Will a New Definition for Advertising Increase Liability?

Do you think you know advertising when you see it?  In some cases, it’s pretty obvious – a TV commercial, a billboard, a magazine ad – all easily fit the definition.  But our understanding of the term is expanding in a world dominated by social media.  So what about that post that seems to show up on your Facebook feed out of the blue?  How about that “sponsored content” that looks a lot like a magazine article? What about an e-mail to 23 people?   

The last scenario – 23 e-mails – was the subject of a recent Lanham Act case decided by the United States Court of Appeals for the Sixth Circuit. And it’s decision that the limited e-mail chain could constitute advertising may have an enormous impact on how businesses handle employees and consultants subject to non-compete agreements.  

The background of the case is pretty simple.  A woman named Angelia Strunk-Zwick served as a manager for a company called Tri-Serve. Tri-Serve is a “professional employment organization” – regulated entity to which employees may outsource certain administrative tasks, such as payroll, workers compensation and employee benefits.  While at Tri-Serve, Zwick was subject to a non-compete agreement.  Zwick left Tri-Serve to join a company called Sheakley HR Solutions.  In the process of moving to Sheakley, Zwick sent an e-mail to 23 Tri-Serve clients.  In the e-mail Zwick told her clients:  

Customers: We are moving! In order to better serve you, we are partnering with Sheakley HR and moving our offices. As many of you know, we have partnered with Sheakley over the years with regards to our workers compensation and unemployment management. We have been blessed to have experienced tremendous growth over the last 6 months. We find ourselves needing more office space and more resources to ensure that our customer service level continues to meet your expectations. By moving into Sheakley Group we will be able to provide you and your employees with additional resources, services, and benefits, while continuing to provide you with the service that you have grown accustomed to expect from TriServe. Nothing will change from your standpoint. We will have new contact information, but nothing else will change. You will begin to see the Sheakley HR name and we will be introducing new benefits and new services to assist you with growing your business.  

Tri-Serve filed suit in federal court, alleging among other things, that the e-mail violated the federal Lanham Act prohibition against false advertising because it falsely suggested that Tri-Serve was entering a partnership with Sheakley when it was not.  But a key question for the court was whether the Lanham Act even applied here.  To state a claim for false advertising, the plaintiff has to establish that the defendant, you know, advertised.   The trial court, which dismissed the Lanham Act claim, applied a test for determining whether a communication constituted advertising that required the statement be:  

(1) commercial speech; (2) by a defendant who is in commercial competition with the plaintiff; (3) for the purpose of influencing customers to buy the defendant’s goods or services; (4) that is disseminated sufficiently to the relevant purchasing public to constitute advertising or promotion within that industry.  

In the trial court’s view, an e-mail to 23 recipients didn’t represent a sufficient dissemination to qualify.  The Sixth Circuit considered that approach too narrow. In its view, the key question is whether “the contested representations are part of an organized campaign to penetrate the relevant market.”  But an organized campaign, especially these days, may not require the carpet bombing approach of “junk mail, newspaper advertising and television commercials.”  It noted the increased use of “targeted promotion”, which in its view “reflects a belief by advertisers that discrete segments of a much larger existing or potential customer base may find specific messages most persuasive . . . In other words, the most focused advertisements or promotions may not be widely disseminated at all.”   

Given this “size only matters somewhat” approach, the Sixth Circuit adopted a revised test, and defined “commercial advertising or promotion as:  

“(1) commercial speech; (2) for the purpose of influencing customers to buy the defendant’s goods or services; (3) that is disseminated either widely enough to the relevant purchasing public to constitute advertising or promotion within that industry or to a substantial portion of the plaintiff’s or defendant’s existing customer or client base.”  Given that definition, an e-mail to 23 recipients could qualify for Lanham Act exposure.  

It’s common for competitors to sue one another when non-compete agreements or trade secrets are in play.  This appellate decision, though, gives the allegedly wronged party a potential new weapon – one that opens up the federal courthouse and provides a remedy that allows for tripling the damages.  This is, safe to say, a big deal.