Antitrust Law Daily Wrap Up, ADVERTISING—C.D. Cal.: Allegations of false online reviews stated Lanham Act claim, (Feb 17, 2015)

By Dan Selcke, J.D.

Allegations that a company falsified online consumer reviews in an effort to drive business away from a competitor stated a claim for false and misleading advertising under the Lanham Act and

California law, according to the federal district court in Los Angeles. The competitor also maintained claims for unfair competition and trade libel (Swiss America Trading Corporation v. Regal Assets, LLC, February 13, 2015, Pregerson, D).

Falsified online reviews. Both Swiss America Trading Corporation and Regal Assets, LLC sold precious metals. They promoted themselves online and relied on Internet reviews and recommendations to generate business. Swiss accused Regal of falsifying those reviews in an effort to drive business away from it. Specifically, Swiss alleged that (1) Regal paid a network of affiliates to write consumer reviews on their websites that disparaged Swiss, (2) Regal in fact owned and controlled those websites, and (3) many of the offending reviews were written using fabricated reviewer identities and credentials. Regal brought a motion to dismiss the claims against it.

False advertising. First, the court considered Regal’s argument that Swiss’ false advertising claims did not satisfy the heightened pleading standards of FRCP 9(b), which required “the identification of the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations.” Walling v. Beverly Enters., 476 F.2d 393. Although it offered no opinion on whether FRCP 9(b) was applicable to false advertising claims in the first place, a contested issue, the court decided that Swiss’ claim did meet this standard.

Swiss’ complaint alleged that Regal’s websites falsely represented themselves as independent of Regal, but that they criticized Swiss and recommended Regal. It also alleged that Regal’s sites used fabricated reviewer identities to give the impression of trustworthiness and that Regal made false, disparaging statements about Swiss, including that it steered customers away from good investments. Under FRCP 9(b), this was enough to allow Regal to mount a defense.

Puffery. Regal also tried to argue that Swiss’ false advertising claim failed because its allegations amounted to mere puffery. The court rejected this argument because Swiss’ allegations were not vague, exaggerated, or subjective. Instead, they were precisely the type of representations upon which consumers might rely.

Trade libel. Next, the court considered Swiss’ claim for trade libel, which required “(1) a publication, (2) which induces others not to deal with plaintiff, and (3) special damages.” New Show Studios LLC v. Needle, No. 2:14-cv-01250-CAS, 2014 WL 2988271 at 13. As discussed, Swiss had identified published statements on Regal’s websites that encouraged customers not to deal with Swiss. Regal argued that Swiss failed to show special damages. However, Swiss’ allegations that word of mouth was important to its business and that it had lost market share to Regal as a result of the misrepresentations on Regal’s websites were enough to satisfy this requirement.

Intentional interference. Finally, the court turned to Swiss’ claim for intentional interference with prospective economic advantage, the only claim on which it agreed with Regal. While Swiss alleged that Regal’s actions disrupted its online business in general, it did not allege that those actions had interfered with an economic relationship between it and some specific third party or that such a relationship was likely to yield an economic benefit. Therefore, the court granted Regal’s motion to dismiss with respect to Swiss’ claim for intentional interference with prospective economic advantage, although it gave Swiss leave to amend. It denied the motion as to all of Swiss’ other claims.

The case number is: 14-04960

Attorneys: Naomi Elana Straus (Mitchell Silberberg and Knupp LLP) for Swiss America Trading Corp. James P. Maniscalco (Towle Denison Smith and Maniscalco LLP) for Regal Assets LLC.

Companies: Swiss America Trading Corp.; Regal Assets LLC

Cases: Advertising, CaliforniaNews