over dissent, 6th Circuit holds that large player in fragmented market could show proximate cause under Lexmark

Campfield v. Safelite Gp., Inc., --- F.4th ----, 2024 WL 164976, Nos. 22-3204/3225 (6th Cir. Jan. 16, 2024)

Over a dissent in relevant part, the court revived plaintiff Ultra Bond’s Lanham Act claim relating to vehicle glass repair and replacement (VGRR). Safelite provides windshield repair and replacement services, while Ultra Bond supplies proprietary bonding resin to repair windshield cracks. Ultra Bond alleged that Safelite violated the Lanham Act by falsely advertising that windshield cracks longer than six inches could not be safely repaired and instead required replacement of the entire windshield. Safelite counterclaimed that Ultra Bond stole trade secrets. The district court granted summary judgment against all claims, finding no valid causes of action. I won’t discuss the trade secret issues, though the court of appeals revived some as not time-barred.

Safelite is the VGRR market leader: in 2016, it had 35.4% of the market; its closest competitor had just 3%. Safelite won’t repair windshield cracks that are longer than six inches (“long cracks”). “Windshield replacement is where Safelite makes its money, while its repair business operates at break-even or at a loss. Ultra Bond makes patented products for vehicle glass repairs, specifically for long cracks, and performs those repairs; it accounts for over 50% of national long-crack repair product sales.

Safelite promoted its policy of repairing only cracks six inches or shorter under a marketing campaign of “the dollar-bill rule”—if the crack is shorter than the length of a dollar bill (approximately six inches), Safelite can repair it. In 2007, the American National Standards Institute (ANSI), in a process that included both Safelite and Ultra Bond, conducted a safety study and concluded that cracks up to fourteen inches could be safely repaired without requiring windshield replacement. It set that as the best practice nationally, and Safelite voted to support that standard, but continued to market the “dollar-bill rule” as the safety standard for windshield repairs and continued to tell consumers that cracks longer than six inches require windshield replacement.

The vast majority of Safelite’s sales come from insurance reimbursement. “And while insurance companies ultimately set the standards for what kinds of damage it will cover, Safelite knows that its dominant market position meant that it can set the standard for insurance companies.” It told its insurance company clients that crack repair could not be safely performed on cracks longer than six inches. “And although it told insurance companies otherwise, Safelite never conducted its own technical study on the safety of long crack repairs to support its assertions.” (Monopoly power has many defects; here the anti-innovation face of monopoly also appears as misleading advertising.) “Safelite made these statements to insurance companies knowing that its insurance clients’ policyholders would choose long crack repair if it were covered,” and it admitted that “its insistence on setting as strict a crack repair standard as possible was tied to protecting its higher-margin windshield replacement business.”

The district court found that Safelite’s statements to insurers and directly to customers counted as commercial advertising or promotion, but that statements made by Safelite through ghostwritten insurance brochures and to customers purely in its capacity as a third-party administrator for insurers did not. It found that there was no genuine issue of material fact on whether the false advertising harmed Ultra Bond, and that laches partly barred the claims because Ultra Bond delayed nearly two decades before suing.

Faced with this story, the court of appeals found that Ultra Bond’s Lanham Act claim should have survived Safelite’s motion for summary judgment. Laches “bars only recovery of pre-filing damages; it does not prevent Ultra Bond from obtaining injunctive relief or post-filing damages.”

Commercial advertising or promotion: The court of appeals upheld the ruling that Safelite’s statements in ghostwritten brochures and statements in its capacity as a third-party administrator for insurance companies weren’t commercial advertising or promotion. They didn’t have any indication that they were made with “the purpose of influencing customers to buy the defendant’s goods and services.” Instead, it was the statements to insurance companies and agents that led insurance companies to set their standards, which were then set forth in the brochures and statements made by third-party administrators. “Thus, Safelite, when functioning as a [third-party administrator] or providing ghostwritten informational brochures to insurance companies, was simply acting on the success of its allegedly misleading or false earlier statements.”

Causation: Under Lexmark, proximate cause can be alleged by “a supplier of a company’s direct competitor where the decreased demand caused by false advertising directly harms the supplier.” Proximate cause doesn’t require any one specific fact pattern or theory. “In this case, the structure of the market suggests that there is unlikely to be a more directly injured commercial victim than Ultra Bond. (Safelite’s direct competitors are VGRR businesses, often small shops, that provide both crack repair and windshield replacement, so false statements that favor one service over the other would not necessarily harm them.)”

Consumer affidavits and expert evidence also supported the causal relationship between Safelite’s statements and decreased demand for Ultra Bond products:

First, nine commercial customers stated that they have experience with customers hearing from Safelite that long crack repair is not safe, educating those individuals that such repair is safe, and having those individuals choose long crack repair, which these customers perform using Ultra Bond products. Second, when misleading ads regarding crack repair were ordered to be removed from the marketplace in New Zealand, Ultra Bond’s direct sales and distribution sales to the country doubled. Third, Ultra Bond’s second expert … conducted a consumer survey and estimated that 24.5% to 30.6% of respondents who replaced windshields would have had them repaired but-for Safelite’s allegedly false statements.

Safelite argued that the declarations from commercial customers were conclusory and repeated claims about demand for Ultra Bond with only slight variations across the declarations: “[I]f customer demand for long crack repair were to increase as a result of customers being informed that long crack repairs can be safely done ... up to 14 inches, I would most certainly have to compete for this increased customer demand by buying more ... Ultra Bond, Inc. products[.]” But this statement wasn’t presented alone: the VGRR shop owners “explain how they have consistently met customers who learned from Safelite that their long cracks could not be repaired. Some shop owners have successfully reeducated customers and completed a long-crack repair using Ultra Bond products, but others have detailed how they have lost customers who called their insurance, were directed to Safelite as the TPA, and were told that long crack repair is unsafe or that the windshield must be replaced.”

This created a genuine issue of material fact on injury causation. “While Lexmark itself involved an alleged 1:1 ratio between sales gained by the defendant and sales lost by the plaintiff, it does not hold that § 1125(a) requires such a ratio in order to establish causation.” Plus, the New Zealand evidence was “additional evidence” that would allow a jury to find causation. Because reasonable minds may differ “as to the foreseeability of a particular risk or the character of an intervening cause, the question is one for submission to the jury under proper instructions as to proximate cause.”

The court also upheld the dismissal of Safelite’s unfair competition claim based on statements that, e.g., insurance companies “dupe[ ]” customers “into paying $350 for a $20 windshield,” and that Safelite’s repair tool was intentionally imperfect “as there is no way they could not know when it appears to not work on two out of three repairs.” But Safelite didn’t show falsity, or sales diversion.

Judge Bush dissented only on Lanham Act causation and would have found no proximate cause. The dissent said that proximate cause usually only allows the most direct victim to sue, and that Lexmark created a “narrow” exception where there was a one-to-one decrease in sales for every increase for the false advertiser. (Lexmark reasoned that the victims of false advertising are always harmed by third parties withholding their business because of the false advertising, and thus proximate cause encompasses their injuries—which seems exactly the scenario here.)

Judge Bush wasn’t willing to attribute customer beliefs about the safety of long crack repair to Safelite’s advertising, making the declarations speculative. It’s always possible to linguistically extend a causal chain, and Judge Bush did:

One must assume first that there are customers with long cracks in their windshields who would seek to get them repaired rather than replaced but decided not to because of Safelite’s statements; second, that those customers would choose one of Ultra Bond’s commercial customers for repair services; and third, that this untapped customer base is so substantial that commercial customers, who ostensibly use Ultra Bond for repairs under six inches, would have to buy additional product from Ultra Bond. And, for the injury caused by Safelite’s statements to insurers, Ultra Bond’s theory additionally requires one to accept without proof that, absent Safelite’s statements, the insurers would opt to change their policies to cover repair for cracks longer than six inches for their customers. This extended inferential chain is a far cry from the “automatic” injury at issue in Lexmark.

Also, most of the declarants state that long crack repair is only a small part of their business, so the causal chain also requires that Ultra Bond’s direct customers could and would have absorbed their customers’ added demand for long crack repairs.

Ultra Bond’s own expert explained that the crack repair industry is “highly fragmented,” which “makes assessing the particular impact of Safelite’s actions to Ultra Bond difficult,” especially since Ultra Bond’s products can be used to repair both long cracks and cracks under six inches. The New Zealand evidence was only “a bare assertion from Ultra Bond’s owner to [an] expert and, more importantly, does not translate into a triable issue that Safelite’s advertisements in the United States ‘more or less automatically’ cause an injury to Ultra Bond as in Lexmark.” (Seems to me that the empirical evidence takes the place of logic in showing injury, and that logic is not the only or indeed, given judicial fallibility, the best way of showing injury.) Thus, Ultra Bond wasn’t a “direct victim.”

The real weakness of the dissent, it seems to me, is the “if not them, then who?” question. Maybe insurance companies, but given standard principal/agent problems, they don’t necessarily have the right incentives either. Ultra Bond seems like a good candidate!