Competitors Push Back With False Advertising Laws

Competition Law360
August 31, 2015

By Eric W. Buetzow
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In a time when the “disruptive” label is far from viewed as pejorative and, in fact, deemed essential for many new business models, existing market participants looking to fight back are turning to powerful federal and state false advertising laws to re-establish the rules of the game. Indeed, while much of the glamour in the world of modern commercial litigation among rivals is reserved for high-stakes intellectual property and/or antitrust battles, many are finding highly effective tools outside of those conventionally complex, technical (and expensive) legal frameworks.

The Lanham Act: Providing a Powerful Tool to Contemporary Competitors

As the Tenth Circuit Court of Appeals recently recognized in affirming judgment in favor of the competitor, false advertising causes of action are providing a robust weapon against overly aggressive and often youthful firms who “cross[] the line from harmless hyperbole into underhanded deception with material commercial consequences.”[1] And, as some young businesses are learning, this delineation often does not favor the defendant who has been seeking to push the envelope in the marketplace.

Perhaps most illustrative is the current case against Uber Technologies Inc. brought by an alliance of California taxi companies, pending in the Northern District of California. Rather than seeking regulatory or antitrust-based relief, the taxi cooperative’s action pushes back against Uber’s assertions in the marketplace with respect to customer safety — including that it is “setting the strictest safety standards possible,” that its safety is “already best in class,” “industry-leading,” and that its “three-step screening” background check procedure “adheres to a “comprehensive and new industry standard.”[2] Uber further claims to offer more safety protection compared to its competitors, because “[u]nlike the taxi industry, our background checking process and standards are consistent across the United States and often more rigorous than what is required to become a taxi driver.”[3]

While such statements at first blush may appear to embody the type of self-aggrandizement (or “puffery”) that most expect to see or hear in sales commerce, Judge Jon Tigar last month held that Uber had employed sufficiently specific and testable language to be actionable as false or misleading, thus denying Uber’s motion to dismiss. “A reasonable consumer reading these statements in the context of Uber’s advertising campaign could conclude that an Uber ride is objectively and measurably safer than a ride provided by a taxi or other competitor service, i.e., it is statistically most likely to keep riders from harm. References to the ‘strictest safety standards’ and explicit comparisons with competitor taxi services reinforce the impression that Uber's statements are grounded in fact.”[4]

Moreover, Uber could not immunize itself from liability by trying to portray certain statements as merely “aspirational” through the use of prefatory language. Thus, claims in advertising are not shielded from legal scrutiny simply because the defendant has inserted phrases such as “is committed to,” “works hard to” or “is doing everything we can to.” A court must still determine whether there is a likelihood of inducing consumer reliance or a belief that the claims are “based in fact.”[5]

Likewise, under this inquiry, even Uber’s receipt and billing statements indicating that the customer paid a “Safe Ride Fee” are naturally understood as being “made for the purpose of influencing consumers to use Uber’s services again,” and are thus actionable.[6] Judge Tigar thus found that federal law compels permitting the claims against Uber to proceed — a conclusion that likely means no escape for Uber (absent a negotiated settlement) before a jury trial provides the opportunity for public airing and evaluation of the company’s safety and marketing practices.

When it comes to such fact-finding, the Lanham Act provides a further boost to competitor claims in the form of presumptions. As the Tenth Circuit recently noted, when statements at issue are expressly “comparative” to the business of the competitor plaintiff (as also found in Uber, for example), and there is evidence that the defendant made the deceptive statements knowingly, injury to the plaintiff is presumed.[7] Indeed, in a recent Silicon Valley dispute between the mobile technology companies Good Technology Corp. and MobileIron Inc., a federal district court cited this presumption in denying MobileIron’s motion for summary judgement, brought on grounds of lack of any compensable injury.[8] Internal communications suggesting MobileIron had its own concerns over the nature of the marketing statements at the time they were made “[gave] rise to a presumption of injury,” and thus, “[a] jury is required to sort all this out” — even absent evidence of actual harm.[9]

In terms of the quantum of damages, such plaintiffs need not even demonstrate resulting lost sales or profits, as is often required in competitor-based antitrust and/or business tort actions. Rather, the Lanham Act provides for disgorgement in a burden-shifting framework, under which the competitor plaintiff is required only to prove the defendant’s gross profits during the relevant period; and the defendant must, in turn, prove which portion of those profits was not attributable to its unlawful conduct.[10]

In addition, although an award of attorney’s fees is statutorily reserved for “exceptional” cases,[11] the ability to obtain injunctive relief based on potential future injury also supplies an important weapon to businesses looking to protect their revenue streams. As stated by the court in MobileIron, “[a]n inability to show actual damages does not alone preclude a recovery under section 1117 [of the Lanham Act]. Even if Plaintiffs had failed to raise a triable issue as to causation and injury, their claim would still be viable to the extent it sought an injunction.”[12]

Will Competitor Claims Under California Law Remain Viable?

The current landscape is not a complete boon for competitor plaintiffs, however. As also reflected in the recent decisions in the Uber and MobileIron cases, an uncertain status currently dogs state law claims based on a rival’s conduct in advertising.

Although it is widely accepted that the standard for evaluating the defendant’s conduct under California’s Unfair Competition Law (UCL) and False Advertising Law (FAL) is “substantially congruent” to the federal Lanham Act, the viability of competitor actions under California law has been clouded by conflicting decisions on issues of reliance and injury following Proposition 64. Expressly acknowledging the split of opinions among district courts, Judge Tigar, for example, found the taxi co-op’s separate California law claims against Uber to be defective because, as competitors, they do not “allege their own reliance on the misrepresentations,” and thus lack standing.[13] In contrast to federal law, the reliance of third-party consumers was deemed insufficient.[14]

Other courts in recent months, though, have refused to so mechanically apply the requirements of consumer actions to the claims of competitors and, in essence, eliminate competitor claims from California law. “Requiring a competitor to allege reliance,” wrote one federal district court in April, “would effectively read unfair competition claims out of the statute. That would be contrary to the legislature’s express intent.”[15] The court also found no support for this position in Proposition 64 itself, which declares that its purpose is to continue to protect both “businesses and consumers” alike from unfair business practices.[16] Thus, some courts have found sufficient the typical allegation that “consumers were diverted away” as a result of the offending advertising, and the rival plaintiff thus “suffered economic injury in the form of lost customers and sales revenue.”[17]

Still other district courts have permitted competitors to plead around this issue by alleging that they did, in fact, rely on the defendant’s advertising representations — although not in the same manner that consumers do in terms of influencing purchasing decisions. Rather, such competitor reliance can take the form the financial costs incurred in responding to, or correcting the deceptive conduct in the marketplace. Thus, for example, lowering pricing in response to the fraudulent marketing “in order to compete,” or having to expend funds to “debunk” or “combat” the deceptive statements with increased or counter marketing campaigns, have been held to be sufficient economic injury to establish standing under the UCL and FAL.[18]

But, as has been consistently acknowledged, this is an area that “[n]o California Court has addressed,” and resolution by appellate courts and perhaps the California Supreme Court will ultimately be needed.[19] Other potential impending issues to be clarified include the extent to which competitor plaintiffs can successfully recover under the purely “restitutionary” monetary remedy authorized by the UCL and FAL, and facts under which such plaintiffs have a sufficiently “vested interest” in the particular form of lost funds claimed.[20]

For those looking to stiff-arm rivals unfairly gaining advantage in the current climate, time will tell whether California law can be a certain and formidable sidekick in enforcing the rules of engagement. In the meantime, recent decisions reveal that the Lanham Act is proving to be a potent weapon in clashes between modern competitors.

—By Eric W. Buetzow, Zelle Hofmann Voelbel & Mason LLP

Eric Buetzow is a senior associate in Zelle Hofmann's San Francisco office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] General Steel Domestic Sales, LLC v. Chumley, -- Fed. Appx.--, No. 14-1119, 2015 WL 4591924 at * 1 (10th Cir. July 31, 2015)

[2] L.A. Taxi Coop., Inc. v. Uber Technologies, Inc., -- F. Supp. 3d --, No. 15-CV-01257-JST, 2015 WL 4397706 at *5 (N.D. Cal. July 17, 2015).

[3] Id.

[4] Id.

[5] Id. at *6.

[6] Id. at *8.

[7] General Steel, 2015 WL 4591924 at * 4.

[8] Good Technology Corporation v. MobileIron, Inc., No 5:12-cv-05826, 2015 WL 3547944, at *3 (N.D. Cal. June 5, 2015).

[9] Id. at *3.

[10] See, e.g., General Steel, 2015 WL 4591924 at * 4-5.

[11] 15 U.S.C. § 1117(a)(3)

[12] 2015 WL 3547944 at *2 (citations omitted).

[13] Id. at *9.

[14] Last year, the U.S. Supreme Court reaffirmed that a plaintiff under the Lanham Act “can be directly injured by a misrepresentation even where a third party, and not the plaintiff, ... relied on it.” Lexmark International, Inc. v. Static Control Components, Inc., 134 S.Ct. 1377, 1390 (2014) (internal quotes and citations omitted). Thus, actionable injury “occurs when deception of consumers causes them to withhold trade from the plaintiff.” Id.

[15] Underground Solutions, Inc. v. Palermo, No. 13 C 8407, 2015 WL 1594189, at *3 (N.D. Ill. April 7, 2015).

[16] Id.

[17] Goldline, LLC v. Regal Assets, LLC, No. CV 14-03680, 2015 WL 1809301, at *3 (C.D. Cal April 21, 2015); Luxul Technology Inc. v. Nectarlux, LLC, -- F. Supp. 3d --, No. 14-CV-03656, 2015 WL 352048, at *9 (N.D. Cal. Jan. 26, 2015).

[18] Heartland Payment Systems, Inc. v. Mercury Payment Systems, LLC, No. C 14-0437, 2015 WL 3377662, at *6-7 (Feb. 24, 2015); Underground Solutions, 2015 WL 1594189 at *3.

[19] Heartland, 2015 WL 3377662, at *7; Uber, 2015 WL 4397706 at *9.

[20] See, e.g., Uber, 2015 WL 4397706 at *10.