Antitrust Law Daily Wrap Up, ADVERTISING—E.D. Mo.: Prison health care provider’s false advertising and unfair competition claims proceed against competitor over allegedly deceptive websites, (Jul 24, 2013)

By Tobias J. Gillett, J.D., LL.M.

A provider of health care services for correctional facilities may proceed with Lanham Act and Missouri common law unfair competition and false advertising claims against a competitor allegedly responsible for websites and Internet postings claiming to be from an “insider” of the provider, the federal district court in St. Louis has ruled (Corizon, Inc. v. Wexford Health Sources, Inc., July 23, 2013, Noce, D.).

Wexford Health Sources, Inc. and Corizon, Inc. compete in the industry of health care services for correctional facilities. In 2005, Correctional Medical Services, Inc. (CMS), one of two companies that later merged to become Corizon, entered into a contract with the state of Maryland. In 2010, Maryland issued a request for bids, and initially awarded the contract to Wexford. However, following protests and appeals by CMS, Maryland withdrew its intent to award the contract, and instead extended its contract with CMS, claiming that Wexford did not meet certain state requirements.

Wexford directed The CHT Group, a public relations firm, to create a website at http://www.cmsdoesnotcare.com that contained content purportedly written by a Corizon insider that disparaged CMS’s bidding conduct. In addition, a person using a CHT Group IP address posted comments on the Yahoo! Finance web page for the parent company of Prison Health Services, Inc., the other company that merged to form Corizon, complaining about the pending merger and linking to the cmsdoesnotcare.com website. CHT Group also created a website at http://www.phscmsmergerconcerns.com at Wexford’s direction that questioned various aspects of the merger.

Corizon filed suit, alleging claims for false advertising and unfair competition under the Lanham Act and for unfair competition under Missouri common law. Wexford and Corizon both moved for summary judgment.

Standing. The court rejected Wexford’s argument that Corizon lacked constitutional and prudential standing because it could not show an injury other than attorney fees and the investigative costs incurred to determine the identity of the parties behind the Internet activity. The court found that injury for purposes of constitutional standing could be inferred from “the parties’ direct competition and the evidence in the record supporting defendant’s wrongful conduct.” Further, Corizon satisfied the tests for prudential standing for false advertising under the Lanham Act because (1) the companies competed with each other and Corizon alleged a misrepresentation giving rise to a presumed commercial injury, and (2) because the injury alleged was of the type Congress sought to redress; the website contained content concerning Corizon’s treatment of its employees, customers, and security guards; Corizon provided evidence of its investigative and attorney fees; and there was no risk of duplication or complexity in awarding damages.

Falsity. The court also found that statements on the website were literally false, and thus that Corizon has established the “false statement of fact” element of its Lanham Act claim. The court observed that Wexford’s CEO and the president of the CHT Group had authored the website, but that the content of the website excluded them as the purported “CMS insider” behind it. Therefore, the statement that the website’s author was a “CMS insider” was literally false.

Commercial advertisement. The court concluded that the website constituted a commercial advertisement. The court determined that the website was sufficiently disseminated, even though as few as two dozen people may have viewed it and Corizon provided no evidence that any of those people were members of the relevant purchasing public. The court observed that “the inquiry focuses on the efforts made to distribute the statements rather than on the number of readers,” and Wexford had “disseminated the statements to anyone with access to the internet.”

The website also referred to products or services, according to the court. Even assuming that a reader would construe the website’s reference to “how unhappy Maryland was with the CMS Services” as a reference to Corizon’s relationship with Maryland security officers, “the context of the website implie[d] that working with security officers [was] part and parcel with providing healthcare services.”

Finally, the court found that Wexford had an economic motivation for the website. The court observed that Wexford had “in essence” stated “that it intended the website to facilitate multiple economic transactions to meet the requirements of financially lucrative contract,” and that the competitive relationship between the companies and the website’s content supported the finding of economic motivation.

Presumptions of deception, materiality, and injury. The court found that Eighth Circuit case law supported application of rebuttable presumptions of deception and injury based on a finding of literal falsity. However, although some cases appeared to support a presumption of materiality upon a finding of literal falsity, the court found the “weight of authority” was against “presuming materiality even with a finding of literal falsity. Since the website contained literally false statements that referred to Corizon, the rebuttable presumptions of deception and injury applied, and the burden shifted to Wexford to prove their absence. However, Corizon still had to demonstrate materiality.

Deception. The court determined that deception remained a genuine issue of material fact. The website could be seen by anyone with access to the Internet, and therefore statements from three Corizon employees that they had not seen it or knew anyone who had were insufficient to show a lack of actual deception. Testimony from the president of the CHT Group the website only “received approximately 20-25 visitors in total,” and that most of those were representatives of Corizon and Wexford, would have been enough to show a lack of actual deception, and could have supported a lack of a tendency to deceive given the six-month duration of the website . However, the court noted that the CHT Group president characterized his estimate as “supposition.” He testified that he checked the website’s number in January or February, but the website remained live until June. Moreover, the links to the website on Yahoo! Finance and an e-mail received by Wexford from the Baltimore Sun permitted an inference “that the website deceived at least one person.”

Materiality. The materiality of the alleged deception also remained a disputed issue of material fact, according to the court. Although many of the website’s statements concerned CMS’s conduct during the transition process, the court did not have to decide whether Corizon’s services included assisting with the transition “because even statements that do not concern plaintiff’s services could influence a purchasing decision.” Moreover, the court noted that materiality could be established “by proving that the defendants misrepresented an inherent quality or characteristic of the product,” and found “that a reasonable fact-finder could find materiality based on the website content.”

Injury. Injury was also a disputed issue of material fact, according to the court, even though Corizon did not provide evidence of lost profits or goodwill, and relied primarily on the costs to remove the website. The court agreed with the Sixth Circuit’s 2000 decision in Balance Dynamics Corp. v. Schmitt Indus., Inc., 204 F.3d 683, 2000-1 Trade Cases ¶72,810, in which the court concluded that “because a company may justifiably act before it actually sustains injury, standards similar to those applicable to injunctive relief are appropriate where plaintiffs seek to recover damage control expenses.”

Moreover, the burden to produce evidence as to lack of injury rested with Wexford, the court observed. Further, although Maryland’s decision to extend its contract with Corizon may have shown that Corizon lost no profits or goodwill with Maryland, it may still have lost profits or good will from other customers.

Permanent injunction. Finally, the court concluded that Corizon’s request for a permanent injunction was not moot because it was not “absolutely clear” that Wexford would not engage in similar conduct. The court noted that Wexford’s association with the phscmsmergerconcerns.com website and the postings on the Yahoo! Finance website remained disputed facts.

The case is No. 4:10 CV 2430 DDN.

Companies: Corizon, Inc.; Wexford Health Sources, Inc.

Cases: Advertising MissouriNews