadspring’s California domicile and New York’s relative lack of interest in the case; though NY has an interest in protecting its citizens’ First Amendment rights, no defendant was a citizen or resident of that state. (There was an actual conflict because NY protects opinions more strongly than California.)

Defendants argued that the Squidoo Lens was constitutionally protected opinion, and that they were protected by the “substantial truth” defense. This was not enough to merit summary judgment in their favor. For fact versus opinion, California courts ask “whether a reasonable fact finder could conclude the published statement declares or implies a provably false assertion of fact.”  The court found no question that the statements at issue imply provable statements: “Broadspring was formerly Mindset Interactive,” which was “shut down by the FTC in 2005.” Prefacing this claim with a statement that this fact was revealed by “[a] simple Google search” did not render it constitutionally protected opinion.  (The court doesn’t ask whether providing a citation matters, though other courts have suggested that links to sources can matter for defamation purposes.)  Likewise, the statement that  “Sanford Wallace, their founder, known as ‘Spamford Wallace’ was banned from online activity for 5 years,” implies the provable assertion that Wallace founded either Broadspring or Mindset Interactive.  The Squidoo Lens was more than a non-actionable ranking.

The substantial truth defense fared no better.  The burden of pleading and proving truth is on the defendant, and not changed on the theory that Broadspring was a limited purpose public figure—it didn’t become such merely because Congoo itself created a controversy about Broadspring.  Congoo didn’t show truth; the evidence instead suggested falsity.  Neither Broadspring nor Mindset was ever sued or “shut down” by the FTC; Wallace was investigated for his marketing and software distribution practices, and Wallace was a third-party software distributor of Mindset’s. The investigation resulted in a default judgment against Wallace and his corporation, but neither Broadspring nor Mindset was named as a defendant. Broadspring exited the software distribution business voluntarily, motivated by the difficulty of policing the behavior of third-party distributors such as Wallace.  “Even further from the truth” was the claim that Wallace was the “founder” of Broadspring or Mindset.  Defendants argued that they were “connected” as “business partners.”  But the difference between that and being a founder is far greater than the slight inaccuracy in details permitted by California law.

Though Nashed and Congoo didn’t author the Squidoo Lens, a reasonable jury could conclude that Nashed took a “responsible part” in the Lens’s publication based on the e-mail exchange between Cosentino and Nashed and the updated version of the Lens.  And “given the nature of the statements, Cosentino’s and Nashed’s senior roles at Congoo, and the fact that the two communicated about the Lens using their company e-mail addresses, a reasonable jury could hold Congoo liable for the allegedly defamatory statements on a respondeat superior theory.”

On to the Lanham Act claim: Is this “commercial advertising or promotion”? The court used a formulation of the Gordon & Breach test that, consistent with Lexmark, didn’t require competition, but only “(1) commercial speech, (2) made for the purpose of influencing consumers to buy defendant’s goods or services, and (3) … disseminated sufficiently to the relevant purchasing public.”  Defendants contested (3), but the court disagreed. The key to sufficient dissemination is whether the challenged representations “are part of an organized campaign to penetrate the relevant market.”  Isolated disparaging statements aren’t enough, but the breadth of dissemination isn’t dispositive; “the primary focus is the degree to which the representations in question explicitly target relevant consumers.”  Cosentino admitted that he emailed links to the Lens to four publishers, and he continued to send those and other publishers links to similar statements even after the Lens was locked.  Based on that, plus Nashed’s statement that “[o]ur publishers should know about [Broadspring’s] background,” a reasonable jury could conclude that the challenged statements were part of an organized campaign to penetrate the market.

The court also declined to find a failure to show causation or damages. At a minimum, there was a factual issue on Geology.com’s termination of its relationship with Broadspring.  Plus, Broadspring doesn’t have to prove actual sales diversion in order to obtain injunctive relief.  (Citing Johnson & Johnson v. Carter–Wallace, Inc., 631 F.2d 186, 191 (2d Cir.1980) (“Likelihood of competitive injury sufficient to warrant a § 43(a) injunction has been found in the absence of proof of actual sales diversion in numerous cases.”). How does that work with irreparable harm, these days?)

Tortious interference: There wasn’t evidence that Nashed had any contact with Geology.com, so he was kicked out of that claim.  But a reasonable jury could find Cosentino and Congoo liable for using wrongful means (defamation) to interfere with the relationship. What about defendants’ legitimate economic interest, given Congoo’s exclusive contract with Geology.com?  “The means with which Congoo was permitted to protect its economic interest … were limited to those not otherwise illegal, and here a reasonable jury could conclude that Defendants’ authorship and dissemination of the Lens—the very acts that allegedly caused Geology.com to terminate its relationship with Broadspring—constituted defamation and Lanham Act false advertising.”

Congoo’s counterclaims for tortious interference and unfair competition alleged that Broadspring made false and misleading statements to Reader’s Digest and Geology.com. Broadspring allegedly told these publishers that its ads (“creatives”) were much “cleaner” than Congoo’s, and failed to disclose—as required by FTC guidelines—that they were ads, and thus no “cleaner.” It also allegedly told the publishers that Broadspring offered a higher CPM than Congoo, when it often didn’t.  As a result, the publishers allegedly sold Broadspring space on their sites, breaching Congoo’s exclusivity agreements.

The court ruled that Congoo failed to offer evidence that Broadspring’s conduct was “improper,” as required for tortious interference, or that it acted in “bad faith,” as required for unfair competition.  The phrase “cleaner creatives” has a broad definition that could mean many things, including lack of visual clutter or respectability of advertisers, and there was no evidence that the publishers understood it as Congoo interpreted it.  Broadspring’s statements about CPM were “at most, non-specific, boastful statements regarding the superiority of its product, statements that are non-actionable under unfair competition law.”