Tuesday, June 26, 2007

Burger King Franchisee Lacked Standing to Bring False Ad Suit Against McDonald's

This posting was written by Jeffrey May, editor of CCH Trade Regulation Reporter.

A Burger King franchisee lacked standing to sue McDonald's Corporation for violating Sec. 43(a) of the Lanham Act in its advertising and marketing campaigns for promotional games, such as “Monopoly Games at McDonald’s,” “The Deluxe Monopoly Game,” “Who Wants to be a Millionaire,” and “Hatch, Match and Win,” the U.S. Court of Appeals in Atlanta has ruled.

Dismissal of the complaining franchisee's claims for lack of standing (2006-2 Trade Cases ¶75,401) was affirmed.

At the outset, the appellate court took up an issue of first impression for the Eleventh Circuit—whether Congress intended to abrogate the prudential standing doctrine in passing Sec. 43(a) of the Lanham Act.

Joining the Third and Fifth Circuits, which had already addressed the question, the Eleventh Circuit panel held that Congress did not abrogate prudential limitations on standing of plaintiffs to bring suit under Sec. 43(a). Standing to assert false advertising claims under the Lanham Act was limited to parties that had their competitive or commercial interests affected by the challenged conduct.

Test for Standing

The appeals court applied the five-factor test set forth by the Third Circuit: (1) whether the injury is of a type that Congress sought to redress; (2) the directness or indirectness of the asserted injury; (3) the proximity or remoteness of the party to the alleged injurious conduct; (4) the speculativeness of the damage claim; and (5) the risk of duplicative damages or complexity in apportioning damages.

The first and third factors weighed in favor of prudential standing, while the second, fourth, and fifth factors weighed against prudential standing, the court ruled.

While the type of injury alleged weighed in favor of granting standing, the directness of the injury weighed against granting standing. The causal chain linking McDonald’s alleged misrepresentations about the availability of high-value prizes in its promotional games to a decrease in Burger King’s sales was tenuous.

With respect to the third factor, no “identifiable class” of persons was more proximate to the claimed injury than the complaining fast food franchisee and the putative class it sought to represent.

As for the fourth factor, the court found that it was too speculative to conclude that a percentage of the increase in McDonald’s sales and the decrease in Burger King’s sales during the games was directly attributable to McDonald’s alleged misrepresentations about the chances of winning high-value prizes.

Lastly, the risk of duplicative damages or the complexity of apportioning damages weighed against granting standing. If the complaining franchisee had standing to bring the instant claim, then every fast food competitor of McDonald’s asserting that its sales had fallen during the relevant time period would also have standing to bring such a claim. The impact on the federal courts would be substantial, and apportioning damages among these competitors would be a highly complex endeavor.

Categorical Approach

The court rejected the complaining franchisee's argument that it had standing based on its status as a competitor of McDonald's. A so-called “categorical approach” was adopted by the Seventh, Ninth, and Tenth Circuits, under which “actual” or “direct” competition was the “exclusive requirement” for determining prudential standing.

However, the Third Circuit test provided the appropriate flexibility for determining standing under Sec. 43(a) of the Lanham Act, the court held.

The June 22, 2007, decision in Phoenix of Broward, Inc. v. McDonald's Corp. No. 06-14726, will appear at 2007-1 Trade Cases ¶75,751 and in CCH Advertising Law Guide.

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