making claims against counsel's advice could be willful for disgorgement remedy

Dependable Sales & Service, Inc. v. Truecar, Inc., No. 15-cv-1742 (PKC), 2019 WL 1407440 (S.D.N.Y. Mar. 27, 2019)

“Plaintiffs are 108 new-car dealerships located throughout the United States.”  TrueCar is a lead generator: online, it puts consumers in contact with a car dealership that contracted with TrueCar. TrueCar allegedly falsely advertised by promising consumers a negotiation-free, haggle-free buying experience through the TrueCar website. Customers were allegedly channeled toward a TrueCar-affiliated dealership with a pledge of “guaranteed savings” on vehicles that often were not available on the dealership’s lot, then put into the negotiation process typically associated with buying a new car. TrueCar’s website also generated a graphic called the “TrueCar Curve,” which allegedly misled consumers about vehicles’ pricing data, specifically as to the “factory invoice” price paid by dealers to manufacturers.

TrueCar moved for summary judgment on the issue of harm. Plaintiffs’ consumer surveys went to falsity, not harm; their deposition testimony “describes only vague, general perceptions of injury.” This was insufficient to avoid summary judgment as to plaintiffs’ damages. However, there was evidence of willfulness, which meant that equitable disgorgement might be an appropriate remedy.

The evidence of falsity (and willfulness) included TrueCar’s generation of a “Certificate” showing a “guaranteed savings” off the MSRP, which the consumer could then take to a dealer and apply toward the purchase price of a specific make, model and trim of car from a specific dealership. But plaintiffs argued that “TrueCar-affiliated dealerships seldom honored the Certificate’s terms, and the particular make and model of vehicles searched by consumers were rarely available on the dealerships’ lots. In an internal TrueCar presentation, one of the Company officer’s discussed findings that 80% of consumers reported that TrueCar-affiliated dealers did not honor the Certificate price.”  [That’s bad—that’s a level that might attract state AGs/the FTC.]  A TrueCar co-founder and former officer described the Certificate as highly successful in attracting consumer business, and also as going toward “bullshit virtual vehicle[s]” that were seldom available on dealer lots.

TrueCar’s ads also touted a negotiation-free, haggle-free purchasing experience; TrueCar didn’t dispute literal falsity for the purposes of this motion, which seems like a good idea insofar as “No negotiation” was a big part of the ads, e.g. this anti-traditional-dealers ad with the happy guy indicating: “Because I used TrueCar, there was no haggling about the price.” “TrueCar’s market research concluded that a promise of ‘no negotiation’ was a ‘magic bullet for people’ because negotiations were generally challenging to consumers.”  TrueCar’s outside counsel advised the Company against using the “No Negotiation” claim given the claim’s “lack of clarity, concerns with regulators and the likelihood that dealers and consumers would negotiate.” TrueCar chose not to follow this advice, though it stopped advertising a haggle-free buying experience in 2016; some of the plaintiffs in this case were affiliated with TrueCar for some of the false advertising period.

Separately, TrueCar’s “Curve” was allegedly false to the extent that it showed a “TrueCar Price” lower than a “factory invoice” price, implying that the dealer paid a factory invoice price and misled consumers into thinking that TrueCar allows them to pay “less than the dealer paid.” TrueCar argued that “factory invoice” doesn’t mean the dealer’s cost to buy a car, while plaintiffs argued that consumers understand the term to mean just that. Although a disclaimer defined the term “factory invoice” as the price a manufacturer initially charges a dealer, excluding discounts, dealer incentives and money allocated to the dealer upon a sale, plaintiffs argued that this definition was not conveniently displayed or easily accessible to consumers.

The court found that the parties weren’t direct competitors and TrueCar’s ads weren’t specifically comparative to them, thus preventing any presumption of injury and causation. Although “[t]he type and quantity of proof required to show injury and causation has varied from one case to another depending on the circumstances,” ads that “do not draw direct comparisons,” or products “that are not obviously in competition,” will “require a more substantial showing” of injury.  Here, the parties occupied different positions in the marketplace, since TrueCar didn’t sell cars at all (though there was evidence that TrueCar’s former CEO considered non-TrueCar dealerships “competitors”).  The key was that “[a] sale made through TrueCar is not necessarily a sale lost by a plaintiff dealership, as opposed to some other competing dealership in the same market.” Where a plaintiff “operates in a large market” that includes numerous types of retailers, injury “may well be difficult to prove” where it “depends upon the idea that [plaintiff’s] sales are specifically affected by [defendant’s] behavior.” Famous Horse Inc. v. 5th Ave. Photo Inc., 624 F.3d 106 (2d Cir. 2010), abrogated on other grounds by Lexmark.

Plaintiffs’ proposed expert on damages was successfully excluded, so that evidence couldn’t be used to show harm causation. The expert didn’t weigh the “no-haggle” claim against other features on the TrueCar site, didn’t account for other factors that influenced a consumer’s choice of dealerships, and didn’t consider what portion of TrueCar-generated sales could have gone to other competing dealerships in the same geographic markets.  Nor could evidence of falsity, including consumer survey evidence showing that more than half of consumers received a no-haggling/you’ll know the price when you show up message, substitute for evidence of harm.  Individual witnesses “articulated only a vague impression of lost sales and damage to reputation, and did not identify a discernable harm that would permit a reasonable trier of fact to find injury.”  None of the witnesses identified a specific actual sale lost to a TrueCar-affiliated dealership, or evidence of harm to the business reputation of their respective dealers.

TrueCar argued that it should win summary judgment on materiality. The court understandably disagreed. TrueCar argued that consumers who purchased through TrueCar after haggling were obviously not affected by the no-haggle promise, and consumers who were turned off by the surprise haggling wouldn’t buy from TrueCar.  “TrueCar does not cite evidence to support of its description of consumer behavior, and for that reason alone has not met its burden as summary judgment movant. Even if the scenario TrueCar describes is assumed to be accurate and complete, it describes a bait-and-switch transaction … which sometimes led to a sale by a TrueCar-affiliated dealer.”

The Second Circuit has identified “three categorically distinct rationales” for ordering disgorgement of a defendant’s profits: “The rule in this circuit has been that an accounting for profits is normally available ‘only if the defendant is unjustly enriched, if the plaintiff sustained damages from the infringement, or if the accounting is necessary to deter a willful infringer from doing so again.’ No matter what the theory, willful deceptiveness is required. The first two rationales require some sort of showing of injury, whereas disgorgement based on deterrence “is not compensatory in nature, but rather seeks to protect the public at large.” Disgorgement can be partial or full, depending on the need to satisfy a relevant rationale.

Willfulness is necessary, but not always sufficient. Along with the egregiousness of the conduct, other relevant factors include “(1) the degree of certainty that the defendant benefited from the unlawful conduct; (2) availability and adequacy of other remedies; (3) the role of a particular defendant in effectuating the infringement; (4) plaintiff’s laches; and (5) plaintiff’s unclean hands.”

There was enough evidence of willfulness to proceed.  First, “failure to follow the advice of counsel ... must factor into an assessment of ... bad faith.” TrueCar’s outside counsel stated in email, “I strongly advise against using the phrase ‘negotiation-free’ in any form in our ads or other self-attributed public communications …. In my view it is a much greater risk than we should bear at this point.” The CEO, responded in part, “I am inclined to take some practical risk here.” Counsel noted that use of the phrase “negotiation free” “was over my objection, but that is an historical footnote that will hopefully be irrelevant over time ....”  [Narrator: It wasn’t.]  Another email: “I do not believe we should talk about being ‘negotiation free’ in the present tense because we are not (both for the reasons we have debated at length and additionally because in nearly 20% of our jurisdictions we cannot even promise a guaranteed savings, meaning in those states nothing about the experience is ‘negotiation-free’.)” Although counsel approved “no hassle,” he rejected “no haggle” because TrueCar couldn’t assure users that they would not be expected to bargain about price and because consumers would believe that TrueCar would take an “active role” in arranging for sales terms.

Second, TrueCar was “separately aware that its ads left consumers with a false impression about the process of purchasing a new vehicle through TrueCar,” as shown by evidence from several years before it discontinued the claim. Its Chief Product Officer told the CEO that customers were using TrueCar to “configure a virtual vehicle that has less than a 2% chance of existing on a dealer’s lot.” He continued: “when we send in our prospects with a certificate of a bullshit virtual vehicle, we don’t arm them with the proper tools to ensure they know we have their back at the most critical moment.” In deposition, he walked back the 2% figure, but yikes.  Separately, a TrueCar executive noted a consumer survey finding that 80% of respondents stated that TrueCar-affiliated dealers did not honor the “Guaranteed Savings” certificate.

There was also evidence that TrueCar acted against the advice of counsel in listing a factory invoice price on the TrueCar Curve. And a dealer from TrueCar-affiliated dealership that was active in an advisory committee called the “TrueCar dealer council” told TrueCar that certain manufacturers “strictly prohibited” their dealerships “from advertising a price below dealer invoice” as a way “to prevent ‘bait and switch’ advertisements.” He stated, “Many car buyers believe that the dealer invoice is the true cost of the car; it is not.”

There was evidence that weighed against a finding of willfulness. TrueCar stopped running the disputed advertisements in 2016 (the evidence above was mostly from 2013). The homepage included a disclaimer stating that “[e]ach dealer sets its own pricing. Your actual purchase price is negotiated between you and the dealer.” Disappointingly, although TrueCar’s chief marketing officer described the text as “mouse print,” the court considered the disclaimer to be “some evidence” that TrueCar qualified its “negotiation-free” claim on its homepage, rather than simply contradicting the explicit, key claim in ads. 

TrueCar argued that it didn’t profit from its advertisements, meaning that “there are no profits to disgorge” after accounting for its operating expenses. But a court of equity “has considerable discretion in deciding whether operating expenses during a start-up period ought to be netted against profits in a later period.”

A reasonable trier of fact could conclude that TrueCar willfully violated the Lanham Act’s prohibition against false advertising and profited therefrom.  Injunctive relief and corrective advertising also remained remedies on the table.

State law claims were stayed pending resolution of the Lanham Act claim—which sounds like it’s headed for a bench trial.