Thursday, February 19, 2015

False claims of third-party endorsement actionable as false advertising

Fringe Insurance Benefits, Inc. v. Beneco, Inc., No. A–13–CV–034, 2015 WL 631181 (W.D. Tex. Feb. 11, 2015) (magistrate judge)
The parties compete to provide employee benefit plans; FIBI and Beneco specialize in fringe benefit services to government contractors who must comply with prevailing wage laws.  Zane Smith, who worked for Beneco, copied significant portions of an article published by FIBI and used it in an email to potential Beneco customers, in an article for Construction Executive Magazine, and another article sent to over 200 prospective clients.  This was copyright infringement.  But the core of the case was Lanham Act false advertising; each of the challenged statements was made in commercial advertising, but only some were proven false. 
Of particular note, FIBI prevailed on its claim that Beneco falsely claimed to have Department of Labor approval and endorsements from the American Subcontractors Association and Associated Builders and Contractors. The court found these to be literally false claims: Beneco’s plan wasn’t approved or endorsed by any of these entities.  Beneco was endorsed by particular chapters of the two private organizations, but not by the national groups, which both sent it C&D letters demanding that Beneco stop using their logos in ads.  This result is notable because, as a traditional “false endorsement” §43(a)(1)(A) case, FIBI wouldn’t have had standing to object on these associations’ behalf. But that doesn’t mean that FIBI didn’t suffer injury of its own on a false advertising §43(a)(1)(B) theory.  (Compare this recent case, misunderstanding this distinction.)
Other claims: FIBI failed to produce sufficient evidence that Beneco’s claims that “we historically find that our ... plan is typically 50% less in cost than [FIBI’s] plan” were literally false.  Though FIBI showed that several specific cost comparisons sent to potential customers were literally false, and though Beneco never identified the analysis or study backing up this claim, FIBI didn’t provide evidence that Beneco never did any analysis justifying its claim or otherwise more thoroughly compare the products.  Moreover, the claim was clearly misleading, but FIBI didn’t provide evidence that this particular statement confused customers.
By contrast, specific cost comparisons were false. For example, one communication claimed that a specific customer would save “an estimated $1,523” by staying with Beneco. This estimate came from an attached spreadsheet containing several errors—misplacing a decimal point, increasing FIBI’s cost by over $1,900; using an outdated service fee, inflating FIBI’s cost by $1,541; and misstating a record keeping fee by $1/participant, inflating the cost by $108. This was literally false. (But was it commercial advertising or promotion?)  Beneco also provided inaccurate savings estimates to other customers, inflating FIBI’s costs by thousands of dollars and undercalculating its own total costs.  These estimates, “rife with errors,” were literally false.
FIBI failed to show that Beneco’s claims about FIBI’s higher fees and status as a target of legal investigation were literally false.  Beneco told one potential customer that FIBI’s “internal fees and expenses are 3 times higher” than Beneco’s, and that FIBI would hide its fees.  Later, it said that “FIBI has been under investigation by the Federal DoL.”  FIBI didn’t meet its burden of showing literal falsity as to the internal fees—it just provided testimony from a VP that he’d never seen any documentation supporting the claim.  FIBI also impeached Beneco’s only evidence, which compared the plans applied to a parcticular customer, but it didn’t show that the “three times higher fees” claim was wrong in every case, or even in a majority of cases.  And again, FIBI failed to show actual deception, treating the statement as merely misleading.
But the statement that FIBI hid its fees was literally false.  FIBI disclosed all its fees in written agreements and marketing materials. So was Beneco’s claim that FIBI lacked third-party trustee protection, forcing customers to bear certain risks themselves.
By contrast, the “DoL investigation” claim wasn’t false or misleading—though FIBI itself hadn’t been investigated, its affiliate, Plan Benefit Services, had been successfully sued by the Department of Labor for ERISA violations. Plan Benefit Services and FIBI shared common ownership, common control, and functioned together in the same market.  Thus, while the claim wasn’t entirely accurate, it wasn’t “sufficiently misleading to trigger Lanham Act liability.”  And FIBI didn’t prove likely consumer deception.
Coordinate claims of unfair competition under Texas law also succeeded based on the same facts, but a tortious interference claim didn’t, for want of evidence of interference with particular business relationships.
FIBI sought only a permanent injunction.  The Fifth Circuit doesn’t presume irreparable harm from literal falsity. However, the court found irreparable harm here, given testimony from a FIBI VP noting the small size of the benefit plan market and stating that “when information is provided that’s incorrect in those small circles, it gets around pretty quickly and can be damaging,” as well as testimony that many customers are small, “family-run” businesses easily influenced by false endorsements. “That many of the statements were contained in emails sent directly to customers makes an injunction all the more appropriate: as FIBI correctly notes, such ‘difficult-to-monitor channels’ are the most likely source of future harm.”
Thus, Beneco was ordered to refrain from making the statements found to be literally false, and to post a copy of the court’s order on its website, including a link to the judgment on its corporate home page, to persist for 30 days.  The link had to be no smaller than 12 point type “and readily apparent to the site’s visitors with no other accompanying commentary or explanatory statement.”  Aside from the posting requirement, the part of the injunction with the most bite is probably the part that barred Beneco from making “inaccurate and/or incomplete customer-specific comparisons between the costs, fees, or expenses of FIBI and Beneco products.”
Somewhat surprisingly and formalistically, the court then used the pre-eBay rule that copyright infringement leads to a presumption of irreparable harm, and also enjoined defendants “from infringing FIBI’s copyrights to publications, articles, literature or marketing material.”  (Also a pretty broad scope.)

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