Wednesday, January 23, 2008

Ninth Circuit gives copier companies second shot at Ikon/GE in complaint alleging false statements, antitrust violations, and racketeering

The Ninth Circuit today reversed a district court decision to grant a motion to dismiss a complaint brought by Newcal Industries, Inc., Pinnacle Document Systems, Inc. and Kearns Business Solution, Inc. (together “Newcal”) against Ikon Office Solution and General Electric Corporation (together “IKON”). See Newcal Industries Inc. v. Ikon Office Solution, No. 05-16208 (9th Cir. January 23, 2008). The decision can be downloaded here.

Newcal and IKON compete to lease name-brand copier equipment to commercial customers and to provide service contracts for the maintenance of such equipment during the lease term. Newcal alleged in its complaint that IKON was engaging in a scheme to defraud IKON customers by amending their customers’ lease agreements and service contracts without disclosing that the amendments would lengthen the term of the original agreement. By extending such agreements, IKON made it more difficult for Newcal to compete for the business of IKON’s customers at such time as the original lease or service contract expires would normally expire. Newcal alleged antitrust violations under the Sherman Act, false advertising under the Lanham Act, and racketeering under RICO. Newcal also sought a declaratory judgment that IKON’s fraudulently procured contracts were invalid.

The district court dismissed without leave to amend Newcal’s declaratory judgment cause of action, but did allow leave to amend the other claims. Newcal later filed a first amended complaint; however, on motion to dismiss brought by IKON under Rule 12(b)(6) for failure to state a claim, the district court concluded that Newcal had failed to allege a legally cognizable “relevant market” under the Sherman Act, that it had failed to allege any false statement of fact under the Lanham Act, and that it had failed to meet RICO standing requirements, and dismissed the complaint with prejudice.

On appeal, the Ninth Circuit reversed the district court’s dismissal and remanded the case. The court found that Newcal, assuming all facts alleged in the complaint are true (as the court must done in deciding an appeal from a Rule 12(b)(6) dismissal), had pled sufficient allegations to support its asserted claims.

Focusing just on the court’s discussion of Newcal’s Lanham Act claim for allegedly false and misleading statements, Newcal alleged that five particular statements were false or misleading. The district court found all five statements insufficient to support a Lanham Act claim. On appeal, however, the court reversed finding that four of the five statements rested on factual findings rather than legal conclusions, and therefore could not be dismissed under Rule 12(b)(6).

The court began by setting forth the elements necessary to state a prima facie case of false or misleading description or representation of fact in commercial advertising or promotion which misrepresents the nature, characteristics, qualities of the person’s goods, services, or commercial activities under the Section 43(a)(1)(B) of the Lanham Act (15 U.S.C. §1125(a)(1)(B)):

Under the Lanham Act, a “prima facie case requires a showing that (1) the defendant made a false statement either about the plaintiff’s or its own product; (2) the statement was made in commercial advertisement or promotion; (3) the statement actually deceived or had the tendency to deceive a substantial segment of its audience; (4) the deception is material; (5) the defendant caused its false statement to enter interstate commerce; and (6) the plaintiff has been or is likely to be injured as a result of the false statement, either by direct diversion of sales from itself to the defendant, or by a lessening of goodwill associated with the plaintiff’s product.” Jarrow Formulas, Inc. v. Nutrition Now, Inc., 304 F.3d 829 (9th Cir. 2000).

Slip op. at 987.

Newcal set forth in its complaint five particular statements that it alleged were false or misleading statements of fact:

(a) that IKON [ ] would deliver “flexibility” in their “cost-per-copy” contracts and that they would lower copying costs for consumers; (b) that IKON [ ] would deliver 95% up-time service in their IKON Contracts; (c) that original IKON Contracts were intended by IKON to be for a fixed term of sixty (60) months and would expire at the end of that term; (d) that IKON Amendments for sixty (60) months applied only to the changes on the Amendment, not to the entire fleet of IKON [ ] Copier Equipment of the consumer; and (e) that IKON’s “flexing” practices had been declared legal by [the District] Court in its opinion of December 23, 2004.

Slip op. at 987-88 (alterations in original)

The district court had concluded that statement (a) constituted “puffery” and the Ninth Circuit agreed. Citing Cook, Perkiss, & Liehe v. Northern California Collection Service, Inc., 911 F.2d 242, 245-46 (9th Cir. 1990), the court noted that determining whether an alleged misrepresentation is a statement of fact or is instead “mere puffery” is a legal question that may be resolved on a Rule 12(b)(6) motion. The court further noted that a statement is considered puffery if the claim is extremely unlikely to induce consumer reliance and that ultimately, the difference between a statement of fact and mere puffery rests in the specificity or generality of the claim (i.e., consumer reliance will be induced by specific rather than general assertions). A statement that is quantifiable, that makes a claim as to the specific or absolute characteristics of a product may be an actionable statement of fact while a general, subjective claim about a product is non-actionable puffery. The court held that statement (a) was not a quantifiable claim and does not describe any specific or absolute characteristic of IKON’s service, but instead is a general assertion that IKON provides its customers with low costs and flexibility.

As for statement (b), the court noted that whether IKON does or does not actually “deliver 95% up-time service in their IKON Contracts” is a factual question – Newcal’s allegation that this was a false statement at the time it was made is sufficient to survive a 12(b)(6) motion to dismiss.

With respect to statement (c), the court found that this statement could be proved false or possibly true but misleading. In either case, Newcal’s allegation that IKON’s assurance of a 60 month limitation on the contract was misleading since IKON fraudulently extended those contracts will depend on whether IKON knew at the time that it made the statement that it would fraudulently extend the contracts beyond their 60 month terms. IKON’s knowledge and intent at the time and whether the statement was intentionally misleading at the time it was made are factual questions.

As for statements (d) and (e), the issue was whether those statements could reasonably be said to have been made in “a commercial advertisement or promotion.”

The court, citing Coastal Abstract Service, Inc. v. First American Title Insurance Co., 173 F.3d 725, 735 (9th Cir. 1999), stated that in order for a statement of fact to constitute commercial advertising or promotion, it must be (1) commercial speech; (2) by the defendant who is in commercial competition with the plaintiff; (3) for the purpose of influencing consumers to buy defendant’s goods or services; and (4) disseminated sufficiently to the relevant purchasing public to constitute “advertising” or “promotion” within that industry (i.e., the representations need not be made in a “classic advertising campaign” and can include informal types of “promotion”).

The court again notes that whether the statements were disseminated sufficiently to the relevant purchasing public is a factual question, but that Newcal’s allegation that IKON made its allegedly false statements in commercial advertising and promotion of its goods and services through the dissemination of promotional literature to thousands of representatives and employees is sufficient to withstand dismissal at this stage.

As such, the court reversed and remanded Newcal’s Lanham Act claim, finding that the complaint sufficiently alleges all of the elements of a Lanham Act violation, including several false statements of fact that were allegedly disseminated to the relevant market’s consumers.

No comments: