The U.S. Court of Appeals for Ninth Circuit reversed the F.R.Civ. Pro. 12(b)(1) dismissal of a complaint alleging false statements and antitrust violations, finding that the factual allegations, if taken as true, would support the Lanham Act and Sherman Act claims. Newcal Industries Inc. v. IKON Office Solutions, Case No. 05-16208 (9th Cir., Jan. 23, 2008) (Thomas, J.).
Newcal and IKON compete to lease name-brand copier equipment to commercial customers and to provide service contracts for the maintenance of such equipment during the lease term. Newcal filed suit, alleging that IKON was engaging 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 RICO; it sought 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 again moved to dismiss for failure to state a claim. The district court dismissed the complaint, concluding that Newcal had failed to allege a legally cognizable “relevant market” under the Sherman Act, that it had failed to allege any false statement of fact under the Lanham Act and that it had failed to meet RICO standing requirements. Newcal appealed.
The Ninth Circuit reversed, finding that if all facts alleged in the complaint are assumed to be true, Newcal had pled sufficient allegations to support its claims. As for Newcal’s Lanham Act claims (for false and misleading statements), the Court articulated the elements necessary to state a prima facie case under § 43(a) for false or misleading description or representation of fact in commercial advertising or promotion that misrepresents the nature, characteristics or qualities of the person’s goods, services or commercial activities:
a “prima facie case requires a showing that (1) the defendant made a false statement either about the plaintiff’s or its own product; (2) the statement was made in commercial advertisement or promotion; (3) the statement actually deceived or had the tendency to deceive a substantial segment of its audience; (4) the deception is material; (5) the defendant caused its false statement to enter interstate commerce; and (6) 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 the while certain statements were mere “puffery” (generalized, unquantified, non-specific and subjective statements unlikely to induce consumer reliance), other (quantified) statements, e.g., IKON “deliver 95% up-time service in their IKON Contracts” did present factual questions and that if the statement was false at the time it was made, it does provide sufficient basis to survive a Rule 12(b)(6) motion.
Similarly, the Ninth Circuit found Newcal’s allegations regarding IKON’s contract extension clauses (i.e., that IKON knew at the time that it offered the service contracts covered in the complaint that it would be fraudulently extending the original contracts beyond their initial 60-month term), the statement could be intentionally misleading.
As for Newcal’s antitrust claim alleging that IKON possessed market power in the replacement-equipment and service aftermarkets for companies that had leased IKON equipment, IKON moved to dismiss, relying, among other things, on a line of cases holding that a contractually created group cannot constitute a relevant market. The Ninth Circuit reversed, holding that a relevant market under the Sherman Act can consist of a contractually created submarket for replacement equipment and service for customers of a single manufacturer’s product.
Following the reasoning of Eastman Kodak v. Image Technical Services, the Ninth Circuit held that Newcal’s complaint raised factual questions as to the existence of the alleged submarket consisting of only IKON customers because IKON was not merely enforcing a contractual provision, but “exploiting its unique position—its unique contractual relationship—to gain monopoly power in a derivative aftermarket in which its power is not contractually mandated.”
Practice Note: This decision underscores the limitations of motions to dismiss, where the burden for a defendant is high. Here the Ninth Circuit upheld the complaint on the antitrust claim as it had to accept as true all of the allegations made in the complaint. Perhaps a better strategy would have been to move for summary judgment after a record on Newcal’s factual allegations had been developed.