Wednesday, August 28, 2019

When is a sale worth $100,000? court is generous to real estate brokerage ad

At World Properties, LLC v. Baird & Warner Real Estate, Inc., 2019 WL 4034636, No. 18-cv-01973 (N.D. Ill. Aug. 27, 2019)

B&W and plaintiff @properties are real estate brokerage companies serving Chicago and the surrounding area. B&W advertised its accomplishments in 2017, allegedly falsely touting $8.8 billion in sales and 32,000 transactions in violation of the Lanham Act and the Illinois Uniform Deceptive Trade Practices Act. @properties alleged that, in fact, in 2017, B&W’s total volume for properties listed and sold was approximately $5.7 billion and its total number of sales was 17,168, while @properties’s total volume for properties listed and sold was approximately $8.5 billion and its total number of transactions was 17,153. B&W allegedly inflated its sales and transactions figures by including not just its real estate brokerage sales and transactions, but also mortgage originations and refinances performed by its affiliate, Key Mortgage Services, and title searches, title insurance services, and other title-related services performed by its affiliate, BWT, as well as two other companies, Starck Title and Landtrust National Title. Those figures also allegedly included property rentals and leases for which B&W acted as the agent.

B&W allegedly inflated its sales and transactions figures by double- or triple-counting certain transactions, for example: “if B&W acted as the real estate broker for the purchase of a property for $100,000, the purchasers of the property obtained a mortgage from Key Mortgage in the amount of $80,000, and the purchasers of the property used BWT as their title company, B&W would have: (a) considered those three distinct transactions for purposes of the 32,000 transactions figure; and (b) added the $100,000 for the property purchase, the $80,000 for the mortgage origination, and $100,000 for the title insurance or other services into the ‘$8.8 billion in sales’ figure, such that $380,000 would have been added to the ‘sales’ figure for what was a $100,000 transaction.” That does sound hinky.

The ad first appeared in an email from Chicago Agent Magazine, a publication catering to Chicagoland’s top real estate agents, brokers, developers, and mortgage professionals claiming “Our 2017 Stats Are Pretty Interesting” and “IT’S OFFICIAL. WE CRUSHED 2017.” The ad didn’t explain its methods or sources, or mention other related companies. The email linked to a blog post on B&W’s website repeating the claims and adding that, “[i]t’s almost hard to believe everything that happened, and not just with our residential sales company, but with our mortgage and title companies, too.” It stated that the “$8.8 billion in sales and more than 32,000 transactions [B&W] did last year is evidence that [B&W’s] clients and [B&W’s] agents across Chicagoland are onto something.” Four paragraphs in, the blog post notes that “[t]he other businesses in our family had impressive results too,” expressly identifying BWT and Key Mortgage. There were similar ads elsewhere.

Were the sales and transactions numbers literally false? Literal falsity depends on how the statement would be understood by a “linguistically competent person,” and a statement that is ambiguous cannot be literally false. “Sales” and “transactions” were at least ambiguous about whether they included property rentals, leases, and mortgage and title services, which seemed like “transactions,” and revenue derived from these actions pretty clearly would count as “gross receipts” (a key definition of “sales”). [That doesn’t seem to deal with counting the amount of title insurance in sale amounts—insuring a property for $100,000 doesn’t mean you’ve made $100,000 in sales/receipts.]

@properties alleged that “sales” and “transactions” are understood in the real estate brokerage industry to refer “to the exchange of ownership interest and title of a parcel of real property from one person or entity to another person or entity.” But that would make this an implicit falsity claim, which @properties disavowed. “It is not the domain of a literal falsity claim to evaluate the specialized understandings of consumers in a particular market; rather, a literal falsity claim asks only how an advertisement would be understood by a ‘linguistically competent person.’”

[This disturbs me as a blanket statement—the linguistically competent person has to be competent in something.  And English is probably too broad a category; otherwise it wouldn’t be possible to literally falsely advertise to watchmakers that one had tourbillons for sale.  Be truthful: most of you had to look that one up!  It also conflicts with some older cases (albeit not in the 7th Circuit) allowing for literal falsity when a term (a) has a specific meaning to the trade and (b) is directed at the trade; I think falsity in those cases should be provable by expert testimony.]  The court here wanted survey or other evidence to establish that potential real estate brokerage clients have a specific understanding of the words “sales” and “transactions.”

Thus, a literal falsity claim based on the fact that B&W’s $8.8 billion in sales and 32,000 transactions numbers are not limited to real estate brokerage sales couldn’t proceed, and the court concluded that the alleged double- and triple-counting didn’t change things, since the actual property sale, mortgage origination, and purchase of title insurance are each discrete sales and transactions. [But as pled, the title insurance sale was a sale of $100,000 in title insurance, not a receipt of $100,000!  How can it be truthful to count receipts of a couple of hundred dollars as $100,000 in an aggregate sales amount?  The real problem is that each individual definition of “sales” might be truthful but the effect of adding the dollar numbers given for those sales together is not truthful because no single definition of sales can produce the total advertised number.]

However, @properties did successfully plead literal falsity in alleging that it was false to include sales and transactions consummated by Key Mortgage, BWT, Starck, and Landtrust. B&W argued that including those companies’ sales wasn’t literally false because they are B&W affiliates.  That would be a closer question if only Key Mortgage and BWT had been included; “[e]specially with respect to BWT, which includes “Baird & Warner” in its own name, a linguistically competent person may well understand B&W’s sales and transactions figures to include BWT’s sales and transactions.” And the blog post expressly named them as businesses in the family (although in a way that seemed to me to suggest that their successes were separate from the beginning claim). “Ultimately, the issue may turn on the exact nature of the corporate relationship between the affiliates,” and the complaint didn’t allege that all of these were in fact affiliates. “[I]f, in fact, B&W included sales and transactions from wholly unaffiliated entities in its $8.8 billion in sales and 32,000 transactions figures, it would have made a literally false statement.”  [I was just reading about why one might want to transact with a particular company in a group, given the use of corporate structure to limit liability risks.]

Materiality: The complaint cited an article stating that a “real estate broker’s sales volume and position in the real estate market are material to a consumer’s decision regarding which real estate brokerage firm to choose.” Kirk Wakefield, et al., What Do Consumers Expect From Real Estate Agents?, Keller Ctr. Research Report (Nov. 2008). B&W argued that this was about a consumer’s selection of an individual agent rather than a brokerage firm. But the article also recognizes how the reputation of the brokerage company can boost an agent because it “can lead to greater attractiveness or demand for the brand.” And it was reasonable to infer “that one sign of a well-established agency is its number of sales and transactions, and thus a potential client would be more likely to select a real estate brokerage company that has a high volume of sales and transactions.” Materiality is generally an issue of fact, though the court noted that, to survive summary judgment, “@properties would be well-advised to adduce better evidence than a single article.”

Injury: The complaint successfully pled that there was a trend following the publication of the ads in which B&W’s real estate sales volume or number of real estate transactions in both the City of Chicago and Chicagoland markets did one of the following: (i) increased at a higher rate than @properties’s sales volume or number of transactions as compared to the same month of 2017, (ii) increased while @properties’s sales volume or number of transactions decreased, or (iii) decreased at a smaller margin than @properties’s sales volume or number of transactions decreased. This was sufficient at the pleading stage, though @properties would need more “evidence that directly links the trends shown in the charts and any claimed reputational damage with B&W’s deceptive advertising” to prevail.

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