Ariix, LLC v. Nutrisearch Corp., 2023 WL 2933306, No. 17CV320-LAB (DDL) (S.D. Cal. Apr. 13, 2023)
Previous
court of appeals ruling discussed here. Ariix alleged that NutriSearch, the
publisher of the NutriSearch Comparative Guide to Nutritional Supplements, and the
Guide’s author MacWilliam were directly funded by Ariix’s competitor, Usana, so
that Usana could achieve the Guide’s number-one rating for nutritional
supplements. The Ninth Circuit reversed an initial dismissal, finding that
Ariix had “plausibly alleged that the defendant’s publication was commercial
speech, was sufficiently disseminated, and contained actionable statements of
fact.” The appellate panel remanded to decide whether the defendant’s
publication was for the purpose of influencing consumers to buy the defendant’s
goods or services, as additionally required for “commercial advertising or
promotion” under the Lanham Act.
The panel majority did note that the allegations in the
complaint suggest that the advertising was “intended to help Usana’s goods, not
NutriSearch’s product,” and that in analyzing this element, it may be helpful
for this Court “to determine whether the defendants and Usana had an agency
relationship; for example, it might be the case that the defendants were acting
as agents of Usana and therefore had a vested interest in the goods that Usana
sold, which might be enough to satisfy this element.” Judge Collins, in his
dissent, suggested that the third element may be satisfied with allegations
suggesting that “Defendants ... acted on Usana’s behalf or at its direction by
secretly making, in exchange for compensation, specific changes requested by
Usana in its own or competitors’ product reviews in the Guide.” He concluded,
however, that the complaint falls short of alleging a true agency relationship
between Defendants and Usana:
That Defendants wrote obsequious
reviews in the hope that Usana would be pleased and buy more Guides or give
MacWilliam speaking engagements does not make them Usana’s agents in writing
those reviews. Nor does it establish that they acted on Usana’s behalf or
subject to its control in doing so.
Instead, the court agreed that Ariix’s position that,
“[w]hether assessed as a hidden financial arrangement, an agency relationship,
or a conspiracy, MacWilliam and NutriSearch had a vested interest in the sale
of Usana’s goods sufficient to attribute Usana’s goods to them.”
Ariix alleged that “Usana pays NutriSearch and MacWilliam
hundreds of thousands of dollars per year and provides substantial other
benefits—such as book sales to Usana representatives—which altogether account
for more than 90% of MacWilliam’s income.” [Okay, just for clarity: the next
few paragraphs are allegations from the complaint as recited by the court but I’m
not going to repeat “allegedly” 50 times.] As compensation, “Usana exercises
ultimate control over MacWilliam and NutriSearch’s product,” namely by having
Defendants “manipulate their ratings criteria to ensure Usana remains the
top-rated supplement company in the guide and actively sandbag Usana’s
competitors’ ratings and certifications” in order to “ratchet up sales for
Usana products.”
After formally ending his tenure on Usana’s advisory board
because his affiliation with Usana gave the appearance of bias, MacWilliam
approached Usana executives, explaining that he’d like to continue publishing
the Guide in exchange for Usana’s financial support: “I am going to create more
of a third-party appearance, but I’d like you to use me for speaking and
support me.” Usana agreed, but only if MacWilliam promised to “give [Usana] the
number-one rating.” MacWilliam accepted, “assuring Usana it would get the
number-one rating despite the guide’s claims of independence and objectivity.”
Defendants are “entirely dependent” on compensation from
Usana. For instance, “Usana directly pays [Defendants] hundreds of thousands of
dollars per year in fixed stipends, speaking fees, promotion fees, and travel
fees”; Usana “heavily promotes the guide to its sales representatives and
encourages them to purchase it”; Defendants “almost always tie[ ] the
publication of a new edition of the guide to the date of Usana’s annual
convention” so as to “continue to direct associates to the latest edition” and
ensure “robust sales” of the Guide; and at Usana’s speaking events, “MacWilliam
is the only purportedly ‘independent’ speaker who is allowed to promote and
sell his own products at such events.” Thus, “not only do[ ] [Defendants] rate
Usana highest because of the incentive to increase Usana’s sales and to keep
Usana happy, but also because, driven by the dictates of Usana, Usana’s
distributors are their largest market segment [for sales of the Guide].”
During times when Defendants “have failed to meet their
commitments to Usana”—i.e., awarding the top Gold Medal certification to
another company—“Usana punished [Defendants] for failing to deliver per their
agreement by cutting them off financially.” In 2008, an Usana executive
explained to MacWilliam that “we don’t want to stand up and say ‘we’re one of
the five best’ ”—Usana wants to be “number one.” After Usana responded
positively to MacWilliam’s question about whether it would help to be number
one in some way, NutriSearch allegedly “cured this breach of its secret
agreement with Usana by coming out with a new award called ‘Editor’s Choice’
and giving it to Usana.” NutriSearch understood that this would “entitle
MacWilliam to return to the Usana event circuit to speak and sell more books,
and thus earn more speaking fees and book royalties.” The next year, when
“another company was actually going to beat Usana,” MacWilliam explained the
situation to Usana, to which an Usana executive responded that “we pay
[Defendants] to make us number one.” MacWilliam “worked with Usana to adjust
his allegedly objective matrix so that Usana stayed on top.” Each year
thereafter, “Usana required MacWilliam to adjust his matrix” to ensure Usana
remained the top-rated company in the Guide.
The court found that the complaint plausibly alleged the
existence of a hidden financial agreement between defendants and Usana, under
which MacWilliam was paid “hundreds of thousands of dollars” under the guise of
speaking fees in exchange for awarding Usana’s products the Guide’s number-one
rating. All the while, the Guide was explicitly touted as an independent
publication.
This hidden financial agreement plausibly helped increase
the sale of both Usana’s products and sales of the Guide itself—to Usana’s
distributors. “ The parties here had a clear financial arrangement designed to
influence consumers to buy products from a third-party in which Defendants had
a direct financial stake.” (Citing, among others, Enigma Software Grp. USA, LLC
v. Bleeping Comput. LLC, 194 F. Supp. 3d 263, 294 (S.D.N.Y. 2016) (holding that
“by alleging that [Defendant] earns a commission on directed sales of [products
sold by Plaintiff’s competitor], the SAC adequately pleads that [Defendant] had
an economic incentive to engage in such promotion,” and that such commercial
speech was “made for the purpose of influencing consumers to buy products in
which [Defendant] has a financial stake”).)
In light of this financial agreement, an agency relationship
would exist, and the alleged misrepresentations were made within its scope.
“For an agency relationship to exist, an agent must have
authority to act on behalf of the principal and ‘[t]he person represented [must
have] a right to control the actions of the agent.’ ” Actual control is not
necessary; as long as there is an agreement that the principal has the right to
control the agent, an agency relationship exists.
The facts above plausibly alleged that Usana manifested
assent to defendants acting on its behalf. The precise details of the agreement
weren’t required at this stage in the litigation. Likewise, the complaint plausibly
alleged that defendants consented to act on Usana’s behalf and agreed to be
subject to its control. The allegations indicated that defendants voluntarily
yielded to Usana’s desires and complied with its directives in order to secure
Usana’s financial backing.
The Court need not find that the principal “actually
control[s] [the] agent as a prerequisite for establishing a[n] [agency] relationship,
rather the principal need only have ‘a right to control the actions of the
agent.’ ” The complaint plausibly alleged Usana’s editorial control and that “Usana
was clear in its directive that it be awarded the number-one award or else it
would withdraw its financial support…. That Usana went so far as to require
that Defendants change their entire ratings matrix to ensure Usana received the
number-one award is highly suggestive of Usana’s right to control not only
Defendants’ end product, but also the manner and methodology of Defendants’
performance.”
The Ninth Circuit recognizes four avenues through which an
agency relationship may be established: “actual authority, apparent authority,
ratification, and employment (respondeat superior).” Ariix claimed that the
first three all applied.
An agent has actual authority to take a certain action when
“the agent reasonably believes, in accordance with the principal’s
manifestations to the agent, that the principal wishes the agent so to act.” Actual
authority is limited to actions “specifically mentioned to be done in a written
or oral communication” or “consistent with” a principal’s “general statement of
what the agent is supposed to do.” Ratification, on the other hand, occurs when
the principal accepts the benefit of the agent’s act either with actual
knowledge of the material facts or with “knowledge of facts that would have led
a reasonable person to investigate further”—also known as “willful ignorance.”
The complaint plausibly alleged an agency relationship
created through actual authority. “[W]hile the precise details of their
agreement remain unknown, including whether Usana’s instructions were written
or communicated verbally to Defendants, such facts are appropriate for discovery
at a later stage in this litigation.”
The court declined to address whether Ariix’s allegations
separately established a plausible conspiracy.
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