When Is Advertising False Advertising?

Wednesday, October 23, 2013 - 11:08

The Editor interviews Lawrence I. Weinstein, Co-Head of Proskauer’s False Advertising and Trademark Group.

Editor: As co-head of Proskauer’s False Advertising & Trademark Group, you have had a distinguished career as a trial lawyer and counselor. Please explain the purpose and coverage of the Lanham Act.

Weinstein: The Lanham Act actually has two different components. Most people know it as the federal trademark statute, and it provides a cause of action for trademark and trade dress infringement cases and unfair competition cases related to trademark and trade dress infringement. The other component of the Lanham Act, which has also been on the books for a long time, is the federal false advertising statute. My group litigates both false advertising and trademark cases under the Lanham Act, but I understand that the purpose of this interview is to discuss the Lanham Act’s false advertising side.

One of the things that is interesting about the federal false advertising statute is what classes of plaintiffs have standing to sue under that statute. One aspect of standing is uniform in all of the federal circuit courts, and that is that consumers who purchase goods do not have standing to invoke the Lanham Act if they believe that a manufacturer’s advertising misled them into buying the good. Instead, the Lanham Act is available only to entities that have suffered a business injury as a result of alleged false advertising. So if you are a consumer who has purchased an item, and you claim to have been harmed by false advertising associated with your purchase, you cannot sue under the Lanham Act, although there are state law remedies that are available to consumers under those circumstances.

Yet, while it is clear that the Lanham Act false advertising provisions do not confer standing on consumers, it is less clear as to when business entities have standing to sue under the Lanham Act.  At this moment (though perhaps not for long), the scope of Lanham Act standing to sue differs from circuit to circuit. In this current U.S. Supreme Court term we all hope and expect that the issue of who has standing to sue under the Lanham Act will be clarified, because the Court has accepted a petition for certiorari from a decision of the Sixth Circuit in order to resolve a conflict among the circuits on the issue of standing to sue. That issue is very much at the forefront of what is going on in false advertising law.

There are at least three different perspectives among the circuits on who has standing to sue. The narrowest and most conservative application of the Lanham Act false advertising standard is the one promulgated by the Ninth, Seventh and Tenth Circuits. In those circuits, standing to bring a Lanham Act false advertising suit is limited to direct competitors of the advertiser.

A second and broader standard, which has long been adopted by the Second Circuit, as well as the Sixth Circuit, is a test of business injury – “the reasonable interest test.” If the plaintiff can establish that it has suffered a business injury, even if it is not a direct competitor, then the plaintiff has standing to sue. What does a business injury mean? It means it has to be an injury that is likely to occur to the business of the plaintiff as opposed to an injury to a consumer. An example of a business injury to an entity other than a direct competitor of the advertiser is an injury caused by an entity that is contemplating going into direct competition with the advertiser but is not yet in direct competition. Another example is where the relationship between the plaintiff and the defendant is not a direct competitive relationship, but instead is once removed, for example, where a plaintiff is a customer or supplier to a direct competitor of the advertiser, but nonetheless can establish the likelihood of injury resulting from the false advertisement. Category number three, which exists in the Third, Fifth, and Eleventh Circuits, is a multi-factorial test, which is more complicated to apply than either the business injury or the direct competitor test. Putting aside the statutory appropriateness of this test, it is very difficult for lawyers counseling a prospective plaintiff to predict whether standing exists in jurisdictions employing the multi-factorial test. The direct competitor test especially provides for greater certainty in advising clients on whether they have standing to sue.  

Editor: As I recall there were multiple categories that fell under that latter test. Was a plaintiff required to meet all categories to prove his case?

Weinstein: The courts in these jurisdictions are instructed to at least consider, if not apply, all of the factors. It is a balancing test and not a strict numerical one because the courts are weighing the importance of the factors on a case-by-case basis. It creates a certain amount of guesswork for advising counsel. I suspect that most practitioners and clients would prefer that the Court, whichever way it comes down, choose a test that allows for a greater degree of predictability than the multi-factorial test.

Editor: Is the case of Lexmark International, Inc. v. Static Control Component, Inc. likely to resolve the issue of standing once the Supreme Court rules on this case?

Weinstein: One would hope. Oral argument will take place in December. Therefore, we should expect to get a decision during this Supreme Court term, which ends in June 2014. The issue on which the Court granted certiorari related to which standard for standing governs under the Lanham Act. It is hard to predict Supreme Court decisions, but I think the Court is likely to rule on the merits, either adopting one of the three standards currently used or perhaps modifying one of the standards. The bottom line is there will be some clarity on the issue following the Supreme Court’s decision, although how much clarity there will be must await the Court’s opinion. There is and always will be much that is unpredictable under the Lanham Act, because resolution of the substantive issues of false advertising are necessarily fact-driven, case by case. However, standing ought not to be uncertain, so I think most practitioners and most companies hope the decision will provide us with some clarity.

Editor: Please describe the recent case involving Hofstra University’s law students and alumni, which Proskauer lawyers successfully defended.

Weinstein: A couple of years ago a group of lawyers filed a relatively large number of lawsuits against law schools throughout the U.S.  These lawsuits, which were filed on behalf of a putative class of recent graduates from and current students attending the defendant law schools, alleged that the schools had committed fraud and engaged in unfair competition as a result of supposed falsehoods or omissions in their website disclosures on two main subjects: one, the percentage of recent graduates who had obtained employment within nine months of graduation, and two, the average starting salary of recent graduates.  Hofstra was among the schools that were sued. All or virtually all of the law schools that were sued moved to dismiss the complaints for failure to state a claim for relief. Among the law schools’ defenses were that the complaints did not allege any affirmatively false statements, and that law students and young lawyers could not reasonably assume either that (i) when the law schools referred to the percentage of graduates employed nine months after graduation, the schools meant the percentage employed in jobs for which a law degree was required or preferred, or (ii) that all graduates had replied to the law schools’ employment and compensation surveys, when the law schools’ disclosures represented otherwise.  Numerous other defenses were raised as well. 

The class action suits brought against the law schools located in New York have not fared at all well from the plaintiffs’s standpoint.  I believe none of those suits survived a motion to dismiss.  Hofstra, which we represented, was the most recent of the schools that successfully obtained a dismissal of the complaint.

Editor: Is the customary sanction in Lanham Act false advertising cases simply an injunctive order to cease and desist or are monetary damages also awarded?

Weinstein: The answer is both. It is certainly the case that most Lanham Act cases in which the plaintiff has prevailed result in an injunction orders without a monetary component. That is partly because a reasonably significant percentage of Lanham Act cases settle after a motion for preliminary injunction or temporary restraining order is granted. Once cases go to trial, it is still often the case that the only award the court issues in favor of a winning plaintiff is injunctive relief. But it is also the case, often enough these days, that when the plaintiff wins, he or she is awarded by the court or a jury one or more forms of monetary relief. Under the Lanham Act, those forms can include an award of the plaintiff’s lost profits resulting from the false advertising or an award of the defendant’s gained profits resulting from the false advertising. Sometimes, although very rarely, it can be a combination of those two things because such an award is not precluded under the statute. On top of all of that, although there are no punitive damages available under the Lanham Act, the statute provides for an award of up to three times actual damages, plus attorneys’ fees, in what is referred to as an “exceptional case.”

Editor: What determines the choice of forum among the NAD (National Advertising Division of the Better Business Bureau), NARD (National Advertising Review Board) and the federal district and appellate courts?

Weinstein: The short answer is the plaintiff.  A plaintiff can choose to initiate a false advertising case in federal court or it can choose to initiate a challenge at the NAD, which is the National Advertising Division of the Counsel of Better Business Bureaus. There are various factors that inform that choice. One of those factors is cost because an NAD case can be as much as 10 or more times less expensive than a federal court case. The cost savings at NAD can be really quite exceptional in comparison to federal court cases. Among the reasons for this is that NAD does not have discovery, it does not have trials, it does not have contentious oral arguments, and it has little to no motion practice. Those are the things that make federal court litigation so expensive. On the other hand, the money savings that you get in NAD can come with a price in that NAD is a self-regulatory body; it cannot award monetary relief of any sort and its decisions are really advisory – it cannot issue injunctive relief, it cannot hold an advertiser in contempt, it cannot force an advertiser to comply with its decision. Nonetheless, NAD’s decisions do have teeth in that if an advertiser does not comply with a decision, NAD typically will report the advertiser’s non-compliance to the appropriate regulatory body, usually the Federal Trade Commission and sometimes the FDA. That is not something most companies want, to say the least, so typically it is the practice of an advertiser who loses a proceeding at NAD to comply with the decision. In terms of NARB and the federal appellate courts, that really just follows the original choice of the forum. If you lose a Lanham Act case, your only appellate option is to go to federal appellate court. If you lose an NAD case, your practical option is to go to NARB, which is the NAD’s appellate arm. But of course, because NAD cases are not binding, it sometimes happens that even after an NAD decision comes down, there is a federal case brought by one party or another under the Lanham Act.

Editor: What counseling does the firm provide clients in situations where a product infringement or false labeling by a competitor is at issue?

Weinstein: Speaking generally, the assessment and the advice really concern analyzing along with the client the competitive advertising or labeling and assessing what kind of case the client would have in terms of getting that advertising stopped. By case, I mean the various options at a client’s disposal – it can bring a lawsuit, it can initiate an NAD proceeding, it can challenge the advertising at one of the national television networks, assuming the matter concerns television commercials broadcast on a major network, and it can ask that the FTC challenge the advertising in question or it can seek help from another appropriate federal regulatory agency, most typically the FDA. Advising a client as to which of these approaches is best can be challenging, because these bodies apply different standards in assessing advertising. I think clients are benefited by seeking guidance from law firms like ours that have extensive experience and expertise in the area of false advertising because the issues underlying the advice being sought are often very complicated and nuanced. I and my co-chair  Brendan O’Rourke probably have spent collectively about 50 years giving this kind of advice on a daily basis.

Please email the interviewee at lweinstein@proskauer.com with questions about this interview.