October 15, 2003

Advertising Heartburn

Sometimes it seems there’s no shortage of object lessons about the troubles that over-enthusiastic advertising can cause. Procter & Gamble (P&G;) ran ads for a new heartburn product, Prilosec OTC. The ad copy read, "One pill. 24 Hours. Zero Heartburn" The ad copy apparently gave Johnson & Johnson heartburn of a different sort – it filed suit against P&G.;

In response to J&J;’s motion for a preliminary injunction, a federal judge in New York found that P&G; had engaged in false advertising. The judge prohibited P&G; from continuing its ad campaign pending a full trial. (Johnson & Johnson-Merck Consumer Pharmaceuticals Co. v. The Procter & Gamble Company, No. 03 Civ.7042(JES) (S.D.N.Y. Sept. 25, 2003).)

If the parties don't settle before trial, P&G; may find itself staring down the barrel of a big damages award for corrective advertising, under precedent such as one of my favorite case stories, that of U-Haul v. Jartran.

Literally False Claims

First let's take a quick look at the law of false advertising from 10,000 feet. It's actually pretty straightforward -- as Judge Sprizzo noted in the J&J; v. P&G; case, “To prevail on a false advertising claim, a plaintiff must establish that defendant's advertisements are either (1) literally false or (2) although literally true, likely to deceive or confuse consumers.”

Judge Sprizzo zeroed in on the first prong of this test, i.e., whether the P & G ads were literally false. That seemed to be a no-brainer, at least to the judge:

[T][he claim advanced by P & G's advertising--essentially, that 24 hours heartburn relief can be achieved with one pill of Prilosec OTC--is literally false. "One pill. 24 Hours. Zero Heartburn" simply does not equal "One pill. Wait 5 hours. Only then Zero Heartburn for the next 24 hours."
(Emphasis added.)

Coming Soon: J&J;’s Quest for a Damage Award?

P&G;’s legal troubles almost surely aren’t over. It likely will have to face J&J;’s claim for sizeable monetary damages. On that subject, I used to like to tell clients the story of the U-Haul v. Jartran case from the 1980s. Jartran was found liable for false advertising that compared its rental trucks and trailers to those of U-Haul. In the wake of the ad campaign, Jartran's sales had boomed, and U-Haul's sales had slumped. The court awarded damages to U-Haul in the amount of $40 million, representing:

  • the $6 million cost of Jartran’s ad campaign, on the theory that Jartran must have derived at least that much benefit from its ad campaign; plus
  • the $13.5 million cost of U-Haul’s corrective-advertising campaign; plus
  • another $20 million (in effect doubling the award) as a kind of punitive damages permitted by the Lanham Act in exceptional circumstances. The increase in damages presumably was motivated by what the trial court described as Jartran's “deliberately false comparative [advertising] claims.”
The $40 million damage award was upheld by the appellate court. U-Haul Intern., Inc. v. Jartran, Inc., 793 F.2d 1034 (9th Cir. 1986).

Possible Lessons

It doesn't take a rocket scientist to figure out the lessons here:

  • Be careful about the factual statements and implications that you put in your advertisements and other marketing materials.
  • Be even more careful if you're going to run ads comparing your products or services -- even implicitly -- with those of a competitor.

October 15, 2003 in Communications, Embarrassments / Bad Career Moves, Marketing | Permalink | Comments (0) | TrackBack | Aleksandrovci

October 14, 2003

Mother Always Said, Don't Brag

The exuberance and assertiveness of marketing people can make enormous contributions to a company. They can also put the company in a deep hole. Here's an example of the latter: Some not-atypical, faintly boastful language in a company's press releases language, of a kind your marketing people might well have used themselves, kept the company mired in a securities class-action lawsuit, when the lawsuit might otherwise have been dismissed.

A Sad but Familiar Tale

Log On America (LOA) was a Rhode Island-based Internet access provider for residential and commercial customers. From 1992 to early 1999, LOA grew into a company with nine full-time employees and revenues of just under $760,000, but it never once turned a profit.

Despite this decidedly less-than-stellar track record, LOA decided to go public. In April 1999 it went out at $10, the price spiked to $37 on the first day of trading, and closed at $35 per share. LOA went on a buying spree, using its capital and its publicly-traded "currency" (shares) to acquire various New England internet service providers, growing its customer base from 1,000 to over 30,000.

The Fateful Press Releases

During those exhilerating days, LOA issued press releases and interviews that would come back to haunt them in the subsequent securities class-action lawsuit. The company said, for example, that:

  • LOA was the "premier provider of high-speed DSL services in the Northeast corridor";
  • LOA was "a Northeast Regional [CLEC] and Information Internet Service Provider (IISP) providing local dial-tone, in- state toll, long distance, high speed Internet access and cable programming solutions . . . to residential and commercial customers through the Northeast";
  • LOA was "one of New England's leading providers of bundled communications services";
  • LOA was "in a dominant position in the market for integrated data and voice services" and "a dominant super regional communications player."
(Emphasis added.)

The Lawsuit

In an all-too-familiar story, LOA's rapid post-IPO expansion resulted in exploding net losses, which in turn caused the stock price to drop. And then, in early 2000, the tech bubble burst. LOA's stock dropped even more, down to a low of $0.10 per share. NASDAQ eventually delisted the stock.

As night follows day, the securities class-action lawyers found their way to LOA. They filed the usual lawsuit accusing LOA's CEO and CFO of securities fraud, alleging that those two officers had engaged in "a massive fraudulent scheme to deceive investors into thinking [LOA] was a successful 'dominant' telecommunications company, when in actuality it was not."

The LOA officers did they usual thing: they filed a motion to dismiss the lawsuit. The judge granted some portions of their motion, but also kept other, significant portions of the lawsuit alive. Why? Because, the judge concluded, some of the statements in LOA's press releases and interviews might well have been material misstatements:

The representation that LOA was the "premier provider of high-speed DSL services in the Northeast corridor," as it was described in a May 17, 1999 press release, is much more than mere puffery: it is a statement of LOA's present status and capabilities, and connotes that LOA is comparatively superior to all other high-speed DSL service providers in the Northeast corridor.

Likewise, the statements that LOA's transaction with Nortel would "help further solidify [LOA's] dominant position in the market for integrated data and voice services," and that LOA's "proven early market entry strategy is positioning it as a dominant super regional communications player," are both actionable: they clearly imply a comparison to competitors and suggest that activities undertaken by LOA as of December 17, 1999 or February 10, 2000 had made or were making it "dominant" over all other competitors in its field.

The same is true for the statement that, by October 28, 1999, LOA had become "one of New England's leading providers of bundled communications services." Assuming that the substance of the statement is untrue (as Plaintiffs have alleged, and as Defendants have conceded for purposes of this motion), this statement is material, as it connotes superiority over the vast majority of other bundled communications services providers.

(Paragraphing supplied.)

Moreover, LOA apparently was never able to offer cable services, even though they had described themselves as a cable-programming provider.

(Scritchfield v. Paolo, 274 F. Supp. 2d 163 (D.R.I. 2003).)

Some Possible Lessons

  • Think carefully before using superlatives like "premier provider" and "dominant player" to describe your business. The judge and jury might view such statements as non-actionable puffery, or they might regard them as false statements. (Indeed, the Scritchfield judge said that the mere fact that the defendants made a puffery argument was a concession that the statements were not true.)

    I'm not a marketing guy. But my personal belief is that superlative language of this kind seldom does you much good in the marketplace. I think customers and investors tend to discount such language. It therefore provides you with little or no benefit, while still increasing your potential vulnerability to a securities class-action lawsuit. Talk about the worst of both worlds.

  • There's another reason that using pharases like "dominant player" is a bad idea. Someday you may want to acquire, or be acquired by, another company. You might have to do a Hart-Scott-Rodino antitrust filing to get government approval for the acquisition. That filing may have to contain your press releases. You really don't want the government's antitrust reviewer to see your own press releases describing you as the "dominant player" in any particular market or submarket -- at the very least, it likely would complicate the approval process.

Thanks to Securities Litigation Watch for the pointer to this story.

October 14, 2003 in Communications, Litigation, Marketing, Securities law, SEC regs / actions | Permalink | Comments (2) | TrackBack

October 11, 2003

Dinosaur Bones

Frank Quattrone’s trial for obstruction of justice continues; see this story from the AP. On Thursday, Quattrone took the witness stand in his own defense. Quattrone’s lawyer, John Keker, asked him about an unrelated investor lawsuit against his former firm, Morgan Stanley. Quattrone had been a witness in that lawsuit. According to the WSJ, Quattrone commented, “I was amazed how the plaintiff’s lawyer would take extraneous documents and twist and turn them to make it sound like something bad.” (Wall Street Journal, Oct. 10, 2003, at C1, C10 cols. 2-3.)

Quattrone's comment reminded me of how, in a former life, I sometimes used to explain trials to clients. Think of a trial lawyer as a paleontologist, working with a pile of dinosaur bones (documents, witness testimony) to convince a jury that the dinosaur looked like this. The paleontologist describes her vision of the dinosaur, and tries to show the jury how the bones fit together in a way that matches her vision. Perhaps the bones don’t fit together perfectly, however. Perhaps some bones are missing. Of course, there’s an opposing paleontologist in the courtroom, twisting and turning the bones in a different way in support of his own vision.

The jurors typically knew little or nothing about dinosaurs before the trial, and of course they don't get to see the dinosaur in real life. They still have to decide what the beast really looked like. Their decision can change -- or end -- lives, reputations, and bank balances.

October 11, 2003 in Communications, Litigation | Permalink | Comments (4) | TrackBack

October 08, 2003

What Did Quattrone Know, and When Did He Know It?

The Frank Quattrone trial proceeds -- see this Dow Jones story, or this search in the Yahoo news files. As has been widely reported, Quattrone received a "let's clean up those files" email and forwarded it to his group at Credit Suisse First Boston. He had recently been told by a CSFB in-house lawyer that the SEC was doing an investigation into some CSFB-related matters. It's in dispute whether he was told enough to make him realize that his own group should suspend any cleaning out of their files.

The jury will have to decide -- more than 3-1/2 years after the fact -- whether Quattrone had the intent to obstruct justice when he forwarded the clean-up email to his group. Even if Quattrone is acquitted, his life and career have suffered major disruption, all because of an email.

(Continued below)

Basic Documentation-Retention Rules

The basic legal principle is simple, at least in theory: Don't destroy documents that might be relevant to impending legal action, at least not without consulting counsel.

But, you ask, when is legal action impending enough to trigger this principle? It depends. As the Quattrone case illustrates, if any legal action is impending, and you destroy documents, then the government might suddenly get very interested in you. If the jury gets the wrong impression, you could find yourself taking an extended sabbatical from your life as you know it.

Possible Lessons

If in any doubt whether you should destroy particular documents, you likely will sleep better if you consult counsel first. The mere fact that you consulted counsel, standing alone, could later help you refute any allegation of criminal intent.

You might want to get written confirmation of what counsel says, even something as simple as an email exchange. That's a little bit of extra work, but it's worth it. Months or years later, you, or your counsel, may not remember what transpired. Moreover, it's widely believed that juries tend to give credence to contemporaneous written documents, possibly more so than to after-the-fact witness testimony.

October 8, 2003 in Communications, Criminal Penalties, Record-keeping, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack