A recent decision involving both antitrust and Lanham Act claims sheds light on the risks of false advertising. On March 23, 2020, the District Court of Colorado granted and denied in part Johns Manville’s (“JM”) motion to dismiss Chase Manufacturing’s (“Chase”) complaint alleging that JM violated the Sherman Act by engaging in tying and monopolization and the Lanham Act for false advertising. Both JM and Chase sell calcium silicate, known as calsil, which insulates pipes, tanks, and other equipment in industrial facilities. JM accounts for the majority of the domestic calsil market.
According to Chase’s complaint, JM’s sales managers allegedly told customers that Chase’s calsil “may have asbestos and may put…customers and employees at risk,” was poor quality and could not be “trusted to meet specifications,” and was “Chinese” (meaning it was produced in China). A JM sales representative asked a purchaser why it would “risk buying an unproven product that may not meet specifications.” Chase alleged that that two of the five largest distributors heard these comments. JM’s sales managers also allegedly told a smaller distributor that JM never sold calsil that was made in China. Finally, JM’s website FAQ page stated “[w]hile we are aware of one other manufacturer in Asia that produces water resistant calcium silicate, it is an expensive, custom-order product that is not readily available.”
In ruling on the motion to dismiss, the court found that false advertising can serve as an act of monopolization and predatory conduct for purposes of a Sherman Act claim. Chase alleged that JM engaged in product disparagement based on four of the above statements that were attributed to JM sales representatives. The court noted that the effect of false advertising on competition is presumed to be de minimis, requiring a rebuttal of that presumption. The court ruled that Chase’s JM’s sales managers alleged disparaging comments to customers plausibly overcame the de minimis presumption base. JM’s statements on asbestos products that put buyers at risk were likely to induce reasonable reliance based on JM’s credibility in the industry and experience with asbestos liability. JM allegedly made the statements to distributors that were its existing customers, so those buyers lacked personal knowledge of Chase’s product. Even though Chase only provided a few specific examples, the court found it reasonable to infer that remarks were being made throughout Chase’s launch into the calsil market and the court gave those instances weight because of allegations that in this sales channel, important information typically is published through distributors.
Regarding the Lanham Act claim, the court found that for purposes of the motion to dismiss Chase sufficiently alleged a plausible claim for false advertising based on misrepresentations attributed to JM’s sales managers. For a misrepresentation to constitute commercial advertising or product promotion the misrepresentations must “be disseminated sufficiently to the relevant purchasing public to constitute advertising or promotion within that industry.” The court agreed with Chase that misrepresentations from its competitor’s sales managers constituted commercial advertising or promotion because “informal” means of communication — in person meetings, social gatherings, social media and email — as opposed to traditional media are the primary forms of commercial promotion in the calsil market. Chase also alleged that other contractors corroborated their suspicion that JM’s salespeople widely disseminated the statements supporting an inference that the statements were part of an organized plan by JM, despite the informality of the statements.
The case provides a good reminder that courts have long recognized that misrepresentations do not need to be made in a classic advertising campaign to constitute commercial advertising or promotion; informal types of promotion qualify as advertising. The level of circulation of a misrepresentation to qualify as sufficiently disseminated varies according to the industry. In a small or concentrated market, a misrepresentation made to a single customer may support a false advertising claim. The case also reminds us that making false statements about a competitor’s product can have other legal ramifications when made by a company with a large market share.