I recently saw a gym advertising that their location was “Virus-Free!” I am writing this post on November 27, 2020. Covid-19 is peaking, and Ozaukee County is experiencing its highest exposure numbers to date. I question the truthfulness of this ad. How can any business open to the public verify their location is “Virus-Free” from Covid-19? It would be interesting to question the owner under oath regarding how they support that claim and what efforts they made beforehand to determine its truthfulness. Are they testing and contact tracing? How can they make this promise? I also saw other fitness industry businesses located nearby and considered how such a promise may be affecting their business. When a business competitor’s advertising is a lie, what can you do?
A recently filed and likely-ongoing Wisconsin federal case in Green Bay, BenShot v. Lucky Shot (1), discusses a sweeping Federal law affecting unfair business competition across the country called The Lanham Act, along with additional related Wisconsin state law claims. If you would like to learn more about how to protect your business from unfair marketing by a competitor, please consider reaching out to me to discuss.
Lying in Advertising: Made in the USA
These two companies produce similar products featuring bullets lodged in various glass drinkware and promoting the Second Amendment. BenShot is a small business with approx. 25 employees located in the Appleton area.(2) They took issue with Lucky Shot’s claim that their products were Made in the USA. They alleged in a federal lawsuit that their products were primarily made in China. Lucky Shot USA’s newsletter allegedly stated that “Each Lucky Shot USA product is American made to cater to the discriminating eye of historians and collectors alike.” Lucky Shot USA’s Instagram account at that time allegedly stated, “Our products are proudly made in the USA!,” and the profile picture allegedly stated, “MADE IN THE U.S.A.” Lucky Shot’s “About Us” page now states, “A majority of our product line is Made in the USA and most of the balance is assembled in the USA.” (3)
Lying in Advertising: Use The Lanham Act
The Lanham Act is a federal law that creates a cause of action for a business competitor through misleading advertising or labeling. A business competitor can utilize Lanham Act protections when they suffer an injury to a commercial interest because of a defendant’s misrepresentations. To prove a violation of false or deceptive advertising, the plaintiff-business must demonstrate the following:
(1) a false or misleading statement of fact by the defendant-business in a commercial advertisement or promotion about its own or another’s product or commercial activities;
(2) the statement actually deceived or has the tendency to deceive a substantial segment of its audience;
(3) the deception is material in that it is likely to influence the purchasing decision;
(4) the defendant caused its false statement to enter interstate commerce; and
(5) 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 defendant or by a loss of goodwill associated with its products.
The battle in BenShot is likely to be regarding how much ‘USA activity’ allows a company to call their product “Made in the USA.” The Federal Trade Commission has specific regulations on this point. Similarly, our hypothetical competing gym would likely need to argue that the competing gym’s “Virus-Free” claim was false. It would be interesting to litigate the issue of whether COVID-19 was present in the gym around the time of the statement, but the surging numbers and frequency of positive tests by members in our community would likely be relevant and helpful.
The losing party to a Lanham Act claim may be required to pay the winning party’s attorneys fees. This helps assist the smaller company assert its legal rights, even when the claim may not be of a high value. I have assisted companies by offering mixed fee agreements for bringing lawsuits that have attorney fee provisions. I would be paid a reduced hourly rate and a small percentage of any potential recovery. The defendant-business would pay and reimburse those fees if the case is successful, which puts extra pressure on that party.
It is also important to note that at least one of the gyms in our hypothetical must be participating in “interstate commerce” for The Lanham Act to provide relief. Federal statutes are only available for companies participating in commerce across state lines, and each situation is different and unique. If one of the gyms were a national chain, this requirement would likely be met. However, this law might not be available to two small single-location gyms in the middle of the state.
Lying in Advertising: Use Wisconsin’s Unfair Business Practice Act or Common Law Unfair Competition
Wis. Stat. 100.20 (Unfair Business Practices) provides Wisconsin businesses a cause of action against a competing business for unfair trade practices. However, bringing a successful lawsuit often requires proving that a Department of Agriculture, Trade, and Consumer Protection (“DATCP”) rule has been violated, and is very fact-dependent. If proven, the remedies can be quite harsh, with the successful business litigant potentially recovering twice the amount of their loss, and their attorneys’ fees. There are many DATCP regulations that affect a large swath of economic activity.
BenShot pursued a different strategy. Instead of arguing Wis. Stat. 100.20, they argued Wisconsin common law provides a cause of action for unfair competition that does not require proof of violating any DATCP rule. The cause of action is quite like the Lanham Act claim but does not require proof of ‘interstate commerce’ being affected. This claim can be difficult to dismiss quickly in litigation. Discovery may be necessary determine whether the trade practice is unfair.
I suspect our hypothetical competing gym would be successful in arguing that a claim by a competitor about being “Virus-Free” during the peak of Covid-19 may be false. I also suspect they may have success demonstrating it was harmful to their business, as folks looking to join a gym in November 2020 would certainly prefer the virus-free option. Proving damages could be challenging, but production of marketing efforts and testimony from new customers could prove useful. Regardless, proving to a jury that your business was “Virus-Free” during the peak would not be ideal.
Laignappe: Corporate Officer Liability and Demand Letters
A new filing by BenShot alleged a claim against the owner of Lucky Shot in his personal capacity. Corporate officers can be found personally liable under the Lanham Act for violations that take place with their knowledge or direction. They would lose corporate form protections and the plaintiff could move against the corporate officer’s personal assets – houses, cars, bank accounts – to satisfy a judgment. BenShot claims the owner violated the Lanham Act by having prior knowledge that the products were not made in the USA and directly oversaw efforts to conceal this fact. Lucky Shot’s initial attempts to dismiss this claim were unsuccessful. My experience is that viable claims for personal liability against a corporate officer often brings lawsuits to successful conclusion faster.
A simple demand letter may resolve many lying in advertising claims. If you believe the above may apply to your business, it may be prudent to have a business lawyer review your claim and expediently prepare a demand letter, demanding the business remove the false claim. Most prudent business owners will reconsider their ill-advised ad and remove it, likely avoiding the costs, distraction, and potential embarrassment of a lawsuit. Small business disputes often resolve before formal litigation because of effective demand letters. They can often be handled on a budget of less than $1,000.
When Your Competitor is Lying in Advertising, You Have Options
A competitor lying in advertising can have a devastating impact on your business. Federal and Wisconsin laws protecting businesses from unfair business practices, including lying in advertising, have serious teeth. Remedies include multiples of damages, attorneys’ fees paid by the losing party, and even claims against corporate officers in their personal capacity. I encourage business owners facing these issues to avoid immediately dismissing legal action based on a cost-benefit analysis. I may be able to prepare an effective demand letter for minimal legal fees. Negotiating a pre-litigation settlement and release can often be handled on a skeleton budget. These claims may be appropriate for mixed-fee agreements. The court may order the losing party to pay attorneys fees. If you believe this analysis could affect you, please consider contacting me to discuss.
(1) Benshot, LLC v. Lucky Shot U.S. LLC (E.D. Wis. 2019).
(3) Screenshot pull on November 27, 2020 from https://luckyshotusa.com/pages/about-us
(4) Merriam-Webster Dictionary: Definition of “lagniappe” (noun): a small gift given to a customer by a merchant at the time of a purchase. broadly : Something given or obtained gratuitously or by way of good measure. example: The waiter added a cup of seafood gumbo as a lagniappe to the meal.
(5) Screenshot pull on November 27, 2020 from https://luckyshotusa.com/pages/about-us