February 2011 Issue
Civil Cases
Salon FAD v. L’Oreal USA, Inc.,
2011 WL 70591 (S.D.N.Y. Jan. 10, 2011)
ABSTRACT
The Southern District of New York denied beauty-product manufacturers’ motions to dismiss a class-action false-advertising lawsuit brought on behalf of a class of beauty salons based on the manufacturers’ false statements that certain beauty products were sold only in professional salons. The court held that plaintiffs’ allegations regarding potential reputational harm caused by the false statements were sufficient to satisfy the Article III standing and Lanham Act prudential-standing requirements. The court further held that plaintiffs adequately alleged a Lanham Act false-advertising claim because the defendants’ false statements were sufficiently related to the inherent quality of the products, and the advertising was likely to have a material effect on consumers’ purchasing decisions.
CASE SUMMARY
FACTS
A group of beauty salons and a related nonprofit organization (“Plaintiffs”) filed a class-action false-advertising lawsuit against a group of beauty-product manufacturers (“Defendants”) based on Defendants’ false representations on product labels, company websites, and in print advertisements that their hair-care products were available for purchase exclusively through professional salons, when in fact they were also available through nonsalon retail outlets. Plaintiffs alleged that Defendants’ false advertising resulted in a loss of sales and damage to their reputation and goodwill with consumers who purchased the “salon-only” products at Plaintiffs’ salons only to discover that the products are also widely available at mass retailers.
The manufacturers moved to dismiss the lawsuit on three grounds: (1) Plaintiffs lacked Article III standing because they failed to allege an injury that is “fairly traceable” to the Defendants’ false advertising; (2) Plaintiffs lacked statutory standing under the Lanham Act because they failed to identify a likelihood of injury caused by the Defendants’ false advertising; and (3) Plaintiffs did not allege the necessary elements of a false-advertising claim because they did not show that the false statements were material to consumers purchasing the Defendants’ products.
ANALYSIS
The court first analyzed the standing requirements under Article III of the U.S. Constitution. To establish Article III standing, a plaintiff must show (1) that he suffered an injury-in-fact—an invasion of a legally protected interest that is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical; (2) that there was a causal connection between the injury and the conduct complained of; and (3) that it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.
Defendants argued that Plaintiffs failed to establish the second prong of the Article III standing test, namely, a causal connection between the injury alleged and the Defendants’ false advertising. Defendants argued that any injury caused by the diversion of the products from salons to mass retailers did not flow from the false “salon-only” advertising, but rather it was the act of diversion itself that formed the basis of Plaintiffs’ injury. The court recognized that Plaintiffs’ market share would likely be reduced by the diversion of products to mass retailers even if the false advertising ceased, but held that the complaint identified an injury separate from the injury created by the diversion. Specifically, the court noted that Plaintiffs’ complaint asserted an injury to their reputation based on customers who may associate the “salon-only” advertising with the salons themselves as opposed to the manufacturers, and therefore may stop patronizing the salons when they discover the falsity of the advertising. The court rejected Defendants’ arguments that this chain of causation was too attenuated, and determined that Defendants’ false statements have a “determinative or coercive effect” on the consumer’s decision to stop patronizing the sellers’ salons. Accordingly, the court held that Plaintiffs satisfied the standing requirements of Article III.
The court then turned to the issue of Lanham Act standing. Section 43(a) of the Lanham Act extends standing to any plaintiff who “believes that he or she is likely to be damaged by” the false advertising. The Second Circuit, however, employs prudential-standing limitations that narrow the class of potential plaintiffs to only those who are able to demonstrate (1) a reasonable interest to be protected against the alleged false advertising, and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising. The Second Circuit requires a more substantial showing of injury and causation where the plaintiff’s products are not obviously in competition with the defendant’s products, or the defendant’s advertisements do not draw direct comparisons between the parties’ products.
For the same reasons Defendants contended that Plaintiffs lacked Article III standing, Defendants argued that Plaintiffs failed to satisfy the Second Circuit’s prudential-standing requirements. Additionally, Defendants argued that Plaintiffs lacked Lanham Act standing because Plaintiffs were not competitors of Defendants. Again, the court rejected these arguments, holding that Plaintiffs had an interest in maintaining their reputation for integrity among their customers. Defendants’ false advertising undermined Plaintiffs’ perception of integrity among customers and thus resulted in injury to Plaintiffs’ reputation. Rejecting Defendants’ argument that the advertising was unconnected to Plaintiffs’ injury because it was based on consumers’ disbelief of the advertising, the court recognized that consumers’ disbelief could indeed constitute an injury. The court thus held that Plaintiffs satisfied the prudential-standing requirements under the Lanham Act.
Finally, the court addressed Plaintiffs’ substantive false-advertising claim. To establish a claim for false advertising under Section 43(a) of the Lanham Act, Plaintiffs must demonstrate that the statement at issue is false by proving either that (1) the advertising is literally false as a factual matter, or (2) although the advertisement is literally true, it is likely to deceive or confuse customers. In addition to proving falsity, the Plaintiffs must also show that Defendants misrepresented an “inherent quality or characteristic” of the product.
Defendants argued that the false statements did not misrepresent an “inherent quality or characteristic” of the products because the statements related to the marketing of the products, specifically, the extrinsic characteristic of the channels through which they are sold. The court rejected this argument, holding that the false statements implied that the quality of the products was so superior that they were available only through professional hair salons. Defendants further argued that the “salon-only” advertising was unlikely to have a material effect on consumers’ purchasing decisions. The court held that Defendants’ false “salon-only” claim went directly to a highly relevant aspect of the products—quality and superiority—and that consumers may be willing to pay a premium for products sold exclusively through professional salons because they associate those products with professional expertise. The court thus held that Plaintiffs adequately alleged their false-advertising claim.
Accordingly, the court denied Defendants’ motions to dismiss. CONCLUSION
This case demonstrates that sellers can establish standing to sue their suppliers for false advertising relating to the supplied products if the sellers have a reasonable belief that the suppliers’ false statements are likely to injure the sellers’ reputation with their customers. Thus, neither loss of sales nor direct competition between the parties is required to satisfy the standing requirements of Article III or the Lanham Act. In addition, this case shows that the trade channels through which a product is sold to consumers can constitute an “inherent quality or characteristic” of the product for purposes of a false-advertising claim where the advertised trade channels directly reflect a relevant aspect of the product (e.g., superior quality).
