Thursday, April 04, 2019

Lawyer's solicitation of litigation against timeshare company could violate Lanham Act

Diamond Resorts International, Inc. v. Aaronson, --- F. Supp. 3d ----, 2019 WL 1445181, No. 17-cv-1394-Orl-37DCI (M.D. Fla. Mar. 5, 2019)

With all the discussion about “opening up the libel laws,” it’s notable that Lexmark has accomplished very much the same thing for commercial disparagement.  This case is one of a nontrivial number of timeshare resorts suing law firms for suggesting to timeshare clients that they can get out of their financial obligations, and it proceeds.  To me, this case illustrates the rule “professional speech that would be an opinion if said by a nonexpert can be a falsifiable fact claim if said by an expert.”  

Anyway, Diamond sued Aaronson & his law firm for ads on the firm’s website and for Aaronson’s representation of clients who are or were Diamond members (the latter of which sure sounds like a Noerr-Pennington issue, but ok), and the court allows the claims to proceed.

Diamond comprises Las Vegas-based timeshare developers managing over 420 membership resorts worldwide. It alleged that defendants led Diamond members to believe they could get out of their contracts. The members ceased payments, and Diamond allegedly faced baseless arbitration proceedings.

One of the challenged website ads once read:

Timeshare ownership often feels like entrapment. How do we know this? Because people tell us. Their stories are remarkably consistent.
But reciting this disturbing series of events is not going to help legally. Why? Because it’s your word against there’s [sic]. Plus, there are a thousand disclaimers and waivers in those closing documents, enough to absolve the developer of almost anything.
But that’s not to say that you don’t have any leverage, any cards to play. At the Aaronson Firm, we focus on other ways to release your obligation. One in particular: Maintenance. Your developer has a fiduciary duty to manage the resorts in your best interest. Chances are, they’re in breach of that duty, in ways that are very obvious and easy to prove.
This is where the developer is most vulnerable. This is where your leverage is. And you owe it to yourself to hire experienced, competent counsel. At the Aaronson Firm, we have over forty years of combined legal experience. And we are willing to sue, if necessary, in the interest of getting you released.
So call us free of charge to discuss your situation, please. Your legal problems are not insurmountable.

There were changes to this ad and other pages, but you get the gist. The advertisements “generally espouse Defendants’ view of common practices of the timeshare industry as a whole.” [And it’s hard to imagine that a court assessing non-lawyer advertising would find them falsifiable as to a particular plaintiff.] Other ads, however, discuss Diamond specifically, such as a blog post called “Timeshare Traps”:

Diamond Resorts International, Inc., is an incredibly profitable company.... And they appear willing to stop at nothing to maintain this profitability.
... [I]t is inclined to acquire existing facilities from previous developers, many of which were set up on the deed system. In some cases, these resorts were substantially sold out to deeded owners. Undeterred, Diamond has then endeavored to ‘revoke’ the deeds, a unilateral act utterly without legal authority, and impose a ‘points’ system conferring greater access based upon amount of points purchased…. This practice is incredibly unfair to owners of existing interests in these resorts, deeded or otherwise.
So don’t be too surprised if, next time you try to book your vacation, you are told that you have insufficient points to access any of the accommodations, and that you’ll have to buy more.
If you are disappointed with your Diamond timeshare, please don’t hesitate to call us concerning your legal options, including rescission of the contract, free of charge.

There was also a specific “Diamond Resorts Timeshare Cancellation” page in a similar vein, and a blog post, “Timeshare Conflict of Interest” arguing that Diamond had a conflict and unlawfully controlled the boards of condos it managed.

In over 5 years, the homepage had 69,027 visits, the “How It Works” page 12,923 visits, and the “Diamond Resorts Timeshare Cancellation” page 3,330 visits. About 258 Diamond timeshare owners have retained defendants to cancel their Timeshare Contracts, and almost half of those have delinquent Diamond accounts based on their failure to pay money owed under their Timeshare Contracts, over $ 4.5 million in total. Defendants have started over thirty arbitrations against Diamond asserting claims for breach of fiduciary duty, conflicts of interest, and mishandling and misappropriation of maintenance fees, but none have provided relief on those claims, and the arbitrator allegedly found that the claims lacked good faith in multiple instances. In some arbitrations, the arbitrator ruled in Diamond’s favor on counterclaims for breach of the Timeshare Contracts.

The court highlighted two stories (which to me sound like clients taken advantage of twice): Hardisty bought Diamond timeshare points twice, but then had second thoughts because she could not afford the payments and felt she had been lied to by Diamond. When she found Aaronson through the website, Aaronson sent a demand letter to Diamond and began arbitration proceedings against Diamond. But Hardisty indicated that the claims Aaronson filed did not reflect “her perception of Diamond’s wrongdoing.” She found some facts asserted to be untrue, and she didn’t even know what some of the claims meant. None of the asserted claims seemed “obvious” or “easy to prove.” When she asked about continuing to pay Diamond, Aaronson told her she “could probably stop paying them,” so she did. Aaronson then terminated his representation before the arbitration hearing took place.

The Feldmans also bought Diamond timeshare points twice, but wanted to terminate after Diamond increased their maintenance fees. They too found Aaronson online as the only attorney they could find. Although he made no guarantee about the outcome, according to Mr. Feldman, “[h]e was pretty certain” he could deliver. Aaronson told Mr. Feldman that “it would not be to [his] benefit to make any more payments.” Aaronson asserted almost identical claims here, but the statement contained information Mr. Feldman did not understand and other information he did not find accurate or know about. Aaronson then represented the Feldmans during an arbitration hearing against Diamond, where Mr. Feldman testified about the misrepresentations made by the Diamond salespeople, but didn’t prevail. “Feldman felt that the claims raised by Mr. Aaronson—based on maintenance fees, breaches of fiduciary duty, and conflicts of interest—were not obvious and easy to prove.”

Lanham Act claims: The court rejected the term “standing” for the Lexmark inquiry, even though there’s no other good shorthand.  Diamond’s asserted injuries fell within the Lanham Act’s zone of interests (to reputation or sales). Even though Diamond had dropped its claim for money damages for injury to reputation, it still claimed some damage thereto, and a reasonable jury could find the targeted blog posts to have harmed its reputation; and unpaid accounts receivable qualify as “lost sales” for these purposes. (Both of these results seem quite sensible to me.)

Falsity/misleadingness: The challenged ads claimed “that timeshare developers are vulnerable and exposed legally, such as by breaching fiduciary duties in handling maintenance of timeshare properties and perpetuating conflicts of interest” and “that, as a result, there are obvious and provable ways for individuals to get out of their Timeshare Contracts.” They also attacked Diamond specifically, questioning the legality of its points system and stating that it perpetuated an unlawful conflict of interest.

The court found genuine issues of fact both on falsity or misleadingness, “in part because the record belies Defendants’ claimed messages that vulnerabilities in the Timeshare Contracts exist that are obvious and easy to prove due to timeshare developers’ practices.” Defendants asserted the specific “easily provable” claims identified in the ads against Diamond in over thirty cases—but lost on those claims every time.  Moreover, identifying select phrases as opinion wasn’t enough given the whole ad context.  “Although Defendants use equivocal phrases about timeshare developers’ potential unlawful conduct such as ‘chances are’ and ‘may well be,’ the Subject Advertisements also contain more direct, unequivocal statements about the same conduct—even calling on readers to respond.”  [Side note: imagine if we treated disclosures about the quality of scientific evidence for supplement claims this way—which is probably the right way to treat such disclosures!] Each challenged ad conveyed that there was a factual basis for the ads, not just opinion.

The court emphasized that

these advertisements are authored by a lawyer and appear on his law firm’s website—a firm dedicated to timeshare cancellation. They also directly accuse Diamond and other timeshare developers of committing fraud, perpetuating conflicts of interests, breaching fiduciary duties, and other unlawful activity. In them, Defendants represent themselves as “experienced, competent counsel” and contend there are “obvious” and “easy to prove” claims that can be raised against timeshare developers. And finally, the Subject Advertisements call on readers to contact Defendants immediately for a free consultation, with an assurance that their legal problems are not insurmountable. Against this backdrop, the Court cannot find that no genuine issues of material fact exist on the false and misleading nature of the Subject Advertisements.

Deceptiveness: Diamond submitted survey evidence of deception that was admissible; even without the survey, there was a triable issue on literal falsity.  (Sadly, I can’t find the control in the record.  It seems to have been a “letter” about the industry generally, and it doesn’t seem to have said much negative.  Interestingly, “In response to the question about whether, based on a reading of the material they saw, respondents believed that time share owners must be permitted to cancel their contracts if they choose to …, 61% of the respondents who saw one of the Aaronson Web pages answered in the affirmative compared to 50% who saw the control letter.”  The control itself appears to have been deceptive if that’s a false statement—or consumers may be relying on their own sense of equity about cancellation, which also is reason for concern.) 

The defendants’ web pages, the survey indicated, “have the effect of diminishing the perception of timeshare companies among a substantial number of consumers and suggest to a substantial number of consumers that many timeshare property companies are engaged in unlawful practices,” and “that they can get out of their timeshare property contract for any reason.” [Is Diamond arguing that it’s false to say that many timeshare property companies are engaged in unlawful practices?  Has it submitted proof about the level of unlawful practices among timeshare companies generally?  If not, why is that question relevant? In defamation, we’d impose an “of and concerning” requirement—the fact that it’s not being imposed here suggests another benefit of a Lanham Act claim, at least in front of a favorable court.]  Further, respondents were “likely to act on information that suggests they can stop making or withhold payments on their time share properties and … likely to retain the law firm if there was a high probability that their timeshare developer was exposed legally in ways that are relatively straight-forward and provable.”

The court rejected defendants’ challenges to the survey. They argued that the survey should have been limited to timeshare owners who want to get out of their timeshares rather than all timeshare owners, past or present. But the ads are viewable by anyone online, and purport to tell consumers “how to cancel their Timeshare Contracts when they may not have otherwise known they could or when they did not currently desire to get out of their timeshares.” So the population was ok, and it was also, according to the surveyor, “consistent with the definition that would necessarily be used for media scheduling purposes by an advertiser.”

None of the net deception rates exceeded 20%. But there was no binding precedent requiring 20% and many other cases finding less than 20% “sufficient, significant, and meaningful.”  [I tell my students that 10% and below points to a defendant victory, 20% and above to a plaintiff victory, and in the middle it’s factors other than the survey.] Anyway, defendants’ evaluations differed from those of the expert, who was the only consumer behavior expert in the case.  He indicated that some results were less than 20% but still “statistically significant.”  [OK, the survey may be fine, but this is a non sequitur.  A net deception rate of 1% might well be statistically significant—in that we were pretty confident it was real and not an artifact of chance—but statistical and practical significance are very different things.  I would also readily accept a rationale that 15% net deception is practically significant.  But calling it “statistically significant” as if that were a measure of the amount of deception, rather than a measure of our confidence in the result, is misleading, and the court here seems to have been misled.]  The expert also calculated some results that exceed 20% (possibly because he maintained that not all the questions required controls, an argument that I would want more explanation of than the court provided).
Materiality: There was sufficient evidence to go to a jury. For example, Diamond’s damages expert’s report showed a temporal correlation between when Diamond members retained defendants and when they stopped making payments owed under their Timeshare Contracts, and there was evidence that many Diamond clients found defendants through their website.  “So a reasonable jury could find that something in the Subject Advertisements influenced the decision to stop making payments or to pursue arbitration.”  [In fact, the jury ought to have to find that the false elements of the ads influenced the decisions.] If a jury found that the ads “misrepresented the quality of Diamond’s timeshares and business practices,” that could suffice for materiality, which goes to whether there’s a misrepresentation of an “inherent quality or characteristic of the product” [or business operations].

Causation: “a plaintiff suing under § 1125(a) ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising,” which “occurs when deception of consumers causes them to withhold trade from the plaintiff.” Defendants argued that none of the ads directed viewers to stop making payments to Diamond or start legal action, and that there was no evidence that the clients stopped payments or initiated arbitration based solely on the ads.  That was irrelevant. Even without direct evidence, a jury could find proximate cause.

At least some of defendants’ Diamond clients viewed the website/associated videos, and the ads were viewed thousands of times as a whole.  Eleven clients who retained defendants through the firm website stopped paying Diamond within thirty days before retaining them, and twenty did so after retaining them. And the survey report concluded that the ads were likely to cause viewers to hire defendants and to stop making payments. 

Regardless, the court found no authority for the proposition “that the false advertising must be the only reason behind a consumer’s actions for a plaintiff to prevail on a false advertising claim.” Proximate cause is not sole cause or even predominant cause.

Florida law: Defendants argued that Florida’s litigation privilege protected against state law claims. Florida’s litigation privilege provides absolute immunity to statements or acts: (1) made or committed in judicial or quasi-judicial proceedings; and (2) “connected with, or relevant or material to, the cause in hand or subject of inquiry.” But that’s limited “to conduct that is ‘necessarily preliminary’ to judicial proceedings”: pre-suit communications that are a statutory or contractual condition precedent to suit. The court found that defendants hadn’t met their burden to show that the privileged applied.  Though statements made during arbitration proceedings and in documents filed as part of those arbitration proceedings fit within the privilege, “there is a factual dispute on when Mr. Aaronson made statements to his clients about continuing payments to Diamond and whether those statements were necessarily preliminary to or sufficiently related to any arbitration proceedings.” Specific circumstances could be investigated at trial.

Tortious interference: there was a disputed factual issue about whether the ads caused Diamond members to stop paying. Also, Aaronson admitted that he advised at least one client to discontinue payment, and there was evidence he so advised at least one other couple. Was this privileged because he was their agent?  The court found genuine issues of fact about his motivation, given that Aaronson withdrew from representing the Hardistys when they were sued for delinquent payments, and that he gave the advice “knowing that Diamond had successfully counter-claimed against some of his other Diamond Clients for delinquent payments.” He also “failed to explain his motivation behind the advice he gave the Feldmans about ceasing payments—in other words, he has not shown this advice was justified or privileged.”

Trade libel: Same issues as the Lanham Act claim. FDUTPA: Likewise.

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