Antitrust Law Daily Wrap Up, ADVERTISING—D.S.C.: Window replacement firm awarded Lanham Act damages, attorney fees, disgorgement of profits, (Sep 2, 2014)

By Edward L. Puzzo, J.D.

A window replacement company was awarded Lanham Act damages, attorney fees, and disgorgement of profits from a competitor that had falsely advertised that they obtained required governmental permits and tested for lead-based paint, the federal district court in Charleston, South Carolina has ruled (The Muhler Company, Inc. v. Window World of N. Charleston LLC, August 28, 2014, Norton, D.).

Plaintiff Muhler Company and defendant Window World of North Charleston (WWNC) were engaged in the business of supplying and installing replacement windows. They were direct competitors in the Southeast region of South Carolina.

WWNC advertised that it “complied with the strictest industry standards” and was “lead certified.” However, according to the uncontroverted claims of Muhler, in at least 1,700 instances, WWNC failed to obtain required governmental permits for the installation of replacement windows, sometimes even after collecting fees from customers for the permits. WWNC further failed, in at least 289 instances, to test for the presence of lead-based paint or perform lead remediation when installing replacement windows.

According to Muhler, these omissions in its legal responsibilities allowed WWNC to offer services at substantially lower prices than Muhler, giving WWNC an unfair competitive advantage in the market and adversely affecting Muhler’s revenues. Muhler therefore brought claims against WWNC for false and misleading advertising in violation of the Lanham Act and the South Carolina Unfair Trade Practices Act (SCUPTA).

Muhler’s initial complaint was filed in state court in March 2011. In July 2012, WWNC’s counsel withdrew and, in September 2013, WWNC’s replacement counsel withdrew. To date, WWNC has failed to secure replacement counsel. Muhler moved for judgment and damages. WWNC was given notice of the hearing to determine damages, but failed to appear at the hearing.

Lanham Act violations. To support a Lanham Act claim, the plaintiff must establish that (1) the defendant made a false or misleading description of fact or representation of fact in commercial advertisement about his own or another’s product; (2) the misrepresentation was material, in that it was likely to influence the purchasing decision; (3) the misrepresentation actually deceived or has the tendency to deceive a substantial segment of its audience; (4) the defendant placed the false or misleading statement in interstate commerce; and (5) the plaintiff has been or is likely to be injured as a result of the misrepresentation, either by direct diversion of sales or by a lessening of goodwill associated with its product.

The court found that WWNC’s failure to obtain permits or meet lead-based paint requirements foreclosed any possibility that it “complied with the strictest industry standards.” WWNC ‘s advertising, representing that it had “certified risk inspectors” who could “determine if your home has lead hazards,” implied that WWNC complied with all federal and state regulations involved in installing replacement windows in homes with lead-based paint, the court stated. Since WWNC did not have such inspectors, these representations, placed in interstate commerce by being on the Internet, were false and misleading to consumers, the court found. The false representations were material to consumers, influencing their purchasing decision, tended to deceive a substantial segment of its audience, and likely diverted business from Muhler, the court stated. Thus, Muhler established that WWNC violated the Lanham Act.

SCUPTA violations. To support an unfair competition claim under SCUPTA, the plaintiff must establish that (1) the defendant engaged in an unfair or deceptive act in the conduct of trade or commerce; (2) the unfair or deceptive act affected public interest; and (3) the plaintiff suffered a monetary or property loss as a result of the unfair or deceptive acts.

WWNC ‘s statements that it adhered to the highest government standards were false because they ignored governmental permit and lead paint requirements. Based on the number of times WWNC failed to meet these governmental requirements, WWNC’s conduct was an unfair business practice, affecting the public interest because it was capable of repetition, and was material to purchasers’ decisions.

Synergistic factors for monetary relief. Under the 2006 Fourth Circuit case of Synergistic Int’l LLC v. Korman (470 F. 3d 162), there are a number of non-exclusive factors courts must consider in determining the amount the prevailing plaintiffs can recover in a Lanham Act case.

The first factor was whether the defendant had the intent to confuse or deceive. The evidence of more than 1,700 installations without a permit and over 289 instances of failure to perform lead paint inspections both demonstrated that WWNC willfully deceived consumers, the court found.

The second factor was whether the plaintiff lost sales as the result of defendant’s activities in the same market area. Here, evidence was produced that Muhler lost at least $159,000 in window replacement contracts due to WWNC ‘s misrepresentations, the court found.

The third factor was whether injunctive relief might be an adequate remedy in lieu of damages. The court found that injunctive relief would be insufficient to compensate Muhler for profits lost from sales diverted from Muhler to WWNC. Indeed, the monetary harm to Muhler was likely greater than it could affirmatively demonstrate, stated the court.

The fourth factor was whether the plaintiff waited too long after defendant’s activities began, to seek court relief. Here, the court found Muhler did not delay seeking relief.

The fifth factor was whether there was a public interest in making the misconduct unprofitable, balancing the plaintiff’s right to receive compensation for defendant’s activities and defendant’s statutory right not be assessed a penalty. WWNC‘s false advertising misled consumers and exposed them to the complete loss of services they contracted to receive. This violated public policy, the court found.

Damages. Based on the Synergisticfactors, Muhler was entitled to a full recovery. The court found that Muhler had suffered approximately $83,000 in actual damages, which should be trebled to $249,000 due to WWNC’s multiple failures, omissions and misrepresentations.

Disgorgement of profits. In proving disgorgement of profits under the Lanham Act, the plaintiff is required to prove the defendant’s sales only; the defendant then must prove all elements of cost or deduction claimed. Here, WWNC failed to appear at the hearing on damages and as a result, offered no evidence of costs or deductions.

Muhler’s CPA expert opined that WWNC had $5.7 million in gross profits from the 1,700 jobs that were performed without a permit. WWNC, absent from the damages hearing, offered no evidence to establish any costs or deductions from gross revenues. However, to award Muhler the recovery of the full amount of the gross profits would impermissibly penalize WWNC instead of compensating Muhler. Therefore, the court assumed a 50 percent profit margin and ruled that Muhler was entitled to a disgorgement of profits of $2.8 million from WWNC.

Attorneys’ fees. In a Lanham Act case, the court explained, attorneys’ fees may be recovered by the prevailing party under exceptional circumstances where the defendant’s conduct was malicious, fraudulent, willful or deliberate in nature. Since WWNC here failed to obtain permits for over 1,700 installations, and failed to test for lead paint in over 289 other instances, WWNC had deliberately deceived consumers in bad faith, the court ruled, making this an exceptional case warranting the imposition of attorney’s fees.

The case is Civil Action No. 2:11-cv-00851-DCN.

Attorneys: Christine Kent Toporek (Young Clement Rivers and Tisdale) for The Muhler Company, Inc.

Companies: The Muhler Company, Inc.; Window World of N. Charleston LLC.

Cases: Advertising StateUnfairTradePractices SouthCarolinaNews