Friday, January 14, 2011

FTC’s Light Bulb Complaint Fails to Meet Fraud Pleading Standards

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

The Federal Trade Commission failed to satisfy the fraud pleading standards of Rule 9(b) of the Federal Rules of Civil Procedure in a complaint alleging that a light bulb manufacturer and its principals misrepresented the light output and life expectancy of the company’s Light Emitting Diode (LED) bulbs, the federal district court in Santa Ana, California has ruled.

The court rejected the FTC's contention that Rule 9(b) did not apply to actions for violation of Sec. 5 of the Federal Trade Commission Act.

The FTC alleged that the manufacturer's two sole shareholders distributed promotional materials that made specific representations about the watt equivalency, lumen output, and life spans of their LED lamps; that these representations were false or unsubstantiated; and that the principals knew or should known knew or should have known that their conduct was unfair or deceptive.

The claim sounded in fraud because it alleged a unified course of fraudulent conduct and relied entirely on that course of conduct as the basis of the claim, the court held. Precedents applying Rule 9(b) to claims of negligent misrepresentation and violation of California consumer protection statutes were persuasive, the court found.

The FTC did not argue that the complaint met Rule 9(b)'s requirements for pleading the who, what, when, where, and how of the alleged course of conduct. The complaint did not differentiate between conduct of the company and its two principals and failed to explain when or where the alleged misrepresentations took place, the court noted.

Leave to replead was granted.

The decision in Federal Trade Commission v. Lights of America, Inc. will be reported at CCH Advertising Law Guide ¶64,117.

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