Antitrust Law Daily Wrap Up, ADVERTISING—EDWis: Rule 9(b) Heightened Pleading Requirements Do Not Apply to Lanham Act False Advertising Claim, (Dec 5, 2012)

By Tobias J. Gillett, J.D., LLM.

A livestock dietary products producer sufficiently pled a Lanham Act false advertising claim against former employees operating a similar business, the federal district court in Milwaukee has ruled. The court rejected the defending employees’ contention that false advertising claim failed because it did not meet the Federal Rule of Civil Procedure 9(b) heightened pleading requirements. The heightened pleading requirements did not apply to the claim, but, even if they did, the producer would have met them (Priority International Animal Concepts, Inc. v. Bryk, December 1, 2012, Griesbach, W.).

Priority International Animal Concepts, Inc. (PIAC) develops and markets dietary products for livestock, including programs for feeding animals. PIAC alleged that three of its former employees left the company and began distributing a competing line of products to PIAC’s customers that they claimed could be used in place of PIAC’s products in PIAC’s programs.

PIAC filed suit, alleging that the former employees’ representations violated the Lanham Act’s prohibition on false advertising and breached the common law agency duty, as well as state laws regarding fraudulent and deceptive trade practices, among other claims.

Rule 9(b)’s Applicability to Lanham Act False Advertising Claims

The employees filed a motion to dismiss and strike, arguing that Federal Rule of Civil Procedure 9(b), establishing a heightened pleading standard for fraud claims, applied to PIAC’s Lanham Act false advertising claim. To satisfy Rule 9(b)’s heightened standard, a plaintiff must allege “the identity of the person making the misrepresentation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated.” The employees contended that PIAC had not met that standard.

The court disagreed, finding that “fraud is not an element of Priority’s Lanham Act or breach of agency duty claims and neither claim rests on allegations of fraud.” In arguing that Rule 9(b) did apply, the employees had relied on the Seventh Circuit’s 2007 decision in Borsellino v. Goldman Sachs Group, Inc. (477 F.3d 502), which had found that the Rule 9(b) standard did apply to claims for tortious interference with economic advantage, interference with fiduciary relationship, and conspiracy, even though none of those claims included fraud as an “essential element.” The court in that case had found that the claims, which were asserted to have arisen “out of a pattern of fraud and racketeering activity” and charged a defendant with participating in a conspiracy to defraud the plaintiff, were “premised upon a course of fraudulent conduct,” and hence Rule 9(b) applied.

However, the court in the present case observed that the claims at issue here were not based on such premises. “[G]eneral allegations that the defendants made representations that were false and/or misleading and with clear intent to deceive the public and injure Priority” were “not essential to Priority’s false advertising” claims.

In holding that Rule 9(b) does not apply to false advertising claims, the court elected not to follow a line of district court cases in the Seventh Circuit that had found it did apply, finding that they had “little by way of analysis.” Instead, the court chose to follow a decision from the Southern District of New York which had found a claim under the Lanham Act to be “significantly different” from a claim of fraud, noting that fraud requires specific intent to defraud, while a false advertising does not require such intent.

The court dispensed with the employees’ assertion that public policy supported application of the Rule 9(b) standard to false advertising claims, on the grounds that such claims, like claims of fraud, could seriously harm a business’s reputation. The court noted that Rule 9(b) did not apply to “worse allegations than fraud,” and that other means, such as Rule 11 sanctions, existed for protecting parties from baseless allegations. The court suggested that applying Rule 9(b) to claims “that do not sound in fraud” would “only lead to unproductive motion practice.”

Moreover, the court observed that victims of false advertising would typically not know the specific individuals in a corporation that had produced and authorized the advertising prior to discovery. The court declared that the lack of an intent element also meant that a false advertising claim would not harm a business to the extent that a fraud allegation would. Furthermore, the court noted that “[f]alse advertising claims serve the public interest of protecting consumers from confusion and loss.”

Application of Rule 9(b) to PIAC’s Claims

The court also concluded that PIAC would have met the Rule 9(b) standard even if it had applied. PIAC’s allegations that the employees had “made, published, disseminated, circulated, or otherwise placed before the public an advertisement, announcement, statement, or representation” that their products could be used in place of PIAC’s products, and that they presented this information to PIAC’s customers, were sufficient to describe the who, what, where, when, and how required for a fraud claim under Rule 9(b).

The court also found the lack of specific references to the person who made and disseminated the advertisements, and to any specific customer who received such an advertisement, to be “not fatal to Priority’s complaint.” The court noted case precedent finding that the Rule (b) standard “must be relaxed where the plaintiff lacks access to all facts necessary to detail his claim,” and that advertisements are generally “directed to an anonymous audience.”

The court also permitted PIAC’s use of allegations premised on information and belief, noting that “the general rule that averments of fraud cannot be solely supported by information and belief is not applicable in situations where (1) the facts constituting the [fraudulent conduct] are not accessible to the plaintiff and (2) the plaintiff provides the grounds for his suspicions.” The court found that PIAC had provided sufficient evidence that the facts constituting the employees’ fraud were not available to it, and that it had “plausible grounds for suspicion.”

The case is No. 12-C-0150.

Geoffrey S. Trotier (Davis & Kuelthau SC) for Priority International Animal Concepts, Inc. Bradden C. Backer (Albrecht Backer Labor & Employment Law SC) for John Bryk.

Cases: Advertising WisconsinNews