A new decision from a Texas federal court sounds a cautionary note for retailers about the potential for liability based on claims made on items sold in their stores.

In November 2018, the Food and Drug Administration issued a string of announcements notifying the public that certain male dietary products contained hidden drug ingredients that could be dangerous. The products, including supplements known as Rhino Products, were tested and found to contain undisclosed chemicals, the FDA said.

Outlaw Laboratory, a manufacturer of male dietary supplements, filed suit against 14 gas stations and convenience stores in response, asserting violations of the Lanham Act. Outlaw alleged that the defendants sold the Rhino Products—which contained labels touting them as “all natural” and featuring “no harmful synthetic chemicals”—and were therefore liable for false advertising because they displayed and sold the supplements in their stores, even though they were falsely labeled by a third party.

The defendants moved to dismiss the suit, arguing that no cause of action exists under the Lanham Act for merely selling products that contain false labels. While U.S. District Court Judge Jane J. Boyle granted the motion, she did not rule out the possibility of holding a retailer liable for the claims made on products sold at its store.

“To make out a claim for false advertising, a plaintiff must first show that a party made a false or misleading statement of fact about his own or another’s product in the context of ‘commercial advertising or promotion,’” the court wrote. “To qualify as a statement made in the context of commercial advertising or promotion, the representations should be made for ‘the purpose of influencing consumers to buy defendant’s goods or services’ and ‘disseminated sufficiently to the relevant purchasing public.’”

But Outlaw failed to sufficiently make such allegations against the defendants, the court found. The complaint “do[es] no more than allege that the [defendants] ‘own[] and operate[]’ a store at a certain address and ‘promote[], advertise[], disseminate[] and offer[] for sale’ the Rhino Products at its store,” the court said.

Further, the only false statements pointed to by the plaintiff were the labels on the products, but the defendants denied any involvement in making the labels and told the court that, as independent retailers, they had no influence on the product labeling.

Outlaw attempted to persuade the court that its claim should survive because simply putting a product that is falsely labeled into commerce is sufficient to make out a false advertising claim. But Judge Boyle held that a plaintiff must show that the defendants actually made some false statement in commercial advertising or promotion to trigger liability under the Lanham Act—a requirement Outlaw failed to achieve.

“[T]here is nothing in the complaint that alleges the [defendants] here did anything more than passively offer the Rhino Products for sale,” the court wrote.

The court also expressed concern about the policy implications of adopting Outlaw’s position. “Here, Defendants undoubtedly sell many products—should they be responsible for scrutinizing and determining the veracity of every claim on every product label in their stores simply because they sell the product?”

“To be sure, the Court is not holding that retailers or sellers can never be held liable for false advertising,” Judge Boyle wrote. “The Court instead holds that in this case the [defendants] cannot be held liable for false advertising based solely on allegations that they displayed and sold the Rhino Products in their stores.”

To read the memorandum opinion and order in Outlaw Laboratory, LP v. Shenoor Enterprise, Inc., click here.

Why it matters: Although the Texas federal court granted the defendants’ motion to dismiss the Lanham Act suit based on allegations that the retailers displayed and sold the products at issue, it declined to conclude that such an outcome could never be possible, leaving the door open to hold a retailer liable under the Lanham Act where a plaintiff sufficiently alleged that the defendant made false statements in the context of advertising and promotion.