False Advertising, Section 75-1.1, and A Seven-Figure Verdict

by Ellis & Winters LLP
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[co-author: Lauren Travers]

In a recent federal case, section 75-1.1 made the difference between the plaintiff recovering nothing and recovering almost two million dollars. This outcome underscores two key features of section 75-1.1:

First, the statute allows businesses, as well as consumers, to sue.

Second, parties can win under section 75-1.1 even when they cannot win on any other claim.

Here’s the jury verdict in SMD Software, Inc. v. EMove, Inc., a case in the U.S. District Court for the Eastern District of North Carolina. SMD Software claimed that a competing software company engaged in false comparative advertising. SMD’s federal claim for false advertising under section 43(a) of the Lanham Act failed. Its parallel claim under section 75-1.1, however, yielded a verdict of 1.7 million dollars.

The SMD case offers several lessons:

  • Section 75-1.1 can create liability for false or misleading advertisements even when the Lanham Act would not. Thus, in any false-advertising case with a foothold in North Carolina, the plaintiff should consider a 75-1.1 claim.
  • Defendants in a case like SMD should try to import the elements of a false-advertising claim under the Lanham Act into the analysis of section 75-1.1.
  • To maximize their chance of recovering treble damages, false-advertising plaintiffs should distinguish harm caused by North-Carolina-based conduct from harm caused by out-of-state conduct.

Background

The SMD case involved competing makers of software for moving and storage facilities.  At trade shows, the defendants handed out brochures with allegedly false comparisons between the competing software programs.

SMD sued, alleging false advertising under section 43(a) of the Lanham Act, tortious product disparagement and defamation, and claims under section 75-1.1. The 75-1.1 claims had both a deception flavor and an “unfair methods of competition” flavor.

The Verdict

Three claims—section 43(a) of the Lanham Act, tortious disparagement, and section 75-1.1—went to the jury. SMD lost on both the Lanham Act claim and the disparagement claim.

On the Lanham Act claim, SMD could have won on either of two paths. First, it could have shown that the defendants’ statements were literally false or made with an intent to deceive consumers. Second, SMD could have shown that the defendants’ statements were merely misleading. For misleading statements, though, SMD would have to go on to show that the misleading statements actually deceived a substantial segment of consumers.

The jury rejected the Lanham Act claim on both of these paths. On the first path, the jury did not find that the defendants’ statements were literally false or made with an intent to deceive.  On the second path, the jury did find that the statements were misleading, but it did not find that a substantial segment of consumers were actually deceived. Thus, SMD’s Lanham Act claim failed.

On the tortious-disparagement claim, the jury found that the defendants had not made the advertising statements with malice, as this theory requires.

SMD, however, had one more weapon in its arsenal: the 75-1.1 claim. Although this claim involved the same conduct that the Lanham Act claim involved, SMD appeared to pursue the 75-1.1 claim as a freestanding claim. None of the publicly available papers suggests that SMD was pursuing a per se theory—that is, a theory that would make the outcome of the section 75-1.1 claim dependent on the outcome of the Lanham Act claim.

SMD benefited considerably from pursuing a freestanding section 75-1.1 claim, as opposed to a per se claim. On the 75-1.1 claim, the district court required SMD to prove far less than it was required to prove in connection with its Lanham Act claim. The section of the verdict form for the 75-1.1 claim asked the jury only (1) whether the defendants made false or misleading representations of fact, and (2) whether SMD “suffered injury as a result of” any false or misleading statements. The jury answered yes to both questions. It went on to value SMD’s injury from the false or misleading statements at 1.7 million dollars.

This verdict—and the underlying jury instructions—are silent on a key issue:  In a non-per-se section 75-1.1 claim that is based on false advertising, what level of consumer response to the advertising does the plaintiff need to show? As noted above, when a plaintiff pursues a Lanham Act claim based on misleading (as opposed to literally false) advertising, it needs to show that the advertising actually deceived a substantial segment of consumers. In addition, after the U.S. Supreme Court’s recent Lexmark decision, a false-advertising plaintiff “ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising.” Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1391 (2014).

On the 75-1.1 claim in SMD, however, the court did not appear to impose any requirements that resembled actual consumer deception or direct injury. Indeed, the jury instructions on the 75-1.1 claim do not discuss what mechanism of injury—what type of connection between the brochures and SMD’s alleged losses—would be necessary or sufficient.

Reasonable lawyers can debate whether the “consumer results” requirements on a 75-1.1 claim ought to be as demanding as they are on a Lanham Act claim. But it seems likely that when courts decide future false-advertising cases under section 75-1.1, some “consumer results” requirements will emerge.

Treble Damages

The case law under section 75-16 says that courts must automatically treble the damages assessed for a 75-1.1 violation. In SMD, though, the court did not treble the jury’s 1.7-million-dollar award. What happened?

An extraterritoriality problem happened. In American Rockwool, Inc. v. Owens-Corning Fiberglas Corp., the Eastern District had held that applying North Carolina’s treble-damages remedy to a multistate advertising campaign would violate due process and would unduly burden interstate commerce. SMD, too, involved a multistate advertising campaign.  Thus, the court applied American Rockwool and held that SMD could recover only single damages—even on its 75-1.1 claim.

In American Rockwool, the court had left an opening for treble damages—that is, treble damages tailored to the North Carolina conduct that occurs as part of a multistate campaign. In SMD, though, the court held that SMD had not particularized how much of the defendants’ conduct happened in North Carolina. Thus, the court disallowed treble damages entirely. To avoid this result, future false-advertising plaintiffs should separate out the effects of defendants’ North Carolina conduct if they can.

Where Things Stand Now

Earlier this month, the parties in SMD notified the court that they had settled the case in principle. Thus, we’re not likely to see any further substantive rulings in this case.

Even the unfinished symphony that is SMD, however, offers a number of lessons for lawyers in similar cases.

Law student Lauren Travers contributed to this post.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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