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September 9, 2014 in 75-1.1 Exemptions by

A New Data Point on False Advertising, Causation, and Section 75-1.1

One of our recent posts asked how causation works when a plaintiff pursues a false-advertising claim under N.C. Gen. Stat. § 75-1.1. A new decision from the U.S. District Court for the Middle District of North Carolina gives a partial answer to that question.

The SMD verdict raises the causation issue

Earlier this year, in another false-advertising case, SMD Software, Inc. v. EMove, Inc., a plaintiff won a 1.7-million-dollar verdict based on section 75-1.1 alone. The jury instructions in that case did not specify what level of customer response to the false advertising the plaintiff had to show to prevail on its 75-1.1 claim.

The fact pattern in SMD raised this causation question, but the district court did not answer it. Answers might have come in post-trial motions or an appeal. These hopes were dashed, however, when the parties settled the SMD case. Like diners at a Thomas Keller restaurant, we were left wanting one more bite.

Design Resources provides more of an answer

The next course, as it turns out, arrived quickly: Just three months later, another federal court in North Carolina—the Middle District—analyzed causation in another case of alleged false advertising.

Like many cases in the Middle District, Design Resources, Inc. v. Leather Industries of America involved the furniture industry. Design Resources makes NextLeather®, a furniture covering that contains some leather fibers. The defendants were a trade association, the trade association’s director, and Ashley Furniture (the largest manufacturer of furniture in the world, according to Ashley’s website).

Design Resources claimed that the trade association’s director made false and misleading statements in interviews in trade publications. Regarding Ashley, Design Resources claimed that Ashley ran advertisements that denigrated products like NextLeather.

The interview statements and the Ashley ads implied that products like NextLeather are being deceptively passed off as leather. By suing over these statements, Design Resources was saying, in essence, “you acted deceptively by accusing me of acting deceptively.”

Both sides moved for summary judgment. In an extensive opinion, Judge Osteen denied the motion by Design Resources and granted the defendants’ motions.

The court’s opinion covers many claims other than section 75-1.1. In particular, it has an extensive discussion of Design Resources’ claim under section 43(a) of the Lanham Act. Professor Rebecca Tushnet has ably dissected the Lanham Act aspects of the case on her blog.

Here, we’ll focus on the 75-1.1 claim. That claim failed for at least two reasons.

First, the court treated its reasons for rejecting the Lanham Act claim as reasons for rejecting the 75-1.1 claim as well. Citing SMD, the court held that a Lanham Act violation is not “a necessary prerequisite to finding a violation” of section 75-1.1. Nonetheless, the court held, on the facts of Design Resources, that the lack of a false or misleading statement that violated the Lanham Act also showed a lack of deceptive conduct that could violate section 75-1.1.

Second, the court held that Design Resources had not forecast enough evidence that Ashley’s ads proximately caused any injury. The court emphasized the lack of evidence that any customer had made buying decisions based on Ashley’s allegedly deceptive ads.

The court’s reasoning on the affidavit of Design Resources’ president is especially interesting. The president stated that before Ashley’s ad campaign, Design Resources “had more than 25 sample orders from major furniture manufacturers.” After the ads ran, however, “few” of these manufacturers reportedly followed up with actual orders. Design Resources argued that this lack of follow-up orders created a genuine factual issue on whether the ad campaign affected customers’ buying decisions.

Judge Osteen disagreed. He stressed that Design Resources had not put on “any evidence from any of these manufacturers as to their reasons for failing to purchase NextLeather®.” He noted that furniture manufacturers’ decisions not to buy NextLeather could have reflected “incalculable business reasons for not mass producing a line of products based on a simple sample order.” A proper forecast of evidence on causation, he wrote, would consist of evidence that a prospective customer “actually read the advertisements” or “based buying decisions on the advertisements.”

Causation is required; now, what does it require?

As SMD and Design Resources show, courts are still deciding what counts as evidence of causation in false-advertising cases under section 75-1.1. SMD acknowledges a causation requirement, but does not say exactly how the requirement can be satisfied. Design Resources, in contrast, seems to require direct evidence that a customer (a) read an allegedly false advertisement and (b) based a buying decision on that advertisement.

Future cases might raise questions that neither of these decisions answers:

  • For example, what if a buyer testified that he premised his buying decision on many factors, including—but not limited to—an allegedly false advertisement? Would that be enough?
  • Can causation in the false-advertising context ever be established by circumstantial evidence, such as a measurable drop in sales after a sustained period of higher sales? Would the claimant be required to explain away alternative reasons for the sales decline?

Questions on the sufficiency of circumstantial evidence are especially important at the summary-judgment stage, when courts must view evidence in the light most favorable to a non-movant.

In the end, a business that seeks to pursue a 75-1.1 claim based on false advertising would be wise, from the outset of discovery (if not in a pre-suit investigation), to seek out evidence that market participants actually based their buying decisions on the allegedly false advertisements. Design Resources shows the courts’ limited appetite for allowing false-advertising claims based on an unexplained lack of sales—even if that sales shortfall occurs shortly after a false advertisement.

Joe Hammond contributed to this post.

Author: Stephen Feldman