Topic: Statutory standing and the Lanham Act.
Four residential real-estate appraisers sought to bring a class action against a software developer for false advertisement under the Lanham Act. The appraisers used the defendant developer's software to submit critical appraisal information to lending institutions. Despite assurances of security and confidentiality in its marketing materials, the developer harvested submitted information to develop a competing database. The appraisers alleged that they lost profits and business when its lending customers started using the developer's database as an alternative to commissioning new appraisals. The district court found the connection between the false advertising and the appraisers' claimed damages too tenuous and dismissed the complaint for lack of prudential (judicially-created) standing.
However, the 5th Circuit reversed, holding that the plaintiffs had adequately pled the required commercial injury necessary for Lanham Act standing. Even though the relationship between the injuries and defendant's misconduct was somewhat indirect, the court found that the appraisers' complaint adequately pled facts necessary to establish prudential standing. Accepting the facts alleged as true, the court found 1) the nature of the injury negatively impacted the appraisers' ability to compete in the marketplace; 2) the appraisers alleged an injury to their own competitive interests that was not derivative; 3) the damages claim was not speculative; and, 4) there was little risk of duplicative damages or a complex damages apportionment process.
- A five-factor test determines prudential standing under the Lanham Act: 1) nature of injury (whether it is an appropriate type of injury to allow a private remedy for redress); 2) directness or indirectness of injury; 3) proximity or remoteness of party to the injurious conduct; 4) speculativeness of damages claim; and, 5) risk of duplicative damages or complexity in apportioning damages. Multi-factor tests usually entail some measure of internal redundancy, occasionally allowing strong proof on a majority of the factors to outweigh a short-coming on a single prong.
- Although it is a broadly-construed remedial statute, the Lanham Act requires a commercial injury to establish prudential standing - meaning only competitors, and not customers, can bring a claim for false advertisement.
- Depending on a plaintiff's ability to satisfy the other four factors of prudential standing (as the plaintiff appraisers did here), an indirect injury may be enough to support such standing under the Lanham Act. Here, the Court of Appeals held that the alleged misappropriation of appraisal data by the developers served as the direct cause of the appraisers' drop in business, not its false advertisements. As noted by the court, this meant the appraisers' injury was "less direct than is typical" in false advertising cases. But no other intervening market participant existed who was more directly injured by the developer's false advertisements and anti-competitive behavior. Thus, although the second factor in the five-prong test was not satisfied, plaintiffs had met their burden to establish prudential standing.
At the pleading stage, the factual allegations of the complaint must allow the reviewing court to draw a reasonable inference that the defendant is liable for the misconduct alleged. Claims based on statutory causes of action can succeed or fail based on how well the allegations of the complaint establish the link between the injury the statute was designed to redress and the specific circumstances of the case at hand. Therefore, in the case of the Lanham Act, "plaintiffs who complain of nothing more than a ‘competitor's fraudulent act in running its business that gives it an advantage'" and fail to assert this linkage "do not have prudential standing under § 43(a)." Id. at *41.
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