September 20, 2018

You Can Sue Your Competitor For False Advertising

The world of ecommerce is fiercely competitive and complex, especially when it comes to the Amazon marketplace.

Making it even more difficult for merchants is the tendency for competitors to engage in outright lies about the features and benefits of their products.

The fact is, many merchants don’t know they can sue competitors for false advertising claims. However, federal statutes and FTC guidelines coupled with California’s Business & Professions Code 17,200 provide ecommerce firms strong standing and incentives to sue competitors.

That said, it’s important to note that you can’t simply sue under the FTC Act or its regulations. But, you can bring unfair competition claims under California’s Business & Professions Code alleging that the competition is unfair and unlawful because it violates FTC regulations. For instance, fake reviews can constitute unfair or unlawful competition under California law because the reviews violate FTC endorsement regulations.

Companies can also make false advertising claims against competitors under the federal Lanham Act, 15 U.S.C. § 1125(a), alleging that they suffered lost sales, or suffered damage to reputation as a result of the false statements by the competitor.

In a landmark case, the right to sue competitors - and even non-competitors - was clarified by the United States Supreme Court in Lexmark Intl., Inc. v. Static Control Components Inc., 572 U.S. 118 (2014). Before the Lexmark case, it was unclear who exactly had the standing to sue under this statute. In the Lexmark case, the Supreme Court created a two-prong test for standing, requiring that (1) plaintiff’s interest fall within the “zone of interests” protected by the law invoked; and (2) plaintiff’s “injuries are proximately caused by violations of the statute.” Today, it’s clear that a company can sue a competitor for false advertising, alleging damages under a variety of theories, including diminution in sales by the company as the damage caused by the competitor.

Competitors Suing Competitors: It Takes One To Know One

Competitors know their competitor’s products. They can easily assess, identify and prove when false advertising claims are made. Indeed, market competitors are more efficient regulators than the government, which might not have the expertise or the resources to investigate, prosecute and adjudicate false claims.

Merchants can buy a competitor’s product and test it to see if the ingredient label is accurate, or whether it’s a misrepresentation of facts. An Amazon merchant may also suspect unscrupulous tactics when a competitor’s product is priced lower than his products. For example, competitors might price their product lower by removing certain ingredients, while failing to indicate it on their labelling. These are common allegations in false advertising suits.

Certain industries do have higher rates of false advertising. In California, for instance, the cannabis / CBD industry has shown that almost 20 percent of marijuana products fail tests for potency and purity. This indeed may be due to a merchant taking a shortcut to find a way to lower prices. In this case, competitors can sue under the Lanham Act.

Other examples of false advertising suits include:

A 2016 FTC suit against Luminosity. The company agreed to pay $2 million in deceptive advertising charges for claiming its “Brain Training” program would help its customers improve mental functioning and protect them against cognitive decline. They had no scientific evidence to back their claims.While the government brought this lawsuit, a competitor could have brought such a lawsuit under the Lanham Act.

A 2016 class action suit against the web hosting company GoDaddy alleged the company charged high fees for inferior servers, despite what it told customers. The suit further alleged that the company is actually using virtualized servers instead of dedicated servers. Consequently, customers experienced serious declines in their server and website performance. The complaint alleged fraudulent concealment, negligent misrepresentation, and violations of the Arizona Consumer Fraud Act, the California False Advertising Law, and the California Unfair Competition Law.

FTC Disclosure Compliance Do’s & Don’ts:

According to the FTC, “Advertising must tell the truth and not mislead consumers. In addition, claims must be substantiated.”

  • Insert disclosures close to, or on the same page as the claim.
  • Use graphics as cues to entice consumers to look at the disclosure.
  • Conspicuously disclose all material terms, and if non-material terms are included on a separate page, use obvious hyperlinks to guide consumers.
  • Don’t make false claims.
  • Don’t use influencers, promoters, and affiliate marketers in exchange for money or products. If you do, you must conspicuously disclose the relationship.
  • If you make scientific claims, have substantive proof to back them up.
To Sue Or Not To Sue - The Million Dollar Question

Before deciding to sue a competitor, conduct a financial analysis assessing losses and attorney’s fees. Compare that to what the revenues could be without your competitor engaging in false marketing. You can seek damages in the form of lost profits, and even corrective advertising. Sometimes the most important remedy is an injunction prohibiting the competitor from engaging in certain acts in the future.

If Your Firm Has Been Hurt By False Advertising, Contact Us

Kronenberger Rosenfeld regularly advises ecommerce companies about potential litigation against competitors. If you’re suffering harm due to the unfair or unlawful acts of a competitor, feel free to contact us. I look forward to assisting you.

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    This entry was posted on Thursday, September 20, 2018 and is filed under Resources & Self-Education, Internet Law News.

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