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.

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