Monday, August 01, 2022

2d Cir. attempts to explain when puffery can be found as a matter of law

International Code Council, Inc. v. UpCodes Inc., 2022 WL 3008706, --- F.4th ---- (2d Cir. Jul. 29, 2022)

Discussion of district court opinion. ICC develops model building codes and standards; it sued a competitor, UpCodes, for false advertising (Lanham Act, NY GBL, and common law unfair competition). The court of appeals reversed the district court’s sua sponte dismissal (pre-motion letters converted to a motion to dismiss) and further ruled that ICC’s allegations mostly stated a claim. I will not discuss the procedure further.

When a local government adopts an ICC code, “it often does not publish the entirety of the code; rather, it codifies the code by reference and then publishes its own amendments.” ICC also publishes “Custom Codes” that integrate these amendments into its codes; it sells physical and electronic copies of both kinds of codes.

Although the public can view ICC codes for free on ICC’s proprietary platform, there’s demand for more than that, which is why ICC sells special access that allows, e.g., highlighting. UpCodes, meanwhile, allegedly charges its subscribers a premium to access versions of ICC’s publications with integrated amendments.

There were three challenged categories of statements: (1) representations relating to the accuracy of the codes available on UpCodes’s website, including claims that its codes were “always up to date,” and that the website “provides a complete understanding of relevant material,” (2) statements relating to UpCodes’s publication of codes with integrated amendments, including claims such as, “UpCodes hosts the adopted codes as enacted by the state or local jurisdiction,” and (3) statements relating to UpCodes being the sole source of codes with integrated amendments, including claims that UpCodes is the “only place where all the codes are kept up-to-date with all the amendments integrated natively into the code.”

ICC alleged that these statements were false: First, ICC alleged that UpCodes’ codes contained significant errors, from scanning; posting material as law when it hadn’t been adopted; omitting law; and failing to integrate various state and local amendments. Second, errors in amendment integration allegedly made UpCodes’s statements that it hosts codes as enacted by jurisdictions false. Third, ICC alleged that it also offers Custom Codes with integrated amendments, making UpCodes’ “only place” statement false.

[Reordered discussion to track this order.]

Accuracy statements: The district court found that claims of being accurate/up to date and claims that users would get a “complete” understanding of relevant material were puffery. The court of appeals found that, at this stage, the accuracy statements were properly alleged to be false and falsifiable, that is, not puffery, though the completeness statement was puffery (for different reasons than the district court concluded).

The accuracy statements included “[a]lways up to date,” “never work from outdated code,” implications that the website contained “all [relevant] code,” and “We are only [sic] place where all the codes are kept up-to-date with all the amendments integrated natively into the code.” The court of appeals didn’t decide whether “minor, superficial errors” would render these claims false, but, “by averring that its codes are completely up-to-date and comprehensive, at the very least, UpCodes ‘necessarily impl[ies] [the] false message’ that its materials are not missing entire sections of code or erroneously publishing material that it had not been enacted as law,” as alleged.

Whether these claims are puffery “requires a factual inquiry into how users interpreted UpCodes’s claims.” This conclusion followed because the Second Circuit recognizes two kinds of puffery: First, “[s]ubjective claims about products, which cannot be proven either true or false,” including “exaggeration[s] or overstatement[s]” that mention “nothing specific,” but rather amount to “general claim[s] of superiority” “expressed in broad, vague, and commendatory language” that are “considered to be offered and understood as an expression of the seller’s opinion only.” Second, “exaggerated, blustering, and boasting statement[s]” that are objective—and therefore technically provable—but “upon which no reasonable buyer would be justified in relying.”

Worth quoting in full because it is the most comprehensive attempt to explain the proper rule about evaluating puffery on a motion to dismiss that I have seen. I do not necessarily think it’s an accurate description of the overall case law, but it is certainly an attempt to put it on a more consistent path:

Whether a puffery defense against a false advertising claim can be resolved on a motion to dismiss depends in part on the type of puffery at issue: If the challenged advertisements fall under the first form of puffery—subjective statements of opinion which cannot be proven false—then courts treat them as non-actionable puffery as a matter of law. A plaintiff cannot state a false advertising claim based on such a statement because, by definition, it cannot be proven false.

On the other hand, when an advertisement might fall within the second form of puffery—statements that are provable but are so exaggerated that no reasonable buyer would be justified in relying on them—the court must evaluate how a reasonable buyer would react. This often requires extrinsic evidence of consumer impact. Such a fact-intensive inquiry typically should not be resolved on a motion to dismiss. In some cases, however, a statement may be technically false but so patently hyperbolic that any allegations that it misled consumers are facially implausible, thereby making the false advertising claim ripe for dismissal on puffery grounds.

To elaborate on that last bit: “If a bubblegum brand advertised that its gum permits chewers to ‘blow a bubble as big as the moon,’ the statement would be literally false, but it is facially implausible that any reasonable buyer could justifiably rely on that claim.” On the other hand, falsely advertising that the gum would allow users to “blow a bubble bigger than your own head,” it would be plausible that a reasonable buyer could be misled. “The statement might qualify as puffery, but only if consumer evidence introduced at summary judgment or trial showed that ‘no reasonable buyer would be justified in relying on it in navigating the marketplace.’” [So, is the factfinder supposed to use an objective or empirical reasonable consumer as the standard?]

Here, the claims of accuracy could be falsified. Thus, they could be puffery, but only if they are such “exaggerated, blustering, and boasting statement[s]” that “no reasonable buyer would be justified in relying” on them. And UpCodes’s assurances that its products are “[a]lways up to date” and that its users will “never work from outdated code” were “not so patently hyperbolic that it would be implausible for buyers to rely on them.” As a result, “UpCodes could prevail on its puffery defense only after introducing extrinsic evidence of the statements’ effect on consumers on a motion for summary judgment or at trial.”

Comment: Note one interesting thing that happens in this formulation is that puffery is now a “defense,” on which the defendant apparently bears at least the burden of production. I would think that the plaintiff must bear the ultimate burden of proof on falsity, but needing to introduce extrinsic evidence of effect on consumers is a pretty high bar. Is a survey required? Could general expert testimony suffice?

Anyway, we also learn that prior judicial treatment of words like “accurate” isn’t helpful “unless that word is used in a sufficiently similar context.” “Always” is puffery if it modifies an unverifiable attribute, and “up to date” could be subjective “when used as a comparator or superlative (e.g., ‘more up to date’ or ‘most up to date’),” but that’s not what was alleged here. [I really have no idea why comparative/superlative statements are any less factual than noncomparative statements; the underlying intuition is that consumers are less likely to believe such statements, but (1) citation needed, and (2) that conflicts with the conclusion the court just purportedly reached, which is that when something is technically falsifiable, not just hopelessly vague, you need factfinding before you can deem something puffery.] Anyway, UpCodes claimed that its products were “always up to date.” “We do not see how such a statement can be anything other than an explicit claim about the quality of its products.”

The district court understated the alleged errors when it held that “ ‘no reasonable buyer’ would take UpCodes’s representations of accuracy and completeness to mean that the codes are instantaneously updated and at all times error free” because “[a]s changes in law occur, some delay between the adoption of those changes ... and their publication on the UpCodes website is not only understandable, but expected.” ICC didn’t allege mere slowness, but blatant errors, such as publishing the entire “text of ICC’s model International Residential Code 2015 as the ‘Residential Code 2015 of Wyoming’ even though Wyoming has not incorporated the entire International Residential Code 2015,” and publishing eleven code appendices as part of the Building Code 2015 of Wyoming and two code appendices as part of the Wyoming Fire Code even though Wyoming had never adopted those appendices. “While it might be unreasonable for a consumer to think that UpCodes instantaneously updated every code as it was revised, one could reasonably believe based on UpCodes’s representations that its website would not include obvious omissions and inaccuracies such as these.”

Nor could a disclaimer of liability for errors and omissions on the website suffice at the motion to dismiss stage. “[T]he sufficiency of UpCodes’s disclaimer depends upon its effect on consumers, which raises factual questions that are not well suited for resolution on a motion to dismiss.”

However, UpCodes’s statements that its website provides “a complete understanding of relevant material” was nonactionable puffery because that was a mere subjective, unmeasurable statement of UpCodes’s opinion, dependent “on the cognitive abilities of the user and the nature of the project.” [Again, I think this is the court being unwilling to fully embrace the principles it announced. The natural reading of the statement, in context, is not that the site will magically pour understanding into every human that encounters the site. Instead, it is that the site will allow users to access a “complete” set of relevant codes.]

ICC also adequately alleged materiality, which generally “cannot be determined on consideration of a motion to dismiss.”  It was plausible that the allegedly false statements were “likely to influence purchasing decisions” “particularly because nearly all the challenged statements either assure the accuracy of complex legal codes, promote a central feature of UpCodes’s business (i.e., the integration of local amendments), or imply that ICC offers inferior services.”

Statements about integrated amendments: The district court held that “[t]he claim that UpCodes offers integrated amendments is not rendered false by the fact that ‘some but not all’ amendments are posted.” The court of appeals disagreed. Assuming the truth of ICC’s allegations about omitted statements, it was at least facially false for UpCodes to describe itself as the “only place where all the codes are kept up-to-date with all the amendments integrated natively into the code.”

Other relevant statements were also adequately alleged to be literally false by necessary implication, e.g., “UpCodes hosts the adopted codes as enacted by the state or local jurisdiction” and “UpCodes has integrated the local codes in jurisdiction [sic] like Pennsylvania and New York State,” necessarily implied that UpCodes integrates all local amendments made in those jurisdictions. The district court’s interpretation, that UpCodes might be promising only some integration, was implausible in context. And even if the statements were ambiguous, the district court should have considered misleadingness, based on allegations of consumer confusion.

Exclusivity of UpCodes’s services: UpCodes argued that it properly qualified its statement because “ICC’s own screenshot shows that UpCodes claims to be the only source of integrated codes only for ‘jurisdictions [that] do not provide integrated code books.’ ” But in other statements, UpCodes didn’t limit its claims to jurisdictions that do not otherwise provide integrated code books. E.g.: “States and cities enact critical amendments to the base codes. New York State has made amendment [sic] to the codes. UpCodes provides the only source to view these amendments integrated into the model codes.” But ICC pled that it also provides Custom Codes, including “New York building codes showing integrated amendments made by New York.”

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