Section Review

Turning the Tables: How to Recover Damages Incurred by False Advertising

Rebecca L. Hanovice holds a B.A from Cornell University and a J.D. from Cornell Law School. She is an associate at Bromberg & Sunstein LLP in Boston, where she focuses her practice on complex patent and trademark litigation and patent prosecution. She is the co-author of “Making Words Mean Just What We Choose Them to Mean: Patent Claim Interpretation in Light of Phillips v. AWH,” and has assisted on an amicus brief submitted to the Federal Circuit Court of Appeals. She is admitted to the Massachusetts bar and to the U.S. District Court for the District of Massachusetts. © 2005 Bromberg & Sunstein LLP
On her way to her sidewalk booth one morning, Lucy, purveyor of friendly words of wisdom to her fellow classmates, notices some of her friends reading a posted advertisement. Overcome by curiosity, Lucy reads the advertisement and is shocked to find the following statement: “Students who follow Lucy’s advice are 75 percent more likely to be picked last during gym class, especially during football practice.” The flier was published by Charlie Brown Consulting Services. Furious, Lucy makes her way to her booth, intending to assure her customers of the advertisement’s falsity. Unfortunately for Lucy, she receives no business that day or the next.

Lucy has a claim against Charlie Brown Consulting for false advertising. False advertising, commonly known as product disparagement, is actionable under federal law. While Charlie Brown has a First Amendment right to express opinions, there is no protection for false commercial speech. Indeed, any person who uses any “false or misleading representation [or description] of fact, which . . . in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his . . . goods, services, or commercial activities, shall be liable in a civil action.” 15 U.S.C. § 1125(a)(1)(B) (Lanham Act § 43(a)(1)(B)). Though this section of the Lanham Act seems straightforward, a victim of false advertising like Lucy faces an uphill battle to prove, and obtain damages for, a competitor’s misrepresentations. This article summarizes the basic elements of a claim for false advertising, discusses the type of evidence needed to prove those elements, and explains how a court in the First Circuit might calculate an award that will compensate Lucy for loss of goodwill towards her business.

Elements of a False Advertising Claim

Lucy must provide enough evidence to demonstrate consumer confusion and causation, the two key elements of a false advertising claim.

Consumer confusion: Lucy first must prove that consumers were deceived or confused by Charlie Brown’s false advertisements. Such confusion can be shown through the use of consumer surveys, which represent the opinions and beliefs of a relevant cross-section of the consuming public, in this case her classmates.

Lucy may, however, be able to shift the burden of proof if she can demonstrate that Charlie Brown’s advertisements were literally false or that he intended to mislead their classmates. Lucy cannot prove intent to deceive through speculation; she must produce evidence that Charlie Brown actually engaged in a course of conduct intended to deceive the consuming public through false advertisements. Intent to mislead may be inferred if Charlie Brown was aware of the falsity of his advertisements but failed to take steps to correct them. Lucy should be aware, however, that an honest difference of opinion, particularly with regard to scientific support for advertising claims, may refute an accusation of intent to mislead.

Causation: Though there is a presumption of consumer confusion where Charlie Brown intended to deceive or made literally false statements, the First Circuit requires that a claimant in Lucy’s position prove that Charlie Brown’s actions caused the claimed harm to her business. The First Circuit has suggested, however, that it would permit a lower standard of proof whereby Lucy may prove either that Charlie Brown’s conduct was actually or likely injurious. Cashmere & Camel Hair Manufacturers Institute v. Saks Fifth Avenue, 284 F.3d 302, 318 (1st Cir. 2002). According to the First Circuit, a precise showing of causation is not required; Lucy can offer evidence of direct diversion of sales or lessening of goodwill associated with her services as a result of Charlie Brown’s advertising. The court did not address the fact that a diversion of sales seems more like actual injury than likely injury.

Evidence Considered by the Court to Establish Causation

A court faced with a case like Lucy’s must ensure that the factual record supports every item of damage and establishes a causal link between the plaintiff’s injuries and the defendant’s advertisements. Punitive damages are not permitted. Lucy may rely on the following list of evidentiary showings to demonstrate the harm caused by Charlie Brown’s actions. It is important to note the risk that use of only one of these forms of evidence may not be enough to support a damage award.

Defendant’s marketing reports and memos: Charlie Brown’s own memoranda or documents that discuss the success of his false advertisements and the influence of those advertisements on customers may support Lucy’s claim that Charlie Brown caused injury to her business.

Testimony of defendant’s employees: A court may consider as supportive of Lucy’s claim statements by Charlie Brown’s employees about the effectiveness of his false advertisements in obtaining and retaining business.

Testimony of plaintiff’s principals: A court may admit testimony of Lucy’s principals, such as her vice president in charge of marketing, about Lucy’s loss of customers and her inability to approach potential customers.

Expert testimony: Economic experts may be permitted to testify about the business’s lost growth opportunity and argue that Charlie Brown’s disparagement was the cause of harm to Lucy’s goodwill and reputation.

Evidence Considered in Awarding Damages

Although Lucy may be required to establish clearly causation of injury to her advice business, she is not required to demonstrate with certainty the amount of damages resulting from the injury. In fact, Lucy may recover if the evidence permits a reasonable, although approximate, measure of damages. The difficulty inherent in determining a damage award should not be confused with the plaintiff’s right to recover. This principle is particularly beneficial to plaintiffs like Lucy who wish to recover for damage to their reputation or goodwill. Courts use different methods of accounting for goodwill or reputation in order to come up with awards that adequately compensate harm to such intangibles. These methods include:

Trebling damages: Courts have been known to multiply a monetary award to compensate the plaintiff for loss of its goodwill.

Using accounting methods to measure the value of a business’s goodwill: Courts may also use principles of accounting to measure the value of a business’s goodwill.

Corrective advertising costs: A court may require Charlie Brown to reimburse Lucy for the costs of advertising undertaken to counteract misleading statements. An award for corrective advertising may be retrospective (costs already incurred to counter false advertisements), also known as completed corrective advertising, or prospective (costs that will necessarily be incurred in the future). Prospective corrective advertising is especially helpful where a plaintiff, like Lucy, does not have adequate resources to undertake corrective advertising before filing suit.

Defendant’s costs in disseminating false advertisements: Courts may also award damages based on expenditures made by Charlie Brown to disseminate his false advertisements. Lucy must be able to demonstrate, however, that Charlie Brown’s expenditures reasonably approximate her losses.

Tort Law Likely Governs False Advertising Actions

Courts in the First Circuit have characterized false advertising as a tort. Therefore, it is reasonable to expect that a perpetrator of false advertising like Charlie Brown will be held accountable for all foreseeable harms caused by his bad acts, perhaps even lasting suspicion among Lucy’s classmates that her advice will hurt their football careers.

Conclusion

Despite the challenging nature of a false advertising claim, Lucy need not dismantle her advice booth and change professions. With effective witnesses and persuasive evidence, Lucy may be able to recover for injuries caused by Charlie Brown’s false advertising campaign.

©2014 Massachusetts Bar Association