Banks Failed to Plead Reliance on Payment Processor’s Advertising

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

In a case arising from a massive data security breach at credit and debit card payment processor Heartland Payment Systems, card-issuing banks had standing to pursue a claim against Heartland under the Florida Deceptive and Unfair Trade Practices Act (FDUTPA) for making false promotional statements about its data security practices, but failed to state claims under consumer protection laws of California, Colorado, Illinois, New Jersey, New York, Texas, and Washington, the federal district court in Houston has ruled.

Heartland allegedly made some detailed, factual promotional statements about its data security practices that could support banks’ claims of negligent misrepresentation under the common law of New Jersey, but the banks’ conclusory allegations of reliance were inadequate, the court held.

Data Security Breach

The card-issuing banks’ claims arose from a breach of Heartland’s computer systems by three hackers—an American and two unknown Russians. They installed programs that allowed them to obtain payment-card numbers and expiration dates for approximately 130 million accounts, as well as cardholder names for some accounts.

Puffery vs. Actionable Misrepresentations

Advertising claims that are vague and highly subjective constitute nonactionable puffery.

Heartland’s slogans—“The Highest Standards” and “The Most Trusted Transactions”—were puffery, the court found. Similarly, statements such as “layers of state-of-the-art security, technology and techniques to safeguard sensitive credit and debit card account information” were nonactionable.

However, Heartland also allegedly made statements that were factually concrete, verifiable, and subject to proof, including “[w]e maintain current updates of network and operating system security releases and virus definitions, and have engaged a third party to regularly test our systems for vulnerability to unauthorized access”; “we encrypt the cardholder numbers that are stored in our databases using triple-DES protocols, which represent the highest commercially available standard for encryption”; and “Exchange has passed an independent verification process validating compliance with VISA requirements for data security.”

Reliance

Although some of Heartland’s alleged statements might be actionable, the banks’ allegations of reliance where wholly conclusory, according to the court. It was unclear, for example, if the card-issuer banks’ reliance was through their joining, remaining in, or withdrawing from the Visa and MasterCard networks, or what relationship Heartland’s statements had to any such actions. The banks’ fraud and negligent misrepresentation claims were dismissed with leave to amend.

Florida Deceptive and Unfair Trade Practices Act

Heartland argued that only consumers, as the word is traditionally used, may assert claims under the FDUTPA.

The Florida legislature amended the FDUTPA in 2001 to authorize suit by a “person”—rather than a “consumer”—who has suffered loss from a violation. The Act’s purpose is “[t]o protect the consuming public and legitimate business enterprises,” the court observed.

It is unclear if the word “consuming” applied only to “public” or also to “legitimate business enterprises,” the court said. The more natural reading, in the court’s view, is that this clause listed two independent groups that the Act seeks to protect: first, “the consuming public,” and second, “legitimate business enterprises.” The question was close, but the legislature’s use of the word “person” in creating a private right of action suggested a broader reach than the word “consumer.”

Consumer Protection Laws of Other States

The banks’ claims under the New Jersey, New York, and Washington statutes were dismissed without leave to amend.

The banks’ relationship with Heartland existed only by virtue of their participation in the Visa and MasterCard networks. This relationship is far different from the direct, downstream relationship between a consumer of a good and its manufacturer or seller, within the scope of the New Jersey Consumer Fraud Act, the court found. Under the New York Deceptive Acts and Practices Law, the banks were not “consumers,” nor was the conduct at issue “consumer oriented.”

The banks failed to allege facts suggesting that their claim affected the public interest, under the Washington Consumer Protection Act, the court added. The only group likely to be injured in the same fashion—incurring expenses for replacement cards and fraudulent transactions—consisted of other issuer banks. This group was both too small and too specialized to constitute a substantial portion of the public.

The claims under the California, Colorado, Illinois, and Texas were dismissed with leave to amend.

The banks’ conclusory allegations of reliance were insufficient to state claims under the California Unfair Competition Law, the Illinois Consumer Fraud Act, and the Texas Deceptive Trade Practices Act, the court held.

Because the banks’ complaint did not include allegations about pricing, they failed to state a violation of the Colorado Consumer Protection Act’s prohibition against “false or misleading statements of fact concerning the price of goods, services, or property or the reasons for, existence of, or amounts of price reductions.”

The December 1 opinion in In re: Heartland Payment Systems, Inc. Customer Data Security Breach Litigation will be reported at CCH Advertising Law Guide ¶64,508.

Further details regarding CCH Advertising Law Guide appear here.

Franchisor Did Not Commit Fraud, Violate Minnesota Franchise Act in Franchise Sale

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A janitorial business franchisor did not commit common law fraud or violate the anti-fraud provisions of the Minnesota Franchise Act (MFA) in connection with the sale of a franchise to three franchisees because the franchisor made no untrue statements of material fact or misrepresentations, a federal district court in Minneapolis has decided.

The claims were initially brought as part of a putative class action against the franchisor, but the motion for class certification was denied in an earlier ruling (CCH Business Franchise Guide ¶14,335). After proceeding jointly through discovery, the parties agreed that the franchisor would move for summary judgment on the claims of three representative plaintiffs.

As to the first of the three plaintiffs, the franchisor’s alleged statement to that "[i]f you buy more, you’ll get more" was not untrue, the court held. The franchisor structured its franchising business to correlate the amount of business it promised to offer a franchisee with the amount of initial investment made by the franchisee. In that sense, it was true that the more a franchisee bought (or the larger his initial investment), the more he would receive in gross billings of offered accounts, the court determined.

Puffery

The statement that owning one of the franchises was a "good business" and that the business could continue for "a long time" were puffery, the court ruled. In general, puffery includes statements of exaggerated boasting or vague, subjective claims of superiority. The franchisee’s counsel contended that the franchisor’s puffery should be evaluated in the context of the lack of sophistication of the franchisee—an immigrant with limited English ability and business acumen. However, immigrants were not a group so gullible that they could not recognize obvious puffery, the court reasoned.

The first plaintiff also asserted that the franchisor falsely represented a guarantee of $1,000 per month in account billings, but the franchisee admitted in his deposition that he was not promised any level of profits or income. Even if such a representation was made by the franchisor, any reliance on representations regarding profitability was unreasonable as a matter of law because it was directly contradicted by the franchise agreement, the court held.

The fraud claimed by the second of the three plaintiffs hinged on the franchisor’s alleged representations that he could earn as much money as a medical doctor or Ph.D., and its failure to inform him that declined accounts would be counted against the amount of business the franchisor was obligated to provide.

Reliance of Statement

The franchisee could not have reasonably relied on the alleged statement because it was made after he signed the franchise agreement, the court held. Further, the statement directly contradicted the franchisor’s Uniform Franchise Offering Circular (UFOC), which disclaimed any representations as to profitability or income level and was incorporated into the franchise agreement. The franchisee could not impose liability under a common law or MFA-based fraud claim merely because he chose not to read the UFOC, according to the court.

The franchisor could not have defrauded the third plaintiff by allegedly failing to disclose that any offers of accounts that the franchisee declined would count against the total amount of accounts that the franchisor was obligated to offer the franchisee, the court ruled. A reasonable jury would find that the franchisee received a version of the franchisor’s UFOC that unambiguously made such a disclosure, the court decided.

Evidence showed that: (1) the franchisee admitted, while a prospective franchisee, to receiving a "black book" from the franchisor; (2) the franchisor’s May 28, 2002 UFOC was bound as a black book; (3) the franchisee signed a written acknowledgment of having received the May 28, 2002, UFOC; and (4) most importantly, the franchisee produced the first two pages of the May 28, 2002 UFOC in the course of the litigation.

Statute of Limitations

The third franchisee’s claim that the franchisor violated the MFA by making misrepresentations regarding profitability, the availability of evening accounts, and the ability to hire employees was time-barred by the Act’s three-year statute of limitations.

Had the franchisor made the alleged statements, and if they were false, the franchisee would have been aware of the facts constituting the claim within months of purchasing his franchise, the court decided. Thus, even if the discovery rule applied to the MFA to toll the statute of limitations, the claim was barred. The franchisee knew all of the facts constituting the claim in early 2003 but did not file the claim until approximately five years later.

The decisions in Moua v. Jani-King of Minnesota, Inc., will appear at CCH Business Franchise Guide ¶14,665 and ¶14,681.

Consumer Suit Proceeds Against Donald Trump and Trump University

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

Individuals who paid $35,000 apiece to enroll in Trump University seminars, hoping to “Learn from the Master,” can pursue common law fraud and California consumer protection law claims against Donald Trump and Trump University, the federal district court in San Diego has ruled.

The court separately addressed claims against Trump and the university in two opinions issued the same day.

Fraud

The fraud claims against Trump himself focused on the allegation that he lied about “hand picking” instructors. Trump maintained that the named plaintiffs in the class action complaint did not sustain any damages in reliance on the alleged misrepresentation.

To the extent that the plaintiffs did rely on Trump’s alleged misrepresentations, they may have sustained damages of up to $35,000 apiece, the court determined and declined Trumps motion to dismiss.

In claims against the university, three of four named plaintiffs stated claims of fraud by alleging that they signed up for seminars in reliance on university speakers’ statements that included a misrepresentation about providing exclusive access to a list of properties handpicked by Donald Trump.

False Advertising, Consumer Protection Laws

One plaintiff stated a claim of false advertising under California law by alleging that she purchased a $35,000 seminar based on misleading statements at a $1,500 seminar made for the purpose of inducing her purchase, according to the court.

California Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA) claims based on the fraud allegations survived, although the court dismissed the California statutory claims brought by two of the four named plaintiffs who were not California residents. Claims under the New York deceptive acts and practices statute were rejected because none of the plaintiffs took classes in New York.

Puffery

The court agreed with Trump’s contention that his alleged statement “no course offers the same depth of insight, experience and support as the one bearing my name” constituted mere puffery and thus could not support claims under the UCL or CLRA.

The May 16 opinions in Makaeff v. Trump University LLC will be reported in CCH Advertising Law Guide.

Further information about CCH Advertising Law Guide appears here.

Overpayment Caused By Deceptive Ad Could Be Recoverable Under Massachusetts Law

This posting was written by Jody Coultas, Editor of CCH State Unfair Trade Practices Law.

A baby formula purchaser stated a Massachusetts Consumer Protection Act (CPA) claim against the formula manufacturer that allegedly engaged in unlawful and deceptive advertising, according to the federal district court in Boston.

Mead Johnson & Company sent out direct mailings and developed print advertisements for its Enfamil LIPIL baby formula, stating that it was the only formula on the market that improved brain and eye development and contained two important nutrients.

The purchaser alleged that she and other consumers chose to pay more for Enfamil than for other brands based on these statements and that the statements were deceptive because other brands of baby formula contained the nutrients as well. Accordingly, the purchaser filed a class action under the CPA.

Pleading Requirement

To state a CPA claim, the purchaser needed to meet the heightened pleading standard of Federal Rule of Civil Procedure 9(b). The manufacturer argued that the purchaser failed to meet the Rule 9(b) standard by not including (1) the exact amount of loss, (2) the advertisements that were untrue as opposed to misleading, and (3) the dates of the advertisements.
It was sufficient to allege that the purported class consisted of purchasers that bought the baby formula from September 25, 2005 to the present and to include copies of the advertisements.

Ascertainable Injury

Some Massachusetts courts have held that overpayment for a product is not a recoverable injury where the purchaser no longer has the products and did not suffer any other injury from the product. However, the federal district court rejected the magistrate judge’s recommendation that the claim be dismissed for lack of injury.

The Massachusetts Supreme Judicial Court has held that overpayment was recoverable if the underlying advertisement was false. The facts of the case were more analogous to cases in which the purchaser had standing based on pleading of an injury stemming from his decision to pay a higher price because of a company’s advertising.

Puffery

A jury could find the statements made in the advertising deceptive because a reasonable consumer would have chosen the Enfamil over cheaper products because of the advertising. Finally, it was reasonable to rely on the statements made in the advertising because they were specific enough to be interpreted as more than a mere opinion or puffery.

The decision is Martin v. Mead Johnson Nutrition Co., CCH State Unfair Trade Practices Law ¶32,145.

Further information regarding CCH State Unfair Trade Practices Law appears here.

Misrepresenting Product as “Safest” Could Be Deceptive Act

This posting was written by Jody Coultas, Editor of CCH State Unfair Trade Practices Law, and John W. Arden.

An injured user of sumo wrestling equipment could pursue a claim that the manufacturer violated the Colorado Consumer Protection Act (CPA) by knowingly misrepresenting its product as “safest,” the federal district court in Denver has ruled.

Although the manufacturer’s representation of its product as the “best built” was puffery, the manufacturer’s representation of the product as the “safest” was a measurable statement of fact, the court determined.

While attending a corporate conference, the plaintiff participated in a mock sumo wrestling contest in which the two contestants put on the sumo equipment and tried to push each other out of a circle or onto the floor. The plaintiff fell backwards during the contest and sustained serious brain injuries when her head hit the floor. The manufacturer had represented that the sumo equipment was the "best built, and safest," which the plaintiff argued was deceptive and false advertising.

“Best Built"

The advertising claim that the sumo equipment was the "best built" constituted mere puffery and was not actionable under the CPA, according to the court. The manufacturer argued that the "best built" statement was an exaggerated opinion that could not be calibrated or measured.

General statements of opinion that are not meant to be relied on by the consumer are typically considered mere puffery and not actionable under the CPA. In this case, the statement that the equipment was the best built could not be measured objectively and was merely the opinion of the manufacturer. Therefore, the manufacturer was awarded summary judgment for this portion of the claim.

"Safest"

Unlike the "best built" claim, the manufacturer's representation that the sumo equipment was the "safest" could reasonably be seen as a statement of fact and, therefore, was actionable under the CPA, according to the court. "Safest" could conceivably be objectively measured. It would be reasonable to assume that the manufacturer's representation that its suit was the "safest" was a statement of quality made with the purpose of having it accepted as fact.

Although the manufacturer argued that it did not know about the safety of the equipment because there had been few injuries caused by the sumo equipment, the court found that a reasonable jury could find that the manufacturer knew that its equipment was no more safe than any other sumo equipment on the market, and therefore was not the "safest."

In depositions, the manufacturer’s owner and general manager testified that its sumo suits were essentially identical to those of competitors, and a purchaser testified that the manufacturer’s helmets were more easily damaged than another manufacturer’s equipment.

Summary judgment was inappropriate because a jury could find that the manufacturer should have known that its product was more easily damaged, less durable, and therefore less safe than other products on the market, the court concluded.

The decision, Giles v. Inflatable Store, Inc., appears at CCH State Unfair Trade Practices ¶31,801 and will appear at CCH Advertising Law Guide ¶63,370.

Vacuum Cleaner Infomercial Could Be Misleading Ad Under Lanham Act

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

Vacuum manufacturer Oreck's infomercial, showing that a Dyson vacuum cleaner could not reach under a piece of furniture, could be misleading in violation of the Lanham Act, the federal district court in New Orleans has ruled. As demonstrated by counsel at oral argument, a Dyson attachment, which allowed it easily to reach under furniture, had been removed from the vacuum during the infomercial.

Oreck's depiction of the Dyson without the attachment, coupled with statements that the Dyson could not clean under furniture, could cause a reasonable consumer to think that the Dyson was incapable of cleaning under furniture in any circumstance, when it clearly could if the consumer used the attachments provided with the product. There was a triable issue of fact as to whether the advertisement actually deceived consumers, the court concluded.

Puffery

Oreck's argument that several of its advertising claims were puffery was rejected. While the word “bulky” standing alone might be puffery, the claim that a Dyson model was “too bulky to get under furniture” was specific, measurable, and capable of being proven false, the court found.

Oreck's infomercial claim that “no puff of dirt” was emitted when the bag was removed from one of its vacuums was verifiable. Similarly, Oreck did not engage in mere puffery by stating that emptying a Dyson “spread[s] dirt” and was “messy” and that washing the Dyson filters was “not very clean or sanitary” and a “dirty little secret.”

Whether the Dyson vacuum cleaner spread dirt when emptied according to Dyson's instructions and whether cleaning a Dyson filter required a user to come into contact with captured dust and dirt could be determined.

Finally, while no reasonable consumer would rely on the infomercial's description of the Dyson's weight as “backbreaking,” Oreck's claim that its XL Ultra 4120 weighed “only nine pounds” was verifiable, according to the court.

Prior Adjudications

Dyson's suit—based on a new Oreck advertising campaign—was not barred by res judicata or a settlement agreement in previous litigation between the parties, the court held. While many of the facts and issues were similar to the previous case, res judicata was inapplicable because the two actions were not based on the same nucleus of operative facts.

A previous infomercial featured a Hoover vacuum, and Dyson sued Oreck because that infomercial implied that all bagless vacuums were emptied in the same manner. By contrast, the “messy” vacuum depicted in the new infomercial was a Dyson. This specific attack on Dyson's vacuum was different in kind from the generic claim about bagless vacuums at issue in the earlier case and presented a more direct injury to Dyson. The parties' settlement agreement gave Oreck permission to continue making advertising claims it was making at the time of settlement only.

The March 4 opinion in Dyson, Inc. v. Oreck Corp. will be reported at CCH Advertising Law Guide ¶63,308.