Certification nonprofit engaged in commercial speech when it badmouthed uncertified seller

Handsome Brook Farm,
LLC v. Humane Farm Animal Care, Inc., 2016 WL 3348431, No. 16-cv-592 (E.D. Va.
Jun. 15, 2016)
 
Nice thorough
opinion playing out the interaction between Lexmark
and the definition of “commercial advertising or promotion.”  The USDA has the National Organic Program, for
eggs “Certified Organic.” The American Humane Association has a standard for
pasture-raised eggs allowing those who use it to claim “American Humane
Certified™” or “Pasture Raised.”  Humane
Farm Animal Care, a nonprofit, certifies eggs as “Certified Humane®.”  Handsome Brook sells egs with the USDA organic
and AHA pasture-raised and humane labels, but not the HFAC Certified Humane
label.
 
Producers that pass
HFAC’s inspection may use the Certified Humane® logo on their eggs; the
licensing agreement is renewable annually and application/inspection fees must
be paid annually to renew, as well as $.05 per case of thirty dozen eggs.  HFAC’s largest source of revenue in 2013 and
2014 was the licensing fees paid based on the quantity of product sold with the
HFAC logo.
 
Handsome Brook doesn’t
use the HFAC logo.  Some of its eggs are
packaged in Illinois, at Phil’s Fresh Eggs, which packages eggs from three
farmers, each of which is certified organic under the USDA program and also
AHA-certified, as is Handsome Brook. 
None of Handsome Brook’s eggs are HFAC-certified, though HFAC does
certify other farmers whose eggs are packaged at Phil’s Fresh Eggs.
 
In May 2016, Phil’s
Fresh Eggs’ Vice President contacted HFAC to update its certification. During
the resulting inspection, the inspector observed that Handsome Brook’s USDA
certification was from 2013 and an annual update was not on file, and though
Handsome Brook had an AHA certification on file, the three source farms did
not. The inspector stated that she could not verify that Handsome Brook’s eggs
were “American Humane Certified” because the AHA had not inspected Phil’s Fresh
Eggs.
 
However, Handsome
Brook and its three suppliers were in fact all appropriately certified  under the USDA and AHA programs; Handsome
Brook emailed the suppliers’ USDA certifications to Phil’s Fresh Eggs five
months before the audit, and the AHA’s publicly viewable website listed
Handsome Brook’s three suppliers as “currently considered certified under the
umbrella of Handsome Brook Farm, LLC.”   HFAC’s VP believed that the audit report confirmed
a complaint she received about a month earlier about Handsome Brook mislabeling
its eggs, so she drafted an email titled “Unverified Pasture Raised Label
Claims”:
 
I am writing you to share some potentially troubling news about one of
your egg suppliers, Handsome Brook Farms. Based upon a whistleblower complaint
we recently conducted a traceability inspection of a packaging plant that packs
Certified Humane® eggs and also packs Handsome Brook Farm’s (HBF) eggs. It came
to our attention that the “Pasture Raised” claims on the Handsome Brook cartons
could not be verified. In fact, of the three producers whose eggs were being
packed into HBF cartons, none were pasture raised. These eggs had tags that
stated, “Certified Organic” but our auditors found that the organic
certification was not current.
 
The email continued
that the auditor found “there was no validation that the eggs going into HBF
cartons were from [AHA] certified farms,” that there was no update of Handsome
Brook’s USDA certification on file at Phil’s Fresh Eggs, and that the
“veracity” of Handsome Brook’s American Humane Certified labeling claim “could
not be substantiated.”  It ended:
 
I hope you will reconsider changing suppliers. Producers who are
Certified Humane® undergo traceability audits to verify that every egg that
goes in every carton that has claims such as “free range” or “pasture raised”
are verified by our inspectors to be exactly that. This in turn protects you.
 
She sent the email
to 69 people at 39 companies, including the top 10 conventional grocery chains
in the United States. She chose them because they were all “retailers who were
thinking of switching from actual pasture-raised laying hens to the Handsome
Brook eggs.”  “The email had the intended
effect,” causing Handsome Brook to lose customers; Whole Foods temporarily
pulled Handsome Brook’s eggs from its shelves, while a large group of retailers
indefinitely pulled the eggs, and a prospective customer indefinitely delayed
plans to launch HB’s eggs in its stores.
 
Handsome Brook sued
for false advertising, tortious interference, and trade libel.  Previously, the court granted a TRO against
further dissemination of the email; in this opinion, it granted a preliminary
injunction.
 
The court used the Gordon & Breach test to determine
whether this was “advertising or promotion.” 
HFAC argued that the email did more than propose a commercial
transaction, because its primary purpose was to support humane animal
treatment.  It also argued that its
certification fees didn’t provide a sufficient economic incentive for the email
to be commercial in nature.
 
The court
disagreed.  HFAC pursued its anmal
welfare objective through “distinctly commercial means.”  It sought to leverage consumer demand for
humane treatment to encourage producers to adhere to its standards.  “Thus both the achievement of HFAC’s public
interest objective and its economic survival critically depend upon its
licensing agreements with producers.”  In
light of that economic reality, the email was primarily commercial in
nature.  In the VP’s own words, she sent
the email to protect the interests of her own licensees. The context
additionally supported calling the email commercial, since the VP intentionally
sent it “to retailers who were thinking of switching from actual pasture-raised
laying hens to the Handsome Brook eggs.”  
 
Gordon & Breach also asks whether the parties are in
commercial competition.  The court,
citing Lexmark, rejected the idea
that the parties have to compete at the same level of the distribution chain.  Although Lexmark
expressly disclaimed any comment on whether the communications before it
constituted “commercial advertising or promotion,” the court here sensibly
pointed out that
 
it would be a perplexing decision by the Supreme Court to conclude that
indirect competitors had standing to bring a Lanham Act claim, but those same
plaintiffs’ claims would necessarily fail on the merits due to lack of direct
competition. Many post-Lexmark cases
have seized on that intuitive conclusion and the absence of a direct-competitor
requirement in the plain language of § 1125(a)(1)(B) to conclude that such a
relationship is not necessary to show commercial advertising or promotion.
 
Indeed, the court
noted, no post-Lexmark case finds the
absence of a direct-competitor relationship to be dispositive in a Lanham Act
claim. The competitive relationship in this case was sufficient: HFAC-certified
eggs compete directly with Handsome Brook’s eggs.
 
HFAC argued that its
speech wasn’t made “for the purpose of influencing consumers to buy defendant’s
goods or services,” as required by Gordon
& Breach
, because it only promoted a class of goods and would only
tangentially raise revenue for HFAC.  But
this wasn’t a nonprofit fundraising letter to prospective donors.  Further, the email promoted HFAC’s product:
the license it offered licensees.  “It is
true that the license promotes a public interest, but it is commercial
nonetheless.” s
 
And the email was
disseminated sufficiently to constitute advertising and promotion within the
relevant industry, even if “many national and countless regional and local
retailers” weren’t included: the top ten conventional grocery chains, over
16,000 stores nationwide, were included. 
HFAC argued that it only targeted retailers that already carried Humane
Certified eggs, but a targeted ad is still an ad.  HFAC specifically chose retailers that were
considering switching to Handsome Brooks eggs, which “clearly demonstrates an
attempt to penetrate the relevant market.”
 
As for falsity, the
email falsely stated that (1) “of the three producers whose eggs were being
packed into HBF cartons, none were pasture raised,” (2) “[b]ased upon a whistleblower complaint we recently conducted a
traceability inspection of a packing plant that packs Certified Humane® eggs
and also packs Handsome Brook Farm’s (HBF) eggs,” and (3) Handsome Brook eggs
inspected at Phil’s Fresh Eggs were being mislabeled as certified organic. This
last was stated by necessary implication: the email said that Handsome Brook’s
organic certification documentation was issued in 2013 and “no annual update
was on file” and also that “our auditors found that the organic certification
was not current.” In fact, Handsome Brook sent its suppliers’ current
certificates several months before the inspection, and even if the auditor
didn’t find them in the file, the statements created the impression that
Handsome Brook was mislabeling its eggs.
 
There was no dispute
about materiality, which was supported by intuition, HFAC’s own business model,
and HFAC’s own statements about the importance of reputation “[i]n the
ethically-sourced products space.” 
HFAC’s VP testified that she sent the email, in the court’s words, “hoping
retailers would find the allegations of mislabeling relevant in their
purchasing decision.”  There was also no
dispute about actual deception and injury.
 
Handsome Brook also
showed irreparable injury:
 
Plaintiff is a young, but quickly growing company. The email had a
clear effect on that growth and Handsome Brook’s goodwill, causing Handsome
Brook to lose one customer temporarily and two large customers indefinitely.
Those injuries are irreparable and would likely compound if the email is
disseminated further.
 
Nor was prohibiting
further dissemination enough.  Handsome
Brook offered evidence that the information in the email “has now seeped even
beyond the initial recipients,” having been forwarded among its
competitors.  A broker reported that
rumors have been repeated at an industry trade show that “Handsome Brook Farm
had failed a Certified Humane audit.” Each forward or word-of-mouth
communication threatened “additional loss of goodwill, customers, and growth
opportunities,” which were irreparable injuries. Handsome Brook estimated that
the monthly loss of revenue from even one grocer pulling Handsome Brook eggs was
in the hundreds of thousands of dollars. “Even if this number could be
sufficiently estimated so as to be recoverable at trial, there is a very small
likelihood that HFAC could satisfy such a judgment if the injuries continue to
swell, as HFAC is a nonprofit operating at a [deficit].”
 
Handsome Brook’s own
defense of itself wasn’t sufficient.  “HFAC’s
email directly impugns Handsome Brook’s credibility, such that an email from
Handsome Brook is not likely to have the intended palliative effect.”  HFAC’s accusation gave the claim credibility;
the same credible source was required to halt the harm.
 
Thus, the balance of
the equities favored ordering HFAC to issue a corrective email.  Though that might harm its reputation, that
was HFAC’s self-inflicted injury, by sending the email after performing only a
cursory investigation.  The auditor or
the VP “could have made some effort to contact Handsome Brook, Handsome Brook’s
suppliers, AHA, the USDA, regional certifying organizations, or publicly
available information to verify the conclusions reached in the audit.” However,
an order requiring HFAC to post a corrective statement on its website was too
much; it would just be public shaming. 
The corrective email would also further the public interest in avoiding
false advertising.

from Blogger http://ift.tt/28J7MK7

Advertisements
This entry was posted in Uncategorized and tagged , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s