Bank has Lanham Act standing to assert disparagement claim against former customer (itself a service provider)

SouthState Bank, N.A. v. Qoins Technologies, Inc., --- F.Supp.3d ----, 2024 WL 911075, No. 1:22-CV-5020-MHC (N.D. Ga. Mar. 1, 2024)

“Qoins is a financial technology company that collects funds from its customers and disburses payments to designated creditors in order to help its customers pay off their debts.” Customers inform Qoins of their outstanding debts that they wish to pay and transfer money to Qoins “on a regular basis to satisfy such debts over time.” In 2019, Qoins entered into a Master Disbursement Services Agreement with Atlantic Capital Bank to establish a banking relationship, which included creating bank accounts that contained customer funds. SouthState is ACB’s successor in interest. Under the agreement, Qoins was the bank’s customer (and Qoins customers weren’t). It set up custodial accounts for holding customer funds—not to be used for operations; an operating account; and a reserve account. Qoins customers would make deposits to custodial accounts; Qoins would make payments to creditors and then reconcile deposits and payments. Qoins agreed to ensure that custodial accounts had sufficient funds to carry out the payments and to cover any fees related to the transactions, and to keep records of its transactions and provide accurate information to the bank.

In June 2022, “SouthState documented the mutual agreement” reached by Qoins and SouthState that the banking relationship between them would terminate, effective July 20, 2022. SouthState was unable to complete the transition process to a new bank partner (Evolve) because “ACH requests to SouthState for Qoins’s Customers’ funds [ ] exceeded the amounts in Qoins’s accounts with SouthState.” Qoins initiated an ACH request in the amount of $150,000 from the Custodial Accounts to Evolve; however, because the Custodial Accounts were overdrawn, SouthState denied the request. SouthState allegedly eventually had to charge off the negative balances of Qoins’s accounts in an amount in excess of $33,000.”

SouthState alleged that the custodial accounts were improperly “used in multiple instances by Qoins to fund Qoins’s other accounts at SouthState”; custodial accounts were frequently funded by the operating account; Qoins’ earnings weren’t sufficient to maintain operating capital; and funds from the different accounts were commingled.

In early December 2022, Qoins published an announcement on its website informing customers that it “recently switched to a new bank partner” in order to “provide additional services,” but “[u]nfortunately, however, some of our customers have not been able to migrate their accounts due to ongoing issues with SouthState Bank.”

The announcement included a question, “Why can’t I access my money?” and provided the following answer:

If you never attempted to migrate, or if you received an error message during the migration process (including a message that says your account is “on hold”), your funds are still at SouthState Bank. SouthState Bank is unable to release your funds, so we have been unable to migrate your account or refund your money. We continue to work with SouthState Bank to resolve this matter expeditiously. While we have seen some customers reach out to SouthState Bank directly, customers have had no luck. Some customers have also reached out to our new bank partner, but they are not in a position to help.

Qoins’s announcement also provided a link to the FDIC’s Customer Assistance Form and informed any aggrieved customers that a Qoins representative would assist in helping the customer file a complaint against SouthState with the FDIC. Qoins also referred to SouthState in its responses to customer reviews, saying it was responsible for withholding funds. This was all allegedly false and misleading (given that Qoins customers were not SouthState customers, they weren’t FDIC insured). “Numerous” Qoins customers allegedly filed complaints against SouthState “with relevant federal agencies,” even though SouthState was not responsible to Qoins’s customers and SouthState did not possess any records of the customers’ interactions with Qoins.

The court mostly denied Qoins’ motion to dismiss the resulting claims, including breach of contract and libel.

False advertising/false association: SouthState lacked standing to bring a false association claim against Qoins because there were no allegations of passing off, and in fact Qoins allegedly identified SouthState as a banking partner. Thus, SouthState didn’t fall within the zone of interests for false association. [I think what the court meant was that Lexmark’s zone of interests/proximate cause test applies to §43(a)(1)(A) claims, as I think it would have to, but that the zone of interests/proximate cause analysis differs as between false association and false advertising.]

But SouthState did have standing for a false advertising claim. “Because SouthState is alleging reputational injuries, no direct competition is required and SouthState has pleaded with sufficiency that it has standing to sue because the alleged false representations about SouthState could impact its business reputation.”

Were the Qoins statements made in commercial advertising or promotion? Qoins argued that they were answers to customer questions and not intended to influence customers away from SouthState or targeted at SouthState customers. The Eleventh Circuit has adopted Gordon & Breach’s test (probably as modified by Lexmark).

Qoins’s argument that the statements were not made to the purchasing public is unavailing because SouthState has alleged that Qoins made the representations on its website and in response to customer reviews on online application stores. Importantly, these representations are alleged to be public-facing and widely accessible. “[W]hen statements are so broadly disseminated, they are much more likely to constitute commercial advertising.”

Drawing all inferences in SouthState’s favor, “Qoins’s statements were made to pacify customer concerns and to influence customers to start or continue their relationship with Qoins. A reasonable inference also can be made that Qoins’s statements were intended to influence customers to purchase its service, because such issues were not attributable to the new banking partner.” That sufficed.

Interestingly, the court also found that SouthState sufficiently alleged materiality in two independent ways: (1) allegedly false representations that SouthState continued to hold customers’ funds concerned “the essential characteristic of its business as a bank” and (2) because consumers allegedly filed complaints against SouthState based on Qoin’s representations, it was plausible that those representations affected consumer decisions about SouthState.