Ninth Circuit gives copier lessor second shot at Lanham Act claims

In Newcal Industries Inc v IKON Office Solutions (Case 05-16208, January 23 2008), the US Court of Appeals for the Ninth Circuit has reversed the district court's dismissal of a complaint alleging false statements and antitrust violations. The Ninth Circuit held that the factual allegations, if taken as true, would support the Lanham Act and Sherman Act claims.

Newcal Industries Inc and IKON Office Solutions compete to lease name-brand copier equipment to commercial customers and provide service contracts for the maintenance of such equipment during the lease term. Newcal alleged that IKON engaged in a scheme to defraud IKON customers by amending their customers' lease agreements and service contracts without disclosing that the amendments would lengthen the term of the original agreement. Newcal alleged:

• antitrust violations under the Sherman Act;
  
  
• false advertising under the Lanham Act; and
  
  
• racketeering under the Racketeer Influenced and Corrupt Organizations Act (RICO).

Newcal sought a declaratory judgment that IKON's fraudulently procured contracts were invalid.

The district court dismissed Newcal's declaratory judgment action, but permitted it to amend the other claims. After Newcal filed an amended complaint, IKON moved to dismiss for failure to state a claim. The district court dismissed Newcal's complaint, concluding that Newcal had failed to:

• allege a legally cognizable relevant market under the Sherman Act;
  
  
• allege any false statement of fact under the Lanham Act; and
  
  
• meet RICO standing requirements.

Newcal appealed.

The Ninth Circuit reversed and remanded the case to the district court, finding that if all facts alleged in the complaint were assumed to be true, Newcal had pled sufficient allegations to support its claims. As for the Lanham Act claims (for false and misleading statements), the court articulated the elements necessary to state a prima facie case under Paragraph 43(a) for:

• false or misleading description;
  
  
• representation of fact in commercial advertising; or
  
  
• promotion that misrepresents the nature, characteristics or qualities of the person's goods, services or commercial activities.

According to the court, a prima facie case requires a showing that:

• the defendant made a false statement either about the plaintiff's or its own product;
  
  
• the statement was made in commercial advertising or promotion;
  
  
• the statement actually deceived or had the tendency to deceive a substantial segment of its audience;
  
  
• the deception was material;
  
  
• the defendant caused its false statement to enter interstate commerce; and
  
  
• the plaintiff has been or is likely to be injured as a result of the false statement, either by direct diversion of sales from itself to the defendant, or by a lessening of goodwill associated with the plaintiff's product.

After examining the statements that Newcal alleged were false or misleading, the Ninth Circuit agreed with the district court that while certain statements were mere "puffery" (ie, generalized, unquantified, non-specific and subjective statements unlikely to induce consumer reliance), other quantified statements (eg, "IKON delivers 95% up-time service in its IKON contracts") presented factual questions. If the statements were false at the time they were made, this provided a sufficient basis to survive a motion under Rule 12(b)(6) of the Federal Rules of Civil Procedure.

With regard to the antitrust claim, the Ninth Circuit held that Newcal's complaint raised factual questions as to the existence of an alleged submarket consisting of only IKON customers.

This decision underscores the limitations of motions to dismiss, where the burden for a defendant is high.

Paul Devinsky, McDermott Will & Emery, Washington