Antitrust Law Daily Wrap Up, ADVERTISING—6th Cir.: Professional employment organizations state valid Lanham Act claims against competitor , (Dec 8, 2015)

By Greg Hammond, J.D.

The owner of two professional employment organizations (PEOs) adequately alleged Lanham Act false advertising claims against a competitor for emails purportedly sent out by the PEOs’ manager falsely representing that the PEOs were partnering with the competitor. In partially reversing a dismissal order, the U.S. Court of Appeals in Cincinnati concluded that the competitor could be vicariously liable for the manager’s actions and the owner sufficiently identified false or misleading statements of fact that deceived the intended audience, caused harm, and were introduced into interstate commerce (Grubbs v. Sheakley Group, Inc., December 7, 2015, Clay, E.).

Tri-Serve, Ltd. and TriServe #1, LLC are PEOs, regulated entities that employers outsource certain administrative tasks to, including payroll, workers’ compensation, and benefits. Tri-Serve filed suit against Sheakley Group, Inc., alleging false advertising, trade name infringement, and false designation of origin, in violation of the Lanham Act, as well as violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). The federal district court in Cincinnati dismissed the complaint and Tri-Serve appealed.

False advertising. The appellate court determined that Tri-Serve stated a sufficient claim for false advertising against Sheakley. First, Tri-Serve identified various false or misleading statements of fact that were made in an email to Tri-Serve customers, arguing that statements concerning “partnering” and that Tri-Serve was “moving” into Sheakley Group were false because Tri-Serve was not moving and the companies had no relationship whatsoever. Second, the emails and mailings containing the statements appeared to deceive the Tri-Serve customers who received them, as clients were sending payments to Sheakley instead of Tri-Serve’s owner. Third, the court determined that the false address in the email and mailings, along with statements about “partnering,” would likely cause a consumer to send funds to Sheakley, instead of Tri-Serve, which actually did occur. Lastly, the act of sending an email created the interstate commerce nexus necessary for jurisdiction, the court determined. The lower court’s order of dismissal was therefore reversed and remanded with regard to the Lanham Act false advertising claim.

The appellate court also reversed the order, dismissing trade name infringement and false designation of origin claims under the Lanham Act, noting—in part—that Sheakley could be held vicariously liable for Tri-Serve’s manager’s conduct because an intent to create an apparent partnership in the eyes of the Tri-Serve clients was self-evident from the language in the email and mailings.

RICO. The RICO claim, however, was properly dismissed, the appellate court concluded. It reasoned that a single eight-month scheme to move Tri-Serve clients to Sheakley with the single victim being Tri-Serve’s owner, could not meet the standard for closed- or open-ended RICO liability. There were no further facts alleged that demonstrated Sheakley threatened future criminal conduct in order to support a substantive RICO violation. Although there was plenty of evidence of an agreement on the part of Tri-Serve’s manager and Sheakley to bring Tri-Serve to Sheakley, the RICO conspiracy claim failed because the plaintiffs failed to allege a substantive RICO violation.

The case is No. 15-3302.

Attorneys: Robert A. Winter, Jr. for Linda Grubbs, Tri-Serve, Ltd., Tri-Serve #1, LLC, and Capital Concepts, Inc. Rachael A. Rowe (Keating Muething & Klekamp PPI) for Sheakley Group, Inc.

Companies: Tri-Serve, Ltd.; Tri-Serve #1, LLC; Capital Concepts, Inc.; Sheakley Group, Inc.

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