Rule 9(b) applies to false advertising Lanham Act claims against SmileDirect

Ciccio v.
SmileDirectClub, LLC, 2020 WL 2850146, No. 19-cv-00845 (M.D. Tenn. Jun. 2,

SmileDirect sells plastic
aligners for orthodontic use. Its SmileDirect program uses teledentistry as an
alternative to conventional orthodontic care. The American Dental Association
filed a complaint with the FTC alleging that SmileDirect has made “numerous
false and misleading claims…to fraudulently entice customers to purchase its
products and services”; it and its state affiliates also filed complaints with
the FDA and with state licensing authorities. SmileDirect argued that this is
an anticompetitive campaign. 

The initial
complaint was filed by a SmileDirect customer, Nigohosian, and three
orthodontists, pleading eight counts under various common law and statutory
theories of false advertising, consumer protection, and fraud. Nighosian accepted
an online contract requiring arbitration by the AAA for everything except “claims
within the jurisdiction of Small Claims Court.” The court initially ruled that
the threshold issue of arbitrability for her should be decided, in the first
instance, through the arbitration process; the consumers (including later-added
ones who the court indicated but did not rule would also be bound by this
holding) voluntarily dismissed their claims.

While various
defense motions were pending, one of the consumers filed a Demand for
Arbitration with the AAA, and AAA sent the attorneys involved a letter
informing them that the AAA’s “Healthcare Due Process Protocol” dictates that
the AAA “may only proceed forward on arbitration matters arising out of
healthcare treatment agreements if the parties agree to binding forms of
dispute resolution after a dispute arises.” In light of this determination of
nonarbitrability, two of the consumers sought to rejoin the case here, even
though this decision was made “administratively, not by an arbitrator,” and
involved only one plaintiff.

Defendants argued
that, though the arbitration clauses require the parties to abide by AAA rules,
they do not require them to rely on the AAA itself to arbitrate, so the plaintiffs
must seek out an alternative venue. The AAA, by policy, “will no longer accept
the administration of cases involving individual patients without a
post-dispute agreement to arbitrate.” However it will “administer disputes
between patients and healthcare providers to the extent a court order directs
such a dispute to arbitration where the parties’ agreement provided for the
AAA’s rules or administration.” Courts have split on the effects of this policy.
As to the possibility of another abitrator, the plaintiffs pointed out that the
AAA’s own Consumer Arbitration Rules provide that, “[w]hen parties have
provided for the AAA’s rules or AAA administration as part of their consumer
agreement, they shall be deemed to have agreed that the application of the
AAA’s rules and AAA administration of the consumer arbitration shall be an
essential term of their consumer agreement.” The Rules also say that, if the AAA
declines to administer an arbitration, “either party may choose to submit its
dispute to the appropriate court for resolution.” Courts that nonetheless
required arbitration in similar situations did not appear to have relied on the
content of the AAA rules as a whole, but merely on the relevant arbitration
provisions and the Healthcare Policy in isolation. Thus, the consumer who
received the letter showed that he was free to go to court.

However, it was “colorable”
that the AAA would accept Nigohosian’s claim pursuant to the court’s earlier
order, based on an exception in the Healthcare Policy Statement for directly
court-ordered arbitration, so she had to try, even though an earlier arbitration
request involving another potential plaintiff had been rejected by AAA. But she
could rejoin the case, subject to a stay, while arbitration proceeds/the AAA
decides if it’s arbitrable—the court explicitly said that its prior references
to “the arbitrator” did not preclude arbitrability review by the AAA’s
non-arbitrator personnel; reading the order as a requirement to have the AAA
arbitrate would rewrite the AAA’s rules, to which the parties agreed.

Lanham Act claims by
orthodontists: First, the court decided that Rule 9(b) applied to Lanham Act
false advertising claims. Somehow courts never do this with Lanham Act §43(a)(1)(A)
claims. Plaintiffs argued that “a strict application of Rule 9(b) [would be]
unnecessary, unworkable, or unfair” in that, e.g., “advertisements are
frequently disseminated over and over, sometimes through multiple channels,”
and “ ‘[w]here the allegedly misleading advertising has occurred over a long
period of time, it would be unreasonable and contrary to the Sixth Circuit’s
liberal construction of Rule 9(b) to require Plaintiff to identify the exact
day, hour or place of every advertisement which made the allegedly misleading
statements.’” And in a Lanham Act claim, “the plaintiff, typically a
competitor, is unlikely to have been the actual intended recipient of the
relevant communications. It makes less sense, therefore, to impose on the
plaintiff a heightened responsibility in describing what was said—a fact about
which he, unlike a defrauded person, would have no special knowledge.”

But “at least some
of the purposes of Rule 9(b) are clearly implicated in the false advertising
context,” such as protecting a defendant from unwarranted damage to its
reputation (even though intent isn’t required, as it is not for trademark
infringement). And Rule 9(b) is supposed to “discourage[ ] ‘fishing expeditions
and strike suits’ [that] appear more likely to consume a defendant’s resources
than to reveal evidence[ ] of wrongdoing.” Allegedly false advertising about
quality “could open up discovery into every aspect of the product. If the
plaintiff is required to specifically identify the difference between the
advertised features and the product itself, discovery can be narrowed.”

However, the court
cautioned that adequately pleading false advertising didn’t require pleading
fraud with particularity; the elements of the claim controlled. And even under
Rule 9(b), what constitutes particularity depends on what’s necessary to
provide sufficient notice.

advertising or promotion: Plaintiffs alleged a lot of it: SmileDirect allegedly
engaged in an “omni-channel approach to marketing, using billboards (including
in Times Square and the NYC Subway), Google, Facebook, Instagram, and other
social media platforms,” as well as having “purchased advertising time during
televised national sporting events, such as college football games.” The
complaint quoted some verbatim, and also identified as another example a blog
post from SmileDirect’s “Grin Life” blog. The court didn’t require “specific
dates and times” for the “omni-channel” marketing given the “sustained,
repeated communications.” In cases involving numerous false statements, a
plaintiff can satisfy Rule 9(b) by describing the allegedly false scheme and
providing “representative” examples, rather than listing every wrongful act.

Claims that SmileDirect’s customers were highly satisfied “may ultimately turn
out to be the type of vague puffery that cannot support statutory liability,”
but there were other more concrete and specific claims, e.g., the claim that
“[a]n individual who is requesting treatment by using SmileDirectClub’s
aligners is receiving the same level of care from a treating
dentist-orthodontist as an individual visiting a traditional orthodontist or
dentist for treatment.” Plaintiffs pled specific ways in which SmileDirect’s
internet-based teledentistry system allegedly “falls far below the level of
care involved in a traditional dental setting, particularly with regard to the
limited diagnostic tools available in the SmileDirect setting and the
comparatively lesser role played by dentists rather than non-dentist support
personnel.” Whether “level of care” was sufficiently definite to be factual
could not be decided on a motion to dismiss. 

In addition, SmileDirect
allegedly advertised that SmileDirect’s plastic aligners work “three times
faster than braces.” This suggested that aligners perform a comparable service
to traditional braces, which plaintiffs alleged was false. SmileDirect also
allegedly misrepresented its return policy through its “Smile Guarantee”
policy, leading customers to believe that joining the SmileDirect Program
entailed less financial risk than it did. These too were fact questions, and adequately
alleged to be material. “When choosing between competitive services, the degree
to which one service actually offers an adequate substitute for the other is an
obviously important consideration. Overall cost is also an important consideration,
and whether one will be able to get a refund is a component of determining the
range of potential costs.”

Finally, each individual
orthodontist plaintiffs specifically alleged that his volume of business was
reduced by the diversion of patients to SmileDirect. “Although the defendants
fault the plaintiffs for failing to allege more facts that would support the
conclusion that specific patients chose SmileDirect over them, it is difficult
to imagine how an orthodontist could reasonably be expected to know the
identities of the patients who merely considered him before going elsewhere. If
anyone other than the patients would have that information, it seems more
likely that it would be SmileDirect.”

Tennessee Consumer Protection
Act: The Tennessee Supreme Court has held that non-consumers can sue under the
law if they suffer relevant harm from the violation of the law, and the
orthodontists alleged lost money or property in the form of lost business, so the
orthodontists’ TCPA claims could proceed. The TCPA also doesn’t allow private
class actions for damages, but the statute indicated that injunctive and
declaratory relief for a class was possible.

Florida Deceptive
and Unfair Trade Practices Act: FDUTPA doesn’t allow consequential damages. So
are lost profits consequential or actual damages under the statute? The Florida
state courts haven’t resolved the question, and Florida federal district courts
have disagreed. The court’s Erie guess here was that Florida would
consider a competitor’s lost profits to be actual damages under FDUTPA, which
provides that it shall be “construed liberally to promote” its purposes, and whose
private cause of action, like the TCPA’s, “does appear to contemplate a broad
range of potential plaintiffs. Indeed, the FDUTPA was explicitly amended to
make clear that it allowed claims by parties other than individual consumers,
which supports the inference that it must permit the kinds of damages that
non-consumer plaintiffs are likely to suffer.”

New York General
Business Law §§ 349 and 350-A: Could also proceed because the NY orthodontist
plaintiff’s injuries weren’t derivative of the injuries suffered by SmileDirect
customers. “The injuries suffered by consumers may have been caused by the same
allegedly illegal marketing that caused the orthodontists to lose business, but
one injury was not created by the other.”

from Blogger

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