American Bullion, Inc. v. Regal Assets, LLC, 2014 WL 7404597,
No. CV 14–01873 (C.D. Cal. Dec. 30, 2014)
Regal sought reconsideration of the court’s grant of a
preliminary injunction on false advertising claims, which was granted in
part. American Bullion and Regal compete
in selling gold and other precious metals for individual retirement
accounts. AB argued that Regal’s
affiliate marketers falsely disparaged AB, misdirected potential customers to
Regal, and failed to disclose financial relationships between Regal and the
affiliates. The court concluded that Regal’s affiliates were likely its agents,
that the relevant acts fell within the scope of their agency, and that AB was
entitled to a preliminary injunction.
Regal argued that Winter’s
preliminary injunction standard was inappropriate for speech cases, and that
the injunction was an unconstitutional prior restraint. The cases Regal cited didn’t stand for the
proposition that courts couldn’t enjoin any commercial
speech; false and misleading commercial speech isn’t protected by the First
Amendment, and preliminary injunctions regularly issue in false advertising
cases even in the face of First Amendment arguments.
If Regal was arguing that there wasn’t yet evidence of
falsity, the evidence before the court was otherwise; “there appeared to be
little dispute that false statements were disseminated by some Regal
affiliates.” Regal apparently acknowledged that “some Regal affiliate sites
displayed images appropriated from obituaries as if to suggest that the
deceased individual pictured endorsed Regal, contained completely fabricated
personas and backgrounds of nonexistent endorsers, and explicitly and falsely
stated that Plaintiff was found guilty in a fraud suit and was later sued by
the U.S. Commodities Futures Trading Commission.” Even at the preliminary injunction stage,
these statements were false and unprotected by the First Amendment.
However, the court modified the injunction in some respects
to limit its burden and increase its clarity.
Regal also argued that the court wrongly entered a
preliminary injunction based on a negligence theory, since AB argued only
intentional acts. The court found this
characterization questionable. Principals
can be liable for their agents’ negligent actions within the scope of the
agency, and also for other intentional acts, even those outside the scope of
the agency, that are subsequently ratified by the principal. The court’s previous ruling focused on
agency, and not negligent versus intentional acts, a distinction that wasn’t
very important here.
Principal liability attaches where an intentional tort is a
foreseeable “outgrowth” of the employment, “in the sense that the employment is
such as predictably to create the risk employees will commit intentional torts
of the type for which liability is sought.” Intentional acts outside the scope of agency create principal liability only if
authorized or ratified; but even if ratification were required, Regal arguably
ratified the acts “by paying affiliates for their lead and sales generating
efforts, even when those efforts included dissemination of false and
disparaging statements.”
Regal also argued that circumstances had changed. It retained an outside monitoring firm, hired
a new, experienced General Counsel, and terminated 2100 affiliates. It also
changed the provisions of the agreement between Regal and its affiliates. This last was the most significant, because
the locked-in nature of Regal affiliates was a major factor in the court’s
prior agency finding. Regal argued that
it now encouraged affiliates to work for multiple companies, and that 12% did
so. The court welcomed the changes, but
found that the new agreement didn’t change the “fundamental nature” of the
relationship between Regal and its affiliates. Regal affiliates were, “in
essence, sales agents working on commission,” which was earned for generating
sales and providing certain leads even if the leads didn’t result in sales. “No
matter whether Regal has 2,000 affiliates or 200, so long as Regal pays
affiliates to generate sales, it cannot avoid liability for affiliates’ actions
in pursuit of that goal.”
Plus, if Regal allowed its agents to continue to disseminate
false or misleading information, “such as by allowing agents who post to remain
in the affiliate program and/or continuing to pay those agents for generating
leads and sales for Regal,” Regal could be liable for punitive damages.
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