Antitrust Law Daily Wrap Up, ADVERTISING—S.D. Cal.: Business owners not required to arbitrate false ad claims against LivingSocial, (Oct 17, 2014)

By Jody Coultas, J.D.

Advertising service LivingSocial, Inc. could not compel arbitration of two business owners’ false advertising and unfair business practices claims, since the claims fell outside of an arbitration agreements between the parties, the federal district court in San Diego has ruled (Faegin v. LivingSocial, Inc., October 15, 2014, Hayes, W.).

The business owners signed a Merchant Service Agreement (Agreement), authorizing LivingSocial to advertise and sell vouchers for their cleaning and janitorial services, A.T. Your Service Cleaning and Janitorial. Over a year after the agreement expired, the business owners received an email from a customer, stating that the customer had purchased a voucher through LivingSocial despite the company not advertising with LivingSocial.

LivingSocial was advertising At Your Service Housekeeping, a different company operating in the same area as A.T. Your Service Cleaning and Janitorial. Customers who searched for “At Your Service San Diego” found the business owners’ web site and telephone number. LivingSocial was notified of the issue, but continued to advertise the second company. “AT YOUR SERVICE failed to honor their vouchers” causing confused consumers to write unwarranted negative reviews of A.T. Your Service Cleaning and Janitorial, causing its reputation to suffer.

The false advertising claims were not covered by the arbitration agreement, according to the court. Claims “arise from” an agreement or the breach of an agreement when the claims relate to the interpretation and performance of the contract itself. The business owners argued that the Agreement did not reference LivingSocial's right to advertise competing businesses. LivingSocial argued that the claim depended on the knowledge LivingSocial gained from implementing the Agreement, and that the implementation and promotion of the Agreement was the factual predicate for the false advertising claim. LivingSocial also argued that the business owners had not alleged that LivingSocial advertised any information that was false. The factual allegations that LivingSocial misled consumers causing confusion and mistake as to the source of the services ordered by the consumers, and failed to provide the services ordered within 30 days were not based upon the relationship between the business owners and LivingSocial. Resolving the false advertisement claims did not require an interpretation of the Agreement or interpretation of LivingSocial’s performance of the Agreement. The Agreement did prohibit LivingSocial from refraining from providing advertising services to companies with similar names. Therefore, the motion to arbitrate was denied.

The unfair business practices claims were not referable to arbitration, according to the court. The claims were grounded in the claims of marked infringement and false advertisement. Because those claims did not “arise from or relate to” the Agreement, the unfair business practices claims could not be arbitrated.

The case is No. 14cv00418-WQH-KSC.

Attorneys: James M. Treglio (Clark and Treglio) for Troy Feagin. Derek Smith for LivingSocial, Inc.

Companies: LivingSocial, Inc.

Cases: Advertising CaliforniaNews