literal falsity as Q of fact v. law and other important issues in a dueling ladder case

Wing Enters., Inc. v. Tricam Indus., Inc., No. 17-cv-1769 (ECT/ECW), 2021 WL 63108 (D. Minn. Jan. 7, 2021)

After remand because the court of appeals concluded that a materiality survey was wrongly excluded, the court here tries again in this false advertising case between competing sellers of articulated ladders, also known as multi-position (or MPX) ladders. Given the inclusion of the survey, a reasonable jury could find both that Tricam made a literally false statement and that Wing suffered cognizable commercial injury. One thing worth noting here is the relevance of greater availability of disgorgement of profits, creating the potential for an award even when damages can’t be proven with reasonable specificity.

Wing’s claims all revolve around ANSI A14.2, a voluntary industry standard that “prescribes rules governing safe construction, design, testing, care and use of portable metal ladders of various types and styles.” The standard says, inter alia, that when a ladder uses particular types of rungs those rungs “shall have a step surface of not less than 1 inch, either flat or along a segment of 3 inches or greater radius.” The outer rungs on Tricam’s multi-position ladders are greater than one inch deep in the middle, but they are crimped and less than one each deep at each end, where the rung meets the rail. Wing argued that they therefore fail to comply with the standard, despite (1) the label affixed to each ladder containing an oval icon that bears the text “MANUFACTURER CERTIFIES CONFORMANCE TO OSHA1 ANSI A14.2 CODE FOR METAL LADDERS”; (2) the portion of each product’s page at Home Depot’s website that provides: “Certifications and Listings: ANSI Certified”; and (3) the portion of each product’s page on Tricam’s website that provides: “CERTIFICATIONS: ANSI A14.2 OSHA.”

Tricam argued that it couldn’t be held responsible for statements on Home Depot’s website. The court found a jury issue (which is a gift to Tricam). “The gist of this argument is that Tricam only made this statement to Home Depot—not to the public—and that Home Depot was the one to disseminate it.” Thus, it wasn’t Tricam’s statement. Wing pointed out that Tricam “expected and intended that [statements to Home Depot] would be used in commercial advertising.”

How did the statements get on the website? Home Depot uses an Item Data Management (IDM) system vendor portal for “managing online content relating to products Home Depot sells (or that vendors hope Home Depot will sell)”:

Home Depot chooses what fields a vendor can or must populate within the IDM system, reviews the content vendors submit through the IDM system, may reject content that does not follow Home Depot’s requirements, must approve any changes requested by the vendor, and may itself change content on a product page without prior notification to the vendor.

Tricam knew that if it did not select some type of ANSI certification from a drop-down menu in the IDM system, Home Depot would not issue a SKU number for the product, and the product would likely not be sold at Home Depot. A Home Depot representative testified that the “IDM is the source of truth for all content as it relates to Home Depot” and that Home Depot relies on its suppliers, like Tricam, to make sure the content it enters into the IDM system is accurate.

Home Depot doesn’t independently audit that information, and Tricam warranted that its marketing materials were accurate, including specifically ANSI statements. Deposition testimony unsurprisingly confirmed that Tricam expected and intended that the information it entered would appear on Home Depot’s website and that customers would use it for comparison when ladder-shopping.

Tricam monitors Home Depot pages for Tricam ladders; it can request content changes by submitting a ticket in the IDM system. It considered doing so after this lawsuit was filed, when it removed the ANSI-certification language from its own website, but didn’t, “in part because it wanted customers to be able to differentiate its products from other articulated ladders on Home Depot’s site.”

The court found no previous authority addressing “whether and when a supplier’s Lanham Act liability is cut off after the supplier passes on an allegedly false statement to a retailer expecting and intending that the statement will reach the purchasing public.” Tricam made the novel but too clever by half argument that it could only be contributorily liable, and Home Depot was not alleged to be primarily liable (and Wing might lack standing against Home Depot).

I would have rejected this claimwashing attempt out of hand given the evidence of both intent and effect—the claim reached the consumer just as if Tricam had paid the transit authority to put posters up on buses—but the court was more sympathetic. Wing pointed out that false advertising precedent indicates that retailers can’t be liable for statements from manufacturers, which indicates that the manufacturers are the appropriate target for primary liability, but the court thought that was irrelevant to whether Tricam could be liable, apparently comfortable with the idea that nobody could be liable for a false ad. The court reasoned that because it’s possible that both manufacturer and retailer could be liable, authorities that retailers weren’t liable for transmitting false advertising to consumers didn’t bear on whether manufacturers were liable. This seems to me like a logic error.

The court found that, with reference to the language of the Lanham Act, which requires “use” of a false statement in commerce, the relevant question was “whether the business has ceded so much control that it is no longer ‘using’ the ad.” [Even under the court’s own terms, the issue should be whether the business is controlling the statement at issue. Extensive editorial control by the publisher over the format or other non-false portions of the ad should be irrelevant.]

The court held that there was a genuine dispute of material fact over “whether the degree of control Home Depot exercised over its website means that Tricam did not ‘use’ the online ANSI-certification statement in commerce”:

The evidence that Home Depot could change the content on its webpage without notifying Tricam could suggest that Tricam effectively surrendered control over the allegedly false content. But there is also evidence that Home Depot relies on its vendors to enter accurate information in the system without independently auditing that information; that Tricam expected and intended that customers would use the information it entered into the IDM system to make purchasing decisions; and that Tricam could request changes to the information after it was posted on the website.

I don’t understand how Home Depot’s “potential” control could allow a reasonable jury to conclude that Tricam didn’t “use” this information.

Anyway, a reasonable jury could also find literal falsity. Literal falsity requires a clear answer to the question “what message is being conveyed?” because “[o]nly an unambiguous message can be literally false.” Is this a question of fact or of law? The Eighth Circuit cases are not clear, with at least one case treating it as a factual question by applying the clearly erroneous standard of review to an appeal of a preliminary injunction, and another stating that “[a] literally false statement can be determined as a matter of law, but whether a statement is misleading is considered a matter of fact.” The majority approach in district courts and other circuits is to treat what message is being conveyed as a question of fact, like the question of whether that message is false. The court found that the better approach was that potential ambiguity is a question of fact; the former Eighth Circuit case was decided first and the weight of authority was on this side.

Again, the court gives weight to what I would have dismissed as mere chutzpah: Tricam argued that the only reasonable reading of its statements was that its ladders were tested for ANSI compliance, not that they passed, and they undisputedly were tested. This was a genuine dispute over what it means to “certify” ANSI conformance or to claim an ANSI “certification.” Although Tricam thus posited competing meanings, there would only be ambiguity if there were multiple “reasonable” interpretations of the advertisement, and a jury could find that all reasonable interpretations were just different ways of saying the same thing: ANSI conformance.

Actual deception: The Eighth Circuit has held that once a plaintiff has proved that a statement is literally false, “the court may presume that consumers were misled ... without requiring consumer surveys or other evidence of the ad’s impact on the buying public.” Tricam argued that this rule only applied to comparative statements, but cases saying this are talking about presumptions of harm to the plaintiff/irreparable injury, not presumptions of consumer deception.

Injury: “Relying primarily on cases involving money damages, Tricam asserts that the record lacks evidence to support Wing’s claimed injuries—diversion of sales, price erosion, and loss of business opportunities—and that Wing has not adequately tied those injuries to Tricam’s statements, as opposed to other market factors.” But the nature of a plaintiff’s burden on the injury-and-causation element depends on the type of remedy that it seeks. There’s no presumption of causation when the parties compete directly, though courts will presume injury and causation “in comparative advertising cases where money damages are sought and where there exists proof of willful deception.” The plaintiff’s burden is highest when it seems money damages, and lower (now of course presumptive) when it seeks injunctive relief. Given the congressional policy in favor of protecting consumer rights, “courts are not and should not be reluctant to allow a commercial plaintiff to obtain an injunction even where the likelihood of provable impact on the plaintiff may be subtle and slight.”

Important move: “The burden is similarly low when a plaintiff seeks the equitable remedy of disgorgement of profits. That is because, rather than aiming to compensate the plaintiff for specific, identifiable losses, this remedy ‘exists to deter would-be infringers and to safeguard against unjust enrichment.’” Once a plaintiff has shown the likely harm necessary to establish an underlying Lanham Act violation—and remember, a plaintiff also seeking injunctive relief now gets a presumption of irreparable harm, so courts now have to decide whether that counts— the plaintiff must “prove defendant’s sales only; defendant must prove all elements of cost or deduction claimed.” Willfulness, while a relevant factor, is not an “inflexible precondition to recovery” of profits under the Lanham Act—the court quoted McCarthy for the proposition that Romag should also apply to false advertising claims.

Wing seeks injunctive relief and disgorgement, and thus “does not need to meet the heightened injury-and-causation burden that applies when a plaintiff seeks money damages.” Although Wing didn’t provide sufficient evidence of its alleged lost opportunity to sell ladders in Home Depot stores, it created a genuine issue of material fact on lost sales/market share and price erosion. (It didn’t show lost opportunity to sell ladders because the evidence showed a previous falling out between Wing and Home Depot leading Home Depot to blacklist Wing. Even though this dispute provided Tricam “an opportunity to get back into the business” of multi-position ladders, and even though Wing eventually returned to Home Depot with some other products, Home Depot’s former ladder merchant declined to speculate about whether she would have invited Wing back into Home Depot’s retail stores if Tricam had not represented itself as conforming to ANSI A14.2, saying only that she “would probably reach internal, to existing suppliers, before [she] reached external, to new suppliers.” Under these circumstances, including the fact that Home Depot merely accepted Tricam’s offer rather than conducting a search for a new supplier, the causal chain was too speculative.)

Sales/market share: Wing argued that Tricam could not have entered the market if it had not represented that its ladders conformed to the ANSI standard, and that such ANSI-certification statements made customers more likely to purchase Tricam’s ladders than Wing’s. There was a close but triable issue of fact. The parties were in direct competition, including on Home Depot’s website, and Tricam sold over 565,000 ladders in the first year and a half that they were on the market. “The combination of the competitive relationship between the two companies and the volume of Tricam’s sales led Wing’s expert … to conclude that the introduction of Tricam’s ladders cost Wing sales and market share.” Add to that testimony that Home Depot likely would not have continued selling Tricam’s ladders if it had attempted to change its ANSI-compliance statements and the evidence of materiality accepted by the Federal Circuit, and you get a triable issue.

There was evidence in the record pointing the other way; Wing had higher sales on the Home Depot website than projected, and, after Tricam’s ladders had entered the market, Wing obtained a substantial new line of business by selling its ladders at Lowe’s. But Wing does not need to identify “specific damage,” and the jury should resolve the question.

So too with Wing’s evidence of price erosion:

[A] reasonable juror could find that Tricam’s false ANSI-compliance statements allowed it to enter and remain in the market by selling its ladders at Home Depot. Once in the market, Tricam consistently charged a lower price than Wing for its ladders. One of the reasons Tricam was able to do this was that the crimped design of its ladder rungs—the source of the dispute over ANSI compliance in this case—made its ladders cheaper to manufacture.… And this led several of Wing’s retail partners, particularly Lowe’s, to repeatedly pressure Wing to lower its prices to compete with Tricam. On one occasion, Wing agreed, at the urging of Lowe’s, to a 27% promotional discount on 75,000 ladders in order to compete with Tricam, and the “[e]very day” price of Wing’s ladders “[e]asily” dropped by $40 or $50.

The court cautioned that, while Wing was entitled to go to the jury, “there is no guarantee that Wing will ultimately be able to obtain the monetary relief—disgorgement of profits—that it seeks,” given courts’ broad discretion under the principles of equity. The Eighth Circuit recently suggested that disgorgement is only appropriate in “exceptional” cases. (Does that survive Romag?) Given the new presumption of irreparable injury, however, and the possibility that ANSI certification is necessary in this market, an injunction alone might be worthwhile for Wing.