Antitrust Law Daily Wrap Up, ADVERTISING—10th Cir.: False statements entitled competitor to Lanham Act relief, (Aug 3, 2015)

By Michael Menzhuber, J.D., LL.M.

A determination that a prefabricated steel building seller’s advertising statements violated the Lanham Act, and entitled its competitor to monetary and injunctive relief, was affirmed by the U.S. Court of Appeals in Denver. The appeals court also determined that the federal district court properly dismissed the competitor’s claims under the Colorado Consumer Protection Act (CCPA) because there was no evidence that it suffered any harm from the advertising statements (General Steel Domestic Sales, LLC v. Chumley, July 31, 2015, Gorsuch, N.).

Background. Ethan Chumley was a former salesperson for General Steel, a company that sells prefabricated steel buildings directly to consumers. Upon leaving General Steel, he founded Armstrong Steel Corporation, a rival in the steel building business, which launched an aggressive online marketing campaign that made several untrue statements.

General Steel sued Armstrong, alleging violations of the Lanham Act and the CCPA. The district court dismissed General Steel’s CCPA claims but determined that three statements made by Armstrong violated the Lanham Act: (1) that Armstrong fabricated its own steel; (2) that Armstrong offered “general steel” buildings for sale; and (3) that General Steel failed to offer pregalvanized steel or stainless fasteners for its buildings.

Both parties appealed the district court’s rulings. Chumley and Armstrong (collectively, “defendants”) appealed the district court’s award of relief under the Lanham Act, while General Steel appealed the dismissal of its CCPA claims.

Lanham Act. The appeals court noted that to satisfy a Lanham Act claim, a plaintiff must establish that a defendant’s commercial advertisings contained: (1) a false or misleading representation of fact; (2) was likely to cause confusion about the defendant’s products or services; and (3) injured the plaintiff.

The appeals court determined that the three statements made by Armstrong were literally false. The statement that Armstrong fabricated its own steel was literally false because Armstrong wasn’t a steel manufacturer. Rather, it purchased steel from others to assemble its buildings. The statement that it offered “general steel” buildings for sale was literally false because it suggested that Armstrong was selling General Steel’s buildings, which it was not licensed to do and did not do. The statement that General Steel failed to offer pregalvanized steel or stainless fasteners for its buildings while Armstrong did was literally false because both companies provided these features at an additional cost.

The appeals court also determined that the Armstrong’s false statements were material. Armstrong’s statement concerning “pregalvanized steel” and “stainless fasteners” was material because the evidence at trial established that it would influence consumer purchasing decisions. Armstrong’s other two statements were found by the district court to have misrepresented inherent qualities of its products and thus qualified for the presumption of materiality. On appeal, Armstrong did not offer any convincing reason why this was error.

The district court held that there was a presumption of injury because Armstrong’s false statements appeared in direct side-by-side comparative advertising and because Armstrong made these false statements willfully. On appeal, Armstrong argued that the statements were made in small print in separate advertisements. The appeals court, however, disagreed because every statement appeared on a single web page and no clicking through was needed to view all the statements.

The district court ordered a disgorgement of profits as a remedy for Armstrong’s Lanham Act violations. In calculating the amount of disgorgement, General Steel was required to prove Armstrong’s gross profits during the period in question and Armstrong was required to prove which portion of those profits was not attributable to its Lanham Act violations. Armstrong argued that this burden-shifting endeavor was an improper way to calculate the amount of disgorgement. The appeals court disagreed because the plain language of 15 U.S.C. § 1117(a) anticipates this sort of burden shifting. The appeals court also disagreed with Armstrong’s argument that employing a burden shifting process in false advertising could create a policy problem that does not arise in trademark infringement case.

Colorado Consumer Protection Act. General Steel argued that the district court erred in dismissing its claims under the CCPA by effectively requiring it to point to evidence of an injury in the record to oppose summary judgment. According to General Steel, Armstrong should have first come forward with affirmative evidence showing a lack of injury. The appeals court disagreed because “a defendant may support its motion for summary judgment on an issue on which the plaintiff bears the burden of proof by arguing that the record lacks any evidence in the plaintiff’s favor.”

The case is Nos. 14-1119 and 14-1121.

Attorneys: David S. Fein (Building Services Group Legal Department) for General Steel Domestic Sales, LLC. Paul M. Grant (Goodreid Grant & Kuhn), Karl S. Kronenberger (Kronenberger Rosenfeld), and Peter C. Lemire (Leyendecker & Lemire) for Atlantic Building Systems, LLC.

Companies: General Steel Domestic Sales, LLC; Atlantic Building Systems, LLC

Cases: Advertising ColoradoNews