Wednesday, November 23, 2022

Retailer has standing to assert Lanham Act false advertising claims against its own supplier

AHBP LLC v. Lynd Co., No. SA-22-CV-00096-XR, 2022 WL 17086368 (W.D. Tex. Nov. 18, 2022)

Lexmark provides standing to a purchaser because the harms it alleged are “commercial” harms. In summer 2020, AHBP began negotiating with the Lynd defendants for the exclusive license to market and sell a surface disinfectant/cleaner known as “Bioprotect 500” in Argentina. The Lynd defendants allegedly made false representations about the quality of the product, including that it was effective against the virus that causes COVID-19 and that it would meet the governmental standards for approval required to sell it in Argentina. Lynd issued a press release, “LYND To Disinfect & Protect Apartments with BIOPROTECTUs System.” Lynd advertised the Product as effective against the coronavirus.

Ultimately, AHBP took an exclusive license to sell the product in Argentina, with purchasing and advertising/marketing spend minimums. Defendants allegedly repeatedly promised to provide AHBP with information supporting the product’s purported two-year shelf life and identifying its composition, manufacturing and quality controls, and toxicology. In reliance, AHBP allegedly hired employees and designers, consulted with lawyers, accountants, biologists and virologists, rented warehouse and office space, and entered into contracts with buyers in Argentina. Then defendants allegedly provided a lab report that had been altered by defendants and that was run on a different disinfectant with nearly 15 times as much of the active ingredient. In early 2021, the EPA issued a Stop Sale, Use or Removal Order to defendant Via Clean ordering it stop marketing the product with claims that it was effective against public health-related pathogens, including coronavirus.

AHBP alleged that it was therefore unable to sell the product where it was licensed to do so. Its buyers allegedly refused to continue doing business with it because it couldn’t fulfill its obligations to deliver the product, it suffered severe harm to its business reputation, and its pursuit of the media campaign was rendered a total loss, causing $90 million in damages (mostly lost sales).

Unsurprisingly, fraudulent inducement, common-law fraud, and negligent inducement claims survived.

More surprisingly (perhaps the court wanted to be sure it retained jurisdiction regardless of diversity?), the Lanham Act false advertising claim survived. Lexmark says that “to come within the zone of interests in a suit for false advertising under § 1125(a), a plaintiff must allege an injury to a commercial interest in reputation or sales.” As the court here paraphrased: “Consumers or businesses that are misled into purchasing an inferior product are generally not considered within the zone of interest,” even a business misled by a supplier. Likewise, a plaintiff must show proximate cause: “ordinarily … economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising; and that occurs when deception of consumers causes them to withhold trade from the plaintiff.”

First, the injuries alleged here—“lost profits and loss of goodwill”— “are injuries to precisely the sorts of commercial interests the Act protects. AHBP is suing not as a deceived consumer, but as a ‘perso[n] engaged in’ ‘commerce within the control of Congress,’ whose position in the marketplace has been damaged by the [defendants’] false advertising as to the quality of their product.”

The Third Circuit has said that businesses don’t have standing when misled by suppliers, relying on Lexmark, including that latter case’s statement that “[a] consumer who is hoodwinked into purchasing a disappointing product may well have an injury-in-fact cognizable under Article III, but he cannot invoke the protection of the Lanham Act—a conclusion reached by every Circuit to consider the question.”

But here, the court said, it was “neither bound nor persuaded by this apparently categorical rule that a business entity can never assert a claim for false advertising under the Lanham Act against one of its suppliers.” It seems to me that the court is at least bound by it, given the direct quote from Lexmark, though the gloss given here is not illogical. I can see why the court says that this isn’t an ordinary disappointed consumer case because plaintiff alleged that its goodwill was harmed as a result of the disappointment, and that doesn’t usually happen when a business buys a product for consumption, not for resale. But see The Knit With v. Knitting Fever, Inc., 625 F. App'x 27 (3d Cir. 2015) (finding no standing where supplier’s false representations allegedly damaged retailer’s reputation with its own consumers).

A blanket rule “disregards the economic realities of modern supply chains in favor of a shallow and artificially narrow understanding of the distinction between consumers and competitors.” The key was not “place in the supply chain” but “the manner in which [an entity’s] interests have allegedly been harmed.”

And proximate cause? Ordinarily requires “economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising; and that that occurs when deception of consumers causes them to withhold trade from the plaintiff. That showing is generally not made when the deception produces injuries to a fellow commercial actor that in turn affect the plaintiff.”

The court distinguished the facts alleged here from other businesses-as-consumers cases. A restaurant could not recover under the Lanham Act for harm to its commercial interests

arising out of its purchase of an inferior sanitizer based on false advertising about its quality and efficacy. Even assuming that business slowed down after several instances of food poisoning, the restaurant’s injuries—in the form of lost profits and reputational harm—would not fall within the scope of the Lanham Act because it was harmed, like any other consumer, by its use of the product. Conversely, a co-distributer of the sanitizer that suffered losses as a result of the supplier’s overstatements of the product’s quality would suffer lost profits and reputational harm as a distributer rather than as a consumer.

[That’s really got to be proximate cause in disguise, because the type of harm—commercial reputation—is the same either way.] The complaint alleged that both sides were “distributors in the market for sanitizing products” and thus competitors. Even if that weren’t true, the plaintiff would have standing under the Lanham Act because it lost sales as a result of the Lynd defendants’ false advertising.

Comment: This is a proximate cause question. Those lost sales weren’t the result of people believing the false advertising—they were the result of the scheme being exposed. That seems to be a different type of causation. The court says that proximate cause is present because plaintiff alleged “both economic and reputational injury flowing directly from the Lynd Defendants’ deceptive advertising as to the quality of the Product. Plaintiff was allegedly unable to sell the Product as a result of the Lynd Defendants’ false advertising as to its efficacy.” But “directly” and “as a result” are merely asserted (as perhaps they always are). The false advertising plausibly caused the plaintiff to enter into the contract with the defendant. But it did not thereby cause the lost sales. The fact that plaintiff figured out that the claims were false caused the lost sales.

I don’t really have anything against this holding, or a strong enough commitment to a theory of proximate cause to say the line should be drawn differently. But it’s always a little weird to me that it’s much easier for a business to win a false advertising case against a rival than for a consumer—the one directly harmed—to do so, and so a little weird to see doctrine stretched to some consumers, but only consumers that are businesses, because suffering harm to goodwill is so much more important than having been ordinarily defrauded.

With that out of the way, plaintiffs sufficiently pled a Lanham Act violation: false representations about the quality of the disinfectant that it licensed to the plaintiff, made in a press release. [Consider, for causation analysis, the chain between press release and harm to plaintiff’s goodwill compared to the chain between ad and harm in the standard Lanham Act false advertising case.] The press release was also “the kind of commercial promotion governed by the Lanham Act.”

Business disparagement claims failed, however, because the allegedly false information in the lab report wasn’t plausibly disparaging of the quality of the product or of AHBP. Breach of contract survived.

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