Lexmark allows direct and contributory false advertising claims against certifier

U.S. Structural Plywood Integrity Coalition v. PFS Corp., No. 19-62225-CIV-ALTMAN, 2021 WL 810279 (S.D. Fla. Mar. 3, 2021)

Sometimes I worry that judicial writing is tending too much towards the flip as it moves away from prolixity, but this is a lovely example of how clear language can be deployed:

If you want to build with plywood in the United States, you generally need a certification— called a PS 1-09 stamp. The Plaintiffs are a coalition of ten American structural-plywood mills who manufacture and sell their plywood in the United States. The Defendants are two companies that inspect structural plywood and, if it conforms to the PS 1-09 standard, stamp the wood as PS 1-09-compliant. According to the Plaintiffs, the Defendants have been certifying 36 Brazilian plywood mills with the PS 1-09 stamp—even though the Defendants know (or should know) that the Brazilian wood doesn’t comply with the PS 1-09 standard. In the Plaintiffs’ view, this sham certification process has allowed the Brazilian mills to sell their cheaper, non-compliant wood all over the United States—thus displacing the Plaintiffs’ stronger, better, more expensive products.

Plaintiffs brought negligence and Lanham Act claims.

After a settlement with one defendant, the two remaining defendants “are the sole licensors of the PS 1-09 stamp to 36 Brazilian plywood mills that export structural plywood to the United States.” The US standards for structural plywood are voluntary at the federal level, but customary, and “construction codes across all 50 states require builders to use PS 1-09 structural-grade plywood.” The stamps thus allegedly operate as powerful advertising, allowing Brazilian plywood companies to market their products as conforming to an important American safety standard. But, plaintiffs allege, “it is impossible to consistently manufacture PS 1-09 compliant plywood from the extraordinarily fast-growing loblolly and slash pine plantations in southern Brazil which are the source of the raw materials for all of the Brazilian plywood producers in southern Brazil.” Such accelerated growth rates allegedly “inevitably result in weaker (and less dense) plywood, even when the plywood panels are produced from the same pine species that are commonly found in North America.” These cheaper imports drove down sales and profits of domestic manufacturers, causing the plaintiffs some $75 million in alleged annual losses.

A few years back, the American Plywood Association, the non-profit organization to which all of the plaintiffs belong, announced that defendants’ Brazilian licensees failed its PS 1-09 testing. Plaintiffs commissioned a second test at Clemson University which, again, allegedly revealed shocking failure rates.

Plaintiffs allegd both direct and contributory false advertising, which requires (1) that the “third party in fact directly engaged in false advertising that injured the plaintiff” and (2) “that the defendant contributed to that conduct either by knowingly inducing, or causing the conduct, or by materially participating in it.”

Were there allegedly false or misleading statements by the defendants? Yes, the defendants made representations about the quality of the Brazilian products by giving the Brazilian mills the authority to certify their plywood with the defendants’ PS 1-09 stamps. And without the stamps, the mills wouldn’t be able to sell in the US. This wasn’t like Google running a search engine that putative locksmiths abused to sell fraudulent services. Google didn’t attest to anything about the locksmiths; it was like a building that rents space to business owners. Defendants, “by contrast, are like a state medical-licensing board, which tests the doctors’ qualifications and, by issuing them their licenses, allows them to practice medicine within the jurisdiction. In doing so, the licensing board is making a powerful statement—some would say, the most important statement—about the doctors’ qualifications.”

Defendants argued that they weren’t making any statements at all, because it was the Brazilian mills stamping the wood. “But the Brazilian plywood companies didn’t steal or forge the Defendants’ stamp. The Defendants gave them the stamp and authorized them to use it…. These stamps are thus unquestionably statements of the Defendants.” Even if the mills are the ones touting the certification, the certification came from defendants, and it was disingenuous to say otherwise, given that outside of this litigation, it would be awful for defendants’ business for them to say that they weren’t doing the certifications. “What value … would the certification hold if it were just the self-affixed manifestation of any-old mill’s efforts at self-policing? No. The Defendants’ stamps only have value—and the Defendants’ certification businesses only exist— because the stamps are statements of the Defendants.”

Anyway, even if the stamps weren’t “statements” within the meaning of the Lanham Act, plaintiffs also alleged other false statements by defendants, such as letters to clients reassuring them about the APA report.

As for the contributory false advertising claim, it too was well pled. Plaintiffs “allege that the Defendants knew or should have known about the Brazilian mills’ lack of compliance; that, despite this knowledge, they failed to stop it; and that they conspired with the mills to facilitate the dissemination of faulty plywood throughout the United States.” Because it was undisputed that the mills needed the stamp to sell in the US, “looking the other way” “easily” sufficed as material participation.

Defendants argued that, because they neither stamped the plywood nor profited directly from plywood sales, their stamps weren’t “commercial advertising.” But “commercial speech encompasses not merely direct invitations to trade, but also communications designed to advance business interests.” And the stamps unquestionably “advance” their “business interests,” since their entire certification business depended on the message conveyed by the stamps.

Defendants then argued that the stamps were mere statements of opinion. But “subjective assessments by third-party entities that had no control over market entrants” involved in other cases were not the same as “a series of engineering tests susceptible of objective examination,” as here. A licensor’s certification is a statement of fact—that the aspirant has met the relevant standards—whereas a third-party evaluator that purports to assess competency would just be offering an opinion. It’s true that a licensor, like a medical board, can get it wrong. “But the possibility that the certifier might get the tests wrong—or apply the tests improperly—doesn’t somehow render the tests subjective. We can all agree that the answers to questions of math are objective, even if, from time to time, a young student may erroneously believe that two and two is five.”

Plus, plaintiffs weren’t merely alleging failure to meet the PS 1-09 standards. They alleged that use of the stamp certified that defendants had subjected the mills to certain quality-control processes—even though they allegedly did no such thing. That isn’t subjective. “Either the Defendants tested the wood—or subjected it to quality-control review—or they didn’t. In all these ways, then, the stamp is an actionable statement of fact— not a mere safety rating.” The court also noted that other professionals must of necessity rely on the stamp for verification of quality, since they don’t test it themselves. This too supported the characterization of the stamp as factual.

Next, defendants argued that their certification wasn’t the proximate cause of the plaintiffs’ injuries. But Lexmark teaches that direct sales diversion isn’t the only cognizable injury. Because (and only because) of the allegedly false certification, the Brazilian mills can sell their wood in the United States at a far lower price point, causing major losses. This was proximate cause.

Finally, defendants argued that plaintiffs didn’t sufficiently allege control or participation in the Brazilian mills’ noncompliance. But the plaintiffs adequately alleged close relationships with Brazilian clients, including exclusive inspection service deals. And they alleged that defendants knew or should have known of the defects based on biological facts and independent studies.

The court also refused to dismiss the negligence claim.