Thursday, February 15, 2018

court awards sanctions for misrepresenting website as independent review site in false advertising case

Purple Innovation, LLC v. Honest Reviews, LLC, 2018 WL 840035, No. 17-cv-138 (D. Utah Feb. 12, 2018)

A rare sanctions order in a false advertising case, in which the court grants sanctions based on the defendants’ submission of misleading and false statements to the court in opposing PI’s request for preliminary injunction. PI sells bed-in-a-box mattresses and other bedding products and relies strictly on e-commerce, meaning that online comment and review websites can have a significant impact on its business. A new mattress review website——owned by Honest Reviews and operated by its sole owner, Monahan, began to post reviews.  The HMR website repeatedly stated that it wasn’t influenced by any mattress company and that it didn’t receive financial compensation for its reviews, e.g., HMR was “free from corporate or conglomerates...[that] silence or shape editorial narratives and truths,” and HMR posts “have total editorial independence” for which “[n]o one has influence.”

HMR’s reviews or “articles” about PI’s products suggested a link between a white powder used on some of Plaintiff’s products and cancer-causing agents, for example comparing the powder to a “ground down...plastic mustard container” or “glass coke bottle,” which consumers will inhale every night for “eight to ten hours.” PI received low marks on the HMR site, including an image of a large red “X,” while its competitors, including defendant GhostBed, received favorable ratings. 

PI’s lawsuit alleged that Monahan, the sole owner and operator of HMR, was closely affiliated with GhostBed, making the purported “reviews” actually commercial advertising and promotion that “materially misrepresented the nature, characteristics, and qualities” of PI’s products, while failing to disclose the close affiliation with its competitor. The court initially denied a motion for a TRO, then granted it after PI showed multiple attempts to notify defendants of the case, “including indications that Defendants had received actual notice and that Defendants appeared to be avoiding service of process.”

PI then moved for contempt, based on an alleged failure to comply with the TRO.  Defendants opposed, submitting declarations by Marc Werner (CEO of GhostBed) and Ryan Monahan. Werner stated that “GhostBed does not have any affiliation whatsoever with co-defendants Honest Reviews LLC or Mr. Monahan,” with no control or compensation relationship with  Further, Werner stated, when Monahan identified himself on Twitter and LinkedIn as “Chief Brand Officer” of GhostBed, he did so “mistakenly.”  Werner acknowledged that GhostBed used Achieve Marketing for branding and marketing consultation services and that “[i]n the past, Achieve used another entity, Social Media Sharks, to consult on online presence issues for its clients, including GhostBed.” Social Media Sharks was associated with Monahan, but Werner did not acknowledge any current relationship between GhostBed and Social Media Sharks or GhostBed and Monahan.  Monahan’s declaration was similar, though it stated that Achieve used Social Media Sharks to provide contracted services with GhostBed. Monahan stated that the website had a single source of income, Google Adsense. 

At the hearing, Monahan’s counsel “strongly argued that Monahan was an independent journalist entitled to full protection under the First Amendment,” and that Monahan wasn’t hiding his status as a contractor. GhostBed’s counsel also stated that no relevant business relationship existed between Monahan and GhostBed, stating that “Monahan is a marketing consultant and he works for many, many organizations and clients ..., including GhostBed[.]” Based on these representations, the court dissolved the TRO.

PI later renewed a motion for a preliminary injunction with a newly obtained declaration from GhostBed’s former Director of Marketing, Calisha Anderson, who “confirmed the bulk of Plaintiff’s suspicions regarding the relationship between Monahan and GhostBed.”  She declared that, shortly after beginning her new job, she learned she had “very little actual authority for GhostBed’s marketing” and Monahan “was the real ‘Director of Marketing.’ ” Monahan controlled the GhostBed website, was active in participating in staff meetings, used a email address, held himself out as the Chief Brand Officer, and was able to veto Anderson’s decisions.  Anderson also stated that GhostBed made similar claims about the powder on PI beds.   

Monahan’s counsel called the declaration “lies” and expressed hope that she’d be charged with perjury when he showed that she lied.  The court decided to hold an evidentiary hearing. That hearing established, among other things, that Monahan continued to provide extensive marketing services to GhostBed, for which Social Media Sharks received $10,000 per month, half of which went to Monahan; he also helped GhostBed place competitive ads that targeted PI. The court concluded that Monahan and Werner had materially misrepresented the relationship between HMR and GhostBed, as well as Monahan’s status as an independent journalist. Anderson’s credible testimony wasn’t seriously challenged by cross-examination. The court thus entered a preliminary injunction, after which PI moved for sanctions.

In determining the appropriateness of sanctions, courts consider “(1) the degree of actual prejudice to the [party requesting sanctions], (2) the degree of interference with the judicial process, (3) the litigant’s culpability, (4) whether the litigant was warned in advance that dismissal was a likely sanction, and (5) whether lesser sanctions would be effective.” The court found significant prejudice here—the dissolution of a TRO, depriving PI of the injunctive relief it deserved and requiring PI to spend time and resources to get its injunction a second time. There was also “substantial” interference with the judicial process here was substantial. “Defendants and their counsel adamantly defended misleading representations that Monahan and GhostBed had no meaningful association and that Monahan was a consumer journalist entitled to the fullest possible protection of the First Amendment,” resulting in a full day evidentiary hearing to determine the truth.

Defendants now conceded that the misrepresentations “lacked the level of candor and attention to detail necessary to ensure that all of the material facts were clearly stated and understood by all parties and the Court” but claimed they were “made in the heat of battle.” But “Monahan, Werner, and counsel for each were given numerous opportunities” before the hearing to correct and clarify previous, misleading testimony, but they “doubled down” instead. There was no explicit advance warning that misleading the court by sworn testimony was sanctionable conduct, but they should have known that, and Monahan’s lawyer’s statements about perjury demonstrated his clear understanding of the potential results of submitting a false declaration to the court.  “Indeed, … the misrepresentations by Werner and Monahan were sufficiently egregious that perjury prosecutions would, and perhaps should be, an appropriate consideration.”

Given the egregious nature of Werner’s misrepresentations, the court struck GhostBed’s counterclaims as an appropriate sanction, along with the award of PI’s reasonable attorneys’ fees and costs expended in pursuing its second motion for a preliminary injunction and the sanctions motion, shared jointly between Monahan/HMR and GhostBed. “The court will also issue an adverse jury instruction if deemed appropriate when this case goes to trial.” 

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