Friday, June 05, 2020

Rule 9(b) applies to false advertising Lanham Act claims against SmileDirect

Ciccio v. SmileDirectClub, LLC, 2020 WL 2850146, No. 19-cv-00845 (M.D. Tenn. Jun. 2, 2020)

SmileDirect sells plastic aligners for orthodontic use. Its SmileDirect program uses teledentistry as an alternative to conventional orthodontic care. The American Dental Association filed a complaint with the FTC alleging that SmileDirect has made “numerous false and misleading fraudulently entice customers to purchase its products and services”; it and its state affiliates also filed complaints with the FDA and with state licensing authorities. SmileDirect argued that this is an anticompetitive campaign. 

The initial complaint was filed by a SmileDirect customer, Nigohosian, and three orthodontists, pleading eight counts under various common law and statutory theories of false advertising, consumer protection, and fraud. Nighosian accepted an online contract requiring arbitration by the AAA for everything except “claims within the jurisdiction of Small Claims Court.” The court initially ruled that the threshold issue of arbitrability for her should be decided, in the first instance, through the arbitration process; the consumers (including later-added ones who the court indicated but did not rule would also be bound by this holding) voluntarily dismissed their claims. 

While various defense motions were pending, one of the consumers filed a Demand for Arbitration with the AAA, and AAA sent the attorneys involved a letter informing them that the AAA’s “Healthcare Due Process Protocol” dictates that the AAA “may only proceed forward on arbitration matters arising out of healthcare treatment agreements if the parties agree to binding forms of dispute resolution after a dispute arises.” In light of this determination of nonarbitrability, two of the consumers sought to rejoin the case here, even though this decision was made “administratively, not by an arbitrator,” and involved only one plaintiff. 

Defendants argued that, though the arbitration clauses require the parties to abide by AAA rules, they do not require them to rely on the AAA itself to arbitrate, so the plaintiffs must seek out an alternative venue. The AAA, by policy, “will no longer accept the administration of cases involving individual patients without a post-dispute agreement to arbitrate.” However it will “administer disputes between patients and healthcare providers to the extent a court order directs such a dispute to arbitration where the parties’ agreement provided for the AAA’s rules or administration.” Courts have split on the effects of this policy. As to the possibility of another abitrator, the plaintiffs pointed out that the AAA’s own Consumer Arbitration Rules provide that, “[w]hen parties have provided for the AAA’s rules or AAA administration as part of their consumer agreement, they shall be deemed to have agreed that the application of the AAA’s rules and AAA administration of the consumer arbitration shall be an essential term of their consumer agreement.” The Rules also say that, if the AAA declines to administer an arbitration, “either party may choose to submit its dispute to the appropriate court for resolution.” Courts that nonetheless required arbitration in similar situations did not appear to have relied on the content of the AAA rules as a whole, but merely on the relevant arbitration provisions and the Healthcare Policy in isolation. Thus, the consumer who received the letter showed that he was free to go to court. 

However, it was “colorable” that the AAA would accept Nigohosian’s claim pursuant to the court’s earlier order, based on an exception in the Healthcare Policy Statement for directly court-ordered arbitration, so she had to try, even though an earlier arbitration request involving another potential plaintiff had been rejected by AAA. But she could rejoin the case, subject to a stay, while arbitration proceeds/the AAA decides if it’s arbitrable—the court explicitly said that its prior references to “the arbitrator” did not preclude arbitrability review by the AAA’s non-arbitrator personnel; reading the order as a requirement to have the AAA arbitrate would rewrite the AAA’s rules, to which the parties agreed. 

Lanham Act claims by orthodontists: First, the court decided that Rule 9(b) applied to Lanham Act false advertising claims. Somehow courts never do this with Lanham Act §43(a)(1)(A) claims. Plaintiffs argued that “a strict application of Rule 9(b) [would be] unnecessary, unworkable, or unfair” in that, e.g., “advertisements are frequently disseminated over and over, sometimes through multiple channels,” and “ ‘[w]here the allegedly misleading advertising has occurred over a long period of time, it would be unreasonable and contrary to the Sixth Circuit’s liberal construction of Rule 9(b) to require Plaintiff to identify the exact day, hour or place of every advertisement which made the allegedly misleading statements.’” And in a Lanham Act claim, “the plaintiff, typically a competitor, is unlikely to have been the actual intended recipient of the relevant communications. It makes less sense, therefore, to impose on the plaintiff a heightened responsibility in describing what was said—a fact about which he, unlike a defrauded person, would have no special knowledge.” 

But “at least some of the purposes of Rule 9(b) are clearly implicated in the false advertising context,” such as protecting a defendant from unwarranted damage to its reputation (even though intent isn’t required, as it is not for trademark infringement). And Rule 9(b) is supposed to “discourage[ ] ‘fishing expeditions and strike suits’ [that] appear more likely to consume a defendant’s resources than to reveal evidence[ ] of wrongdoing.” Allegedly false advertising about quality “could open up discovery into every aspect of the product. If the plaintiff is required to specifically identify the difference between the advertised features and the product itself, discovery can be narrowed.” 

However, the court cautioned that adequately pleading false advertising didn’t require pleading fraud with particularity; the elements of the claim controlled. And even under Rule 9(b), what constitutes particularity depends on what’s necessary to provide sufficient notice. 

Commercial advertising or promotion: Plaintiffs alleged a lot of it: SmileDirect allegedly engaged in an “omni-channel approach to marketing, using billboards (including in Times Square and the NYC Subway), Google, Facebook, Instagram, and other social media platforms,” as well as having “purchased advertising time during televised national sporting events, such as college football games.” The complaint quoted some verbatim, and also identified as another example a blog post from SmileDirect’s “Grin Life” blog. The court didn’t require “specific dates and times” for the “omni-channel” marketing given the “sustained, repeated communications.” In cases involving numerous false statements, a plaintiff can satisfy Rule 9(b) by describing the allegedly false scheme and providing “representative” examples, rather than listing every wrongful act.

Falsity/misleadingness: Claims that SmileDirect’s customers were highly satisfied “may ultimately turn out to be the type of vague puffery that cannot support statutory liability,” but there were other more concrete and specific claims, e.g., the claim that “[a]n individual who is requesting treatment by using SmileDirectClub’s aligners is receiving the same level of care from a treating dentist-orthodontist as an individual visiting a traditional orthodontist or dentist for treatment.” Plaintiffs pled specific ways in which SmileDirect’s internet-based teledentistry system allegedly “falls far below the level of care involved in a traditional dental setting, particularly with regard to the limited diagnostic tools available in the SmileDirect setting and the comparatively lesser role played by dentists rather than non-dentist support personnel.” Whether “level of care” was sufficiently definite to be factual could not be decided on a motion to dismiss. 

In addition, SmileDirect allegedly advertised that SmileDirect’s plastic aligners work “three times faster than braces.” This suggested that aligners perform a comparable service to traditional braces, which plaintiffs alleged was false. SmileDirect also allegedly misrepresented its return policy through its “Smile Guarantee” policy, leading customers to believe that joining the SmileDirect Program entailed less financial risk than it did. These too were fact questions, and adequately alleged to be material. “When choosing between competitive services, the degree to which one service actually offers an adequate substitute for the other is an obviously important consideration. Overall cost is also an important consideration, and whether one will be able to get a refund is a component of determining the range of potential costs.” 

Finally, each individual orthodontist plaintiffs specifically alleged that his volume of business was reduced by the diversion of patients to SmileDirect. “Although the defendants fault the plaintiffs for failing to allege more facts that would support the conclusion that specific patients chose SmileDirect over them, it is difficult to imagine how an orthodontist could reasonably be expected to know the identities of the patients who merely considered him before going elsewhere. If anyone other than the patients would have that information, it seems more likely that it would be SmileDirect.” 

Tennessee Consumer Protection Act: The Tennessee Supreme Court has held that non-consumers can sue under the law if they suffer relevant harm from the violation of the law, and the orthodontists alleged lost money or property in the form of lost business, so the orthodontists’ TCPA claims could proceed. The TCPA also doesn’t allow private class actions for damages, but the statute indicated that injunctive and declaratory relief for a class was possible. 

Florida Deceptive and Unfair Trade Practices Act: FDUTPA doesn’t allow consequential damages. So are lost profits consequential or actual damages under the statute? The Florida state courts haven’t resolved the question, and Florida federal district courts have disagreed. The court’s Erie guess here was that Florida would consider a competitor’s lost profits to be actual damages under FDUTPA, which provides that it shall be “construed liberally to promote” its purposes, and whose private cause of action, like the TCPA’s, “does appear to contemplate a broad range of potential plaintiffs. Indeed, the FDUTPA was explicitly amended to make clear that it allowed claims by parties other than individual consumers, which supports the inference that it must permit the kinds of damages that non-consumer plaintiffs are likely to suffer.” 

New York General Business Law §§ 349 and 350-A: Could also proceed because the NY orthodontist plaintiff’s injuries weren’t derivative of the injuries suffered by SmileDirect customers. “The injuries suffered by consumers may have been caused by the same allegedly illegal marketing that caused the orthodontists to lose business, but one injury was not created by the other.”

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