Tuesday, March 14, 2023

detailed examination of harm story dooms FedEx's false advertising claim

Ah, how I wish courts would apply the same scrutiny to trademark harm stories.

FedEx Ground Package System, Inc. v. Route Consultant, Inc., 2023 WL 2466624, No. 3:22-cv-00656 (M.D. Tenn. Mar. 10, 2023)

FedEx uses around 4500 independent contractors (ISPs) to pick up and deliver packages. As alleged,

Each ISP’s contract grants it a certain service area, or “route,” and the ISP is permitted to sell its route to another entity if they can agree on terms. The result is that FedEx routes are, as a practical matter, intangible commodities traded on a competitive market and subject to price fluctuation based on the actual or perceived value of each individual route.

Route Consultant is a consultancy business that serves ISPs, as well as another type of FedEx contractor—transportation service providers or TSPs, who provide long-distance transportation services as opposed to actual package delivery, which is done by ISPs. Together they are known as CSPs, contracted service providers.

Route Consultant allegedly holds itself out as offering CSPs (and aspiring CSPs) advice and information regarding “acquisition strategy, business valuations, operations, efficiency, post-close support, [and] compliance review.” It also “maintains an exclusive portfolio of routes and runs for sale across the United States.” It does not perform any ISP work on its own behalf, but the company’s founder and president founded and operates four other companies that were FedEx ISPs.

Its products/services include a 12-week course on acquisition strategy that costs about $15,000, a program called “FedEx Routes for Sale 101,” and other consultancy and support services. It allegedly promotes FedEx routes as under-the-radar, but promising, investment assets, “like buying Apple at $1 a share.” Its principal, Patton, allegedly promoted the business “by creating a fictionalized crisis between [FedEx] and its ISPs and TSPs as an advertisement for the purported need for Route Consultant’s consultancy and other services.” He allegedly “exaggerated and misrepresented the purported financial hardships of the ISPs and TSPs in the current economic conditions” as well as FedEx’s purportedly bullying response. FedEx posited that Route Consultant’s aim was to encourage CSPs to renegotiate their deals (profiting Route Consultant), or at least to raise Route Consultant’s profile and foster the sense that its services were necessary. FedEx also alleged that the videos could have “drive[n] attendance” for an annual conference put on by Route Consultant.

The challenged materials were: (1) a publicly posted “Letter of Assurance” from Route Consultant to FedEx, highlighting the hardships faced by FedEx contractors and “demanding certain across-the-board modifications to [FedEx’s] agreements with ISPs and TSPs”; (2) “various videos” posted to Route Consultant’s YouTube channel making similar points; and (3) a press release reiterating those points.

In the letter, Patton claimed that FedEx, “knowingly or unknowingly, has placed the financial viability of CSPs in their Ground network at enormous risk.” He stated that “[n]ot a single day passes without my phone ringing with the story of yet another contractor who is financially collapsing under the weight of these dramatic cost changes that have gone unaddressed by FedEx Ground in 2022.” Although FedEx took steps to support its CSPs during the height of the COVID-19 pandemic, it purportedly made “no financial adjustment in any capacity” to the even greater challenges associated with 2022 cost conditions. The letter also mentioned Route Consultant’s upcoming “Contractor Expo + Party.” The videos and press release were of similar tenor.

FedEx sent a C&D telling Patton to shut up (demands included “cease all advocacy on behalf of any service providers other than [his own] ISPs”) and sent a letter to CSPs addressing Route Consultant’s allegations. Obviously, the dispute didn’t end there.

The allegedly false statements made various claims about the precarity of CSPs/FedEx’s responsibility therefor, such as, after referencing the economic changes over the past 12 months, “there has been no financial adjustment in any capacity”; the “average FedEx Ground business run by a CSP currently operates on profit margins below 0%”; since the Q4 of 2020, the industry has seen “a 15% pullback on the value of routes”; “the current CSP financial model is collapsing”; claiming “soaring levels of CSP default rates as evidence of the current financial stress within the network”; and “Almost all of the other contractors that had renegotiation requests were also denied.” Patton also allegedly overstated the size of his businesses by stating, “I have about 225 routes, 275 trucks on the road across 10 different states.”

For falsity, FedEx pled that (1) its CSPs “earn average annual revenue of approximately $2.3 million dollars, a figure that has doubled over the last four years,” (2) “ISPs have requested mid-contract renegotiations for only about 10% of their agreements in 2022,” (3) FedEx “has consented to approximately 40% of renegotiation requests since July 1, 2022, and (5) “over 90% of those renegotiations led to agreement on new terms that resulted in higher contractual payments to the ISPs.” FedEx also points to a report by a business analyst based on data “for 100 ISP businesses ... for sale on Route Consultant’s own website,” which concluded that those businesses “generated an operating margin of 16.0%.”

The press picked up on Route Consultant’s agitations and began reporting on “tension” and a “burgeoning feud” between FedEx and its CSPs. “Some of the coverage suggested that, if the situation continued to deteriorate, it could lead to a slowing of deliveries—a possibility with obvious, serious reputational stakes for FedEx. At least one financial analyst cited Route Consultant’s statements as evidence of ‘structural problems’ with FedEx’s ‘broken and inefficient’ model.”

FedEx brought Lanham Act and Tennessee Consumer Protection Act claims.

Was this “commercial advertising or promotion”? Plausibly. It didn’t have to directly/literally propose a transaction to be commercial speech, as long as it was sufficiently relevant to a real or proposed transaction. The court didn’t resolve what it saw as the difficulty of evaluating Route Consultant’s argument that its speech was not commercial “because it consisted almost entirely of broad, public-facing commentary about business conditions and practices involving FedEx and its CSPs—not any transaction or proposed transaction involving Route Consultant,” versus FedEx’s point that “Route Consultant—like any consultancy business—feeds off the perception of rectifiable (or avoidable) corporate dysfunction. Hyping up that dysfunction—while simultaneously reminding individuals that your services as a consultant are available—is a plausible promotional strategy.” While further factfinding could change the outcome, the accused communications were plausibly commercial speech. “The fact that some aspects of Route Direct’s critique could have been delivered noncommercially … provides no ground for dismissing claims based on the more ambiguous communications that actually did occur.”

However, falsity proved a harder barrier. Some of Patton’s statements, such as those making quantitative claims, were falsifiable. But others were much more subjective—too much so to be falsifiable: “the current CSP financial model is collapsing due to substantial increases in the cost of fuel, labor, and vehicles over the past 12 months.” Since the latter half of the sentence was not pled to be false, there was “no clear division between a company or business model that is ‘collapsing’ under cost increases and one that is merely struggling with them, particularly given that that assessment is at least as much a prediction about the future as a claim about the present.” A “melodramatic” claim is not actionable when a speaker uses a “loose, hyperbolic term” to “convey[ ] an inherently subjective concept.” So too with claims based on “soaring levels of CSP default rates as evidence of the current financial stress within the network” and claims that CSPs are in “financial distress.”

Another set of statements claimed that FedEx made no “adjustments” to “address[ ]” the financial challenges facing CSPs. FedEx argued falsity because CSPs, as a group, were not struggling, and FedEx did, in fact, grant some renegotiation requests, “meaning that it is technically untrue that the company did absolutely nothing.” But in context, it was “clear that the statements at issue were not intended to suggest that FedEx never granted a renegotiation request or never improved the terms pursuant to which an individual, struggling CSP did business. Rather, the statements made were about FedEx’s failure to adjust its overall model and approach and its failure to adequately remedy the headwinds facing CSPs as a class in the manner that it had during the height of the pandemic.” The complaint did not plausibly plead falsity there, given that “FedEx’s consistent position has been that there was no need for any such large-scale adjustment in the first place.”

Thus, it was unlikely that any substantial portion of the intended audience, which was sophisticated, would have been deceived; the court noted that Patton’s own statements acknowledged that FedEx did not have a 100% denial rate for requested renegotiations. And even if one read the statements to be “technically, albeit trivially, false,” it was not plausible that such technical errors were capable of harming FedEx. FedEx’s allegations of harm were “not based on some technical distinction between FedEx’s having done no adjustment versus its having done a little bit of adjustment in a few select instances. Rather, any harm to FedEx appears to have been from the general impression that its contractors were struggling so severely that it posed a risk to FedEx’s operations. That premise did not depend on FedEx’s having done literally nothing—merely that it did not do enough.”

The quantitative assertions could be falsified, but the complaint didn’t plead facts to do so. One challenged statement, for example, was about average profit margins, but FedEx pled evidence regarding average revenues. The only information that FedEx has pleaded about margins was based on a sample of 100 ISPs, not on the “average” CSP. While people might believe either side, FedEx “conspicuously failed to allege that Route Consultant’s numbers were actually false or, in any sufficiently explained way, even misleading.”

For “[a]lmost all of the ... contractors that [made] renegotiation requests were ... denied,” FedEx pled that it “has consented to approximately 40% of renegotiation requests since July 1, 2022.” But the relevant dates didn’t match; the letter at issue was released in July 2022. At most, FedEx pled that a statement that was made at one chronological point would have been false or misleading if it had been made later and with a different time limitation.

FedEx did allege that the statement about the size of Patton’s own routes was literally false.

“[I]t is at least conceivable that a falsehood about Patton’s businesses could harm FedEx by lending Patton’s, and by extension Route Consultant’s, critique more credence than it deserved.” But it was explicitly an estimate, and FedEx didn’t plead just how overstated those numbers were. “Given the comparatively attenuated importance of this fact to FedEx’s theory of harm, the overstatement would have to have been quite substantial to have made any plausible difference in the course of events.”

Claims dismissed.

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