Antitrust Law Daily Wrap Up, ADVERTISING—DNJ: Tax Software Providers’ Statements to Competitor’s Customers Could Be False Advertising, (Apr 24, 2013)

By William Zale, J.D.

Tax software providers authorized to e-file tax returns with the IRS could have engaged in Lanham Act false advertising by informing tax preparers that bank accounts opened using a competing software provider’s Refund Platform were "under suspicion," "unauthorized," and "unapproved," the federal district court in Newark has ruled (Refundo, LLC v. Drake Enterprises, Ltd., April 22, 2013, Linares, J.).

The plaintiff, Refundo, LLC, provides the Refund Platform software to individual tax preparers, such as accountants. The defendants, Drake Enterprises and Petz Enterprises, also provide tax preparation software and are authorized to e-file tax returns with the IRS.

Commercial advertising or promotion. Drake and Petz argued that the Lanham Act claim failed because Refundo failed to allege that Drake and Petz made any false statement that amounts to "commercial advertising or promotion." The court noted that commercial advertising or promotion had been held to consist of (1) commercial speech; (2) by a defendant in commercial competition with the plaintiff; (3) for the purpose of influencing customers to buy the defendant's goods or services; and (4) disseminated sufficiently to the relevant purchasing public to constitute "advertising" or "promotion" within the industry.

The court rejected the defendants’ contention that commercial speech is limited only to speech that proposes a commercial transaction. On motions to dismiss, the court applied the broadest definition for commercial speech, that is, an expression related solely to the economic interest of the speaker and its audience.

Drake’s representatives allegedly advised Refundo’s customers that Refundo used a bank that was "under suspicion," "unapproved," and "unauthorized," and stated that if "[tax preparers] wanted to use the Drake Tax Preparation Program they were required to use one of Drake’s banking partners, one of which is a Drake subsidiary." Refundo alleged that when a Drake-approved bank is used, "higher fees" are charged, "a substantial portion of which goes to Drake." Petz’s representatives allegedly advised Refundo’s customers "that Refundo [was] using an unauthorized bank," and told Refundo’s customers that "in order for Petz to agree to e-file . . . [tax] return[s] with the IRS, that Tax Preparers would be required to use one of its partnering banks."

The court held that the test for commercial speech was satisfied because the allegations supported the plausible inference that Drake and Petz’s statements because they related solely to the economic interest of Drake and Petz on the one hand, and Refundo’s customers on the other. The court also found that Refundo’s allegations raised the plausible inference that the statements were made to tax preparers who are members of Refundo’s purchasing public and that the alleged statements were adequately disseminated.

Drake argued that its statements were made to tax preparers who had already purchased and were actively using Drake’s software. The court noted, however, that Drake’s statements about the Refund Platform could lead a customer reasonably to believe that the Refund Platform was inferior to that of Drake’s own banking products. The allegations sufficed to raise the plausible inference that Drake’s allegedly false statements were made to influence customers to use its services, according to the court.

Petz argued that Refundo failed to allege that it sold a product in competition with Petz. This ignored Refundo’s allegation that Petz imposes a fee of $15.95 each time one of Refundo’s Tax Preparers uses a tax refund banking product that is not from one of its "partnering banks." The court found that this allegation supported the plausible inference that Petz seeks to incentivize the use of its bank partners over other financial institutions, and thus competes with Refundo in offering tax refund products.

Materiality. Drake argued that Refundo failed to allege another required element of a Lanham Act claim, that is, "that the deception is material in that it is likely to influence purchasing decisions." The court disagreed, noting that the tax preparers to whom Drake allegedly made false statements were identified as Refundo customers who used its software to open a bank account on behalf of their clients and enter into contracts with Refundo.

The court denied the defendants’ motions to dismiss the Lanham Act false advertising claim.

The case is No. 13-643 (JLL).

Attorneys: Robert E. Bartkus (Dillon, Bitar & Luther, LLC) for Refundo, LLC. Steven A. Karg (Norris, McLaughlin & Marcus, PA) for Drake Enterprises, Ltd. Matthew Sean Ingles (Orrick Herrington & Sutcliffe LLP) for Petz Enterprises, Inc.

Companies: Refundo, LLC; Drake Enterprises, Ltd.; Petz Enterprises, Inc.

Cases: Advertising NewJerseyNews