Rebecca Tushnet

Another old one coughed up by Westlaw.  Interesting to me because of Maxim’s litigation based on its desire to license its brand in many fields; licensors love to rake in the money, but they hate being held responsible for what licensees do.  Pullman sued the publisher of Maxim Magazine for common-law fraud and violation of the New Jersey Consumer Fraud Act for misrepresenting to her that it owned the Maxim Bungalows when it wasn’t.  Pullman alleged that she bought timeshares in reliance on this belief, and suffered damage when the project went bankrupt as part of an alleged Ponzi scheme.  The magistrate judge recommended dismissal of the claims against two named individuals (officers/etc. of one of the corporate defendants), but would find the basic claims against the corporate defendants both plausible and pled with sufficient particularity.

According to the complaint, Pullman was a longtime timeshare purchaser. She was solicited to invest in a new Maxim Bungalow project, and was told that Maxim was an “owner” and “large” investor in the Maxim Bungalows.  She saw a video that would lead a reasonable viewer to believe that Maxim was an owner, and received a book of draft beneficial interest documents that didn’t disclose that Maxim was not an owner and had only licensed its trademark to the actual owners.  The book did state that the project could be renamed by the company that was “creating the Condominium Regime.”  

She had several discussions with Roger Walser, her Maxim Bungalowas sales rep, who told her that the investment was safe and other things that reinforced the idea that Maxim was an owner, such as telling her of “Maxim’s desire, as an owner to capitalize on the world renowned Maxim name to ‘fill the resort with the Maxim readership.’” Walser reassured Pullman that any renaming of the Maxim Bungalows would still include the word “Maxim,” and that the only way Maxim would remove the Maxim name was if it sold “[its] interest in the Maxim Bungalows[,] which would require the approval of the Homeowners’ Association.”  Walser represented himself to her as an employee of a group (here the Elliotts) that had just obtained a major sales agreement with Maxim Magazine making them the exclusive sales agents of the Maxim Bungalows.”  This led her to believe that Walser “had authority to sell Maxim Bungalows on behalf of Maxim.” The Elliotts were resort developers charged with “the construction and management of the Maxim Bungalows project,” and a license agreement to use the Maxim trademark in connection with the Maxim Bungalows.  Another person told her that a company called Ocean Palms, as a “joint Maxim–Elliott Company,” was an owner of the Maxim Bungalows.  Pullman signed on because “she felt secure investing alongside ‘Maxim,’ a large media company which would take every step possible to ensure that [its] ‘valuable’ name was protected including, at minimum, a thorough investigation of the Elliotts.”

Pullman further investigated Maxim’s connection to the Maxim Bungalows and visited webpages linked from the maxim.com website that contained information about the project.  The Maxim website and linked pages didn’t provide the licensing agreement or disclose that Maxim was just a passive trademark licensor. None of the brochures she’d been provided disclosed Maxim’s true role.  Because she didn’t find any contrary information, she finalized her purchase (a six-figure sum).

The magistrate judge concluded that she’d sufficiently pled fraud, which requires “(1) a material misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon by the other person; and (5) resulting damages.”  

Alpha Media, Maxim’s publisher, argued that she couldn’t attribute the fraudulent statements to it and that it had no duty to disclose its role as trademark licensor.  Alpha Media argued that the individuals who allegedly claimed that Maxim was an owner weren’t connected to Maxim and that it didn’t produce the ads/brochures/etc. Pullman saw.  But Pullman pled sufficient connections between Maxim and the fraudulent misrepresentations to survive a motion to dismiss.  Taking her allegations as true, she alleged an agency relationship between Maxim and Walser, and Maxim and the Ocean Palms realtor.  Plus, other evidence made her belief more plausible, such as the links from maxim.com to the Maxim Bungalows webpages and the fact that nothing in the many ads/documents she saw said that Maxim wasn’t an owner. 

In the alternative, she sufficiently alleged an apparent agency theory.  The indicia of authority on which she relied originated from Maxim, including the “exclusive sales agent” agreement and the ad materials bearing Maxim’s marks.  Numerous cases hold that a jury can find apparent agency through authorized use of prominently displayed insignia. (Citing Gizzi v. Texaco, Inc., 437 F.2d 308 (3d Cir. 1971) (appearance of authority could be created by putative principal’s insignia and slogan prominently displayed on putative agent’s service station, and putative principal’s nationwide advertising campaign); Mayflower Transit, LLC v. Prince, 314 F. Supp. 2d 362 (D.N.J.2004) (putative principal’s logo was on truck that picked up goods and boxes in which goods were placed, and party met with person who identified himself as putative principal’s sales manager); In re NorVergence, Inc., 384 B.R. 315, 368 (Bankr. D.N.J. 2008) (plaintiff alleged that putative principal knowingly allowed putative agent to utilize the principal’s logo on agent’s brochures, among other facts); Mercer v. Weyerhaeuser Co., 735 A.2d 576 (N.J. Super. Ct. App. Div. 1999) ((1) involvement of putative principal was important to plaintiff’s purchase decisions; (2) when plaintiff saw putative agent’s advertisement it always had putative principal’s name and logo with it; and (3) plaintiff was told by agent’s salesman that agent was division of principal).

Defendants argued that Pullman couldn’t have relied on a licensing agreement she didn’t know about at the time she bought.  (Um, because she thought that Maxim was an owner?  Isn’t that how apparent authority always works—there’s some kind of relationship and then a misrepresentation of its nature/quality?)  But there was other evidence of Maxim’s apparent authority, which she encountered before she bought.

Now, on to the substance of the fraud claims.  Pullman’s allegation of reliance wasn’t unreasonable as a matter of law.  Defendants argued that reliance was unreasonable because the purchase contract was with an unrelated company.  But the Ocean Palms realtor told her that Ocean Palms was jointly owned by Maxim, making Pullman’s belief that Maxim was connected to the contract reasonable.  They argued that Pullman’s reliance was unreasonable because she was an experienced timeshare investor who would not believe that Walser could contractually bind non-parties. “But Pullman’s belief is rendered considerably more reasonable because Walser said that he worked as an agent of Maxim, his authority seemed corroborated by the promotional video, and every other person with some sort of apparent authority to discuss the Maxim Bungalows stated Maxim was an owner.”  Finally, they argued that Pullman was unreasonable because she knew that Alpha Media was a trademark licensor who could terminate the license.   But “her argument is that she also thought it was more. She pleads she knew there was risk involved in her purchase; her argument is that she decided the risk was manageable because of her belief that Maxim, as an owner, was backing the project with the value it had invested in its brand.”  This was reasonable.

Duty to disclose: such a duty doesn’t exist unless disclosure is necessary to make a previous statement true or the parties share a special relationship.  But here the alleged fraud was misrepresentation, not mere silence.

Alpha Media argued that Pullman’s alleged reliance wasn’t reasonable because there was no allegation that it had information that would have helped her.  But the fact that Maxim wasn’t actually an owner would plainly have caused Pullman to rethink her purchase.  Though she pled that she expected Maxim to investigate the Elliotts thoroughly and do everything in its power to protect its name, the problem wasn’t Maxim’s failure to investigate, it was that she thought that Maxim was an owner. 

Alpha Media also argued that Pullman admitted in other proceedings that she knew that the investment risks were obvious.  Her earlier statements that she knew that timeshare investment was risky didn’t contradict her theory here, but rather fit into her theory of the case. She pled that she’d had prior positive experiences with timeshares from major brands, and that here Maxim’s brand status caused her to take the risk and invest.  Also, Pullman previously stated that she knew defendants could “one day” terminate the use of their name, but she “never dreamed that ‘one day’ could be before [her] purchase check even cleared the bank in July of 2007.” Again, this wasn’t a contradiction, given her allegations about what she’d been told about Maxim’s ability to remove its name.

Then Alpha Media argued that relying on the promotional video and book wasn’t reasonable. Maxim’s name wasn’t mentioned in the video until the 8 minute mark—but it also included a nearly 5-minute highlight of the Maxim media empire to illustrate the promotional power of the brand, and described the key relationship as a partnership, without disclosing that it meant “licensing arrangement.”  This was a factual dispute, and the claim was still plausible. Selected language from the draft agreement establishing the timeshare rules also suggested that it would be easier to change the name than Pullman thought, but she didn’t “have the benefit of specific lines highlighted and offset when examining a more than 300-page document.”  The judge didn’t think it was appropriate to decide that it would’ve been more reasonable to rely on select statements in this agreement than on direct assurances from a purported agent.

For similar reasons, the NJCFA claim survived.  (The judge found sufficient connections to New Jersey even though Pullman was solicited and viewed the relevant timeshare materials in the Dominican Republic.)  Here, the court rejected Alpha Media’s argument that it was unreasonable for Pullman to rely on the draft agreement because it was labeled “draft” and unreasonable to rely on the webpages linked from maxim.com “without following up with anyone.”  To the contrary, “Pullman was not looking at either of these items in a vacuum. Rather, it was the consistent portrayal of the Maxim Bungalows as Maxim’s property—from sales representatives to marketing materials—that made her reliance reasonable. Pullman does not need to exhaust every conceived avenue of inquiry for her complaint to survive a motion to dismiss.”

You can’t say Pom’s owners aren’t willing to pick a fight (or a fruit or nut).

Also via Zach Schrag.