Reed Construction Data Inc. v. McGraw-Hill Companies, Inc.
Docket: No. 09-CV-8578 (JPO)
Court: District Court, S.D. New York; September 24, 2014; Federal District Court
Reed Construction Data, Inc. initiated legal action against McGraw-Hill Companies, Inc., unidentified individuals, and unidentified entities, citing violations of the Lanham Act, the Sherman Antitrust Act, and various state tort laws. Reed claims that McGraw-Hill illicitly accessed its database service to create misleading product comparisons for potential Reed customers. McGraw-Hill has filed for summary judgment and sought to exclude the testimony of Reed's expert witness, Dr. Frederick Warren-Boulton, with the court holding a two-day Daubert hearing on the matter. The court granted McGraw-Hill's motion to exclude the expert testimony and partially granted its motion for summary judgment.
Both parties operate in the construction product information (CPI) market, which has evolved from printed newsletters to comprehensive searchable databases. Reed's service, "Connect," and McGraw-Hill's "Dodge Network" are the only two national providers. The competition focuses on having the most extensive project listings, with user agreements prohibiting unauthorized comparisons between competing services. Since around 2004, McGraw-Hill has accessed Reed Connect through deceitful means, employing consultants, referred to as "spies," who created fake entities to subscribe and gather information on Reed's project listings. McGraw-Hill concealed these subscriptions and misclassified the related expenses, ultimately spending $3.45 million on this activity.
McGraw-Hill engaged GFK Roper Public Affairs to compare its services with Reed Connect, presenting Roper as an independent evaluator. However, Reed contended that Roper's methodology was flawed and biased in favor of McGraw-Hill, citing instances where McGraw-Hill used its superior products in tests while misrepresenting the comparisons and selectively excluding Reed's strengths. The resultant Roper Reports claimed significant advantages for McGraw-Hill in project listings, which Reed's expert later deemed biased.
While disseminating the Roper Reports, McGraw-Hill also conducted unauthorized ad hoc comparisons, issuing 1,235 unique comparisons based on its access to Reed Connect, often suggesting searches that would only yield results from McGraw-Hill’s database. McGraw-Hill claimed a five-to-one advantage in exclusive projects over Reed, but Reed argued the true ratio was closer to 2.6-to-one. Reed accused McGraw-Hill of "stealing" project leads using its access, while McGraw-Hill characterized the incidents as isolated violations of internal rules it dubbed the "Roper Rules."
Reed filed a lawsuit in 2009, including claims under the Racketeering-Influenced and Corrupt Organizations Act (RICO), which were dismissed by Judge Sweet, but other claims proceeded. Although Reed initially claimed that over 231 customers noticed the Roper Reports' influence, discovery revealed only one customer declaration supporting this assertion. Reed now argues it suffered damages due to customer loss and having to lower service prices, backed by expert testimony from Dr. Frederick Warren-Boulton, which McGraw-Hill has moved to strike under Federal Rule of Evidence 702.
Dr. Warren-Boulton has been retained by Reed to provide expert testimony on four key questions regarding antitrust issues: (1) whether a distinct national market for CPI exists to invoke § 2 of the Sherman Act; (2) whether McGraw-Hill exercised market power; (3) whether McGraw-Hill's actions allowed it to maintain that power; and (4) whether McGraw-Hill's actions harmed Reed. The first three questions pertain to his “liability opinion,” while the last addresses his “damages opinion.”
To substantiate his opinions, Dr. Warren-Boulton utilized statistical regression analyses on pricing and service data from both Reed and McGraw-Hill. Regression analysis aims to isolate the impact of one variable (the independent variable) on another (the dependent variable) by controlling for other factors (control variables). The resulting influence is quantified as a “coefficient.”
In conducting his analysis, Dr. Warren-Boulton focused on determining any potential damage to Reed from McGraw-Hill's misconduct. Although Reed acknowledged that only a few customers were misled by McGraw-Hill’s comparisons, Dr. Warren-Boulton identified a “price effect,” theorizing that customers paid inflated prices for McGraw-Hill’s services due to its misconduct, resulting in a corresponding loss for Reed. To quantify this impact, he proposed a “benchmark” model, a type of residual model that extrapolates unobservable data (such as misconduct) by comparing it to observable data against a known benchmark statistic.
Warren-Boulton’s benchmark model analyzes price discrepancies between national and local services during a specified period, establishing a “price index ratio” for each party involved. He posits that McGraw-Hill’s misconduct has a more substantial impact on national pricing compared to local pricing, with the effects diminishing over time since the misconduct ended around 2008. The analysis is indexed to 2013, a point by which Warren-Boulton believes the misconduct's effects will have fully dissipated. A decline in the price index difference over time, not attributable to other factors, would indicate a price effect resulting from McGraw-Hill's actions, visualized as a funnel that narrows from a wide gap at the onset of misconduct to no gap by the end. To validate this hypothesis, he developed two regression models controlling for various factors (service type, coverage area, market relevance) and measuring the influence of time since the misconduct began on price index ratios. Significant and negative coefficients related to quarterly variables would support his “funnel” theory of damages.
The admission of expert evidence is governed by Federal Rule of Evidence 702, which requires courts to assess whether the expert testimony will aid the trier of fact, the expert’s qualifications, the grounding of the testimony in sufficient facts or data, the reliability of the methods used, and the application of those methods to the case facts. Additionally, courts evaluate the scientific validity of the testimony based on factors such as testability, peer review status, error rates, and acceptance in the relevant field, as highlighted in the case Bricklayers, Trowel Trades Int’l Pension Fund v. Credit Suisse First Boston.
The proponent of expert testimony bears the burden of demonstrating its admissibility, specifically proving its reliability by a preponderance of the evidence, not its correctness. The reliability test is flexible and does not rigidly adhere to the factors outlined in Daubert; rather, the court must evaluate if the methodology represents "good science" and generates "scientific knowledge," distinct from ordinary knowledge. This standard is more stringent than the previous Frye standard, which only required that testimony arise from widely accepted methods within the relevant field. Daubert permits the admission of scientific evidence that may not yet be endorsed by the scientific community, and the rejection of testimony by experts does not automatically render it inadmissible. The court acts as a gatekeeper, determining if the methodology is scientifically sound without assessing the credibility of the experts or their conclusions. Courts should exclude only unscientific testimony that fails to aid in resolving relevant issues. Certainty is not a prerequisite for knowledge in this context.
A mistake in expert testimony must be within a tolerable range rather than remote, with disputes being resolved by the trier of fact, while testimony outside this range is excluded. In regression analysis cases, particularly securities fraud and employment discrimination, specific standards for admissibility have developed. Key issues include the selection of relevant time periods and control variables. Regression analyses must not involve "cherry-picking" data to strengthen conclusions but should be based on factual context. For example, in the Bricklayers case, an expert improperly selected volatile dates instead of relevant event days, leading to exclusion of the analysis. Furthermore, regression analyses must adhere to a consistent methodology, as the practice must align with predictable and justifiable standards under Daubert criteria.
In the case of Bricklayers, a regression analyst created a benchmark model of stock prices but excluded days with any news regarding the defendants’ business, which the district court deemed impermissible cherry-picking. However, the appellate court overturned this decision, allowing the exclusion of those days based on expert scholarship indicating increased volatility on news release days. The court emphasized that the jury should determine if the methodology unfairly selected days with allegedly false or corrective disclosures. For regression analyses to be admissible, they must control for significant factors affecting the dependent variable; omitting major variables renders the analysis inadmissible, while excluding less critical ones may affect probative value but not admissibility.
In Bickerstaff, a regression analysis presented by a plaintiff alleging discrimination was deemed inadmissible because it failed to account for crucial variables like teaching evaluations and duration of service in salary decisions. Conversely, in Bazemore, a regression was admissible despite omitting county salary differences, with the jury tasked to assess the potential bias of such omissions.
In the current case, a Daubert hearing was held regarding Dr. Warren-Boulton’s regression analysis, with Dr. Sumanth Addanki critiquing its flaws. McGraw-Hill raised two objections to Dr. Warren-Boulton’s model: the use of local pricing data as a baseline and the assumption that misconduct could affect prices without altering quantity. Dr. Warren-Boulton’s model theorizes that McGraw-Hill's misconduct created a gradual price gap in national CPI that lessened over time as the misconduct faded.
McGraw-Hill contends that Dr. Warren-Boulton’s liability opinion, which asserts that the national market for CPI is distinct and influenced by various market forces, is inconsistent with the available evidence. Dr. Warren-Boulton acknowledged during testimony that increased competition, particularly from Reed, is a significant factor in the national market, although the local market remains competitive. This suggests that McGraw-Hill would likely reduce national prices without adjusting local prices, thereby potentially explaining the narrowing price gap without implicating any misconduct.
Dr. Warren-Boulton's response to McGraw-Hill's critique regarding local pricing as a baseline is deemed inadequate, as he fails to address the concern that increased competition could account for the narrowing gap. This oversight, among other methodological flaws, raises doubts about the admissibility of his model under the Daubert standard.
Additionally, McGraw-Hill challenges a fundamental aspect of Dr. Warren-Boulton's model, which posits a price effect without a corresponding quantity effect—contrary to established microeconomic theory. Standard economic principles indicate that price increases typically lead to decreased demand for a good. Dr. Warren-Boulton has not classified CPI as a perfectly inelastic good, a Giffen good, or a Veblen good, which are exceptions to this rule. Consequently, McGraw-Hill argues that the absence of a contrary explanation substantiates their reductio ad absurdum argument, casting further doubt on the validity of Dr. Warren-Boulton's conclusions.
Dr. Warren-Boulton's rebuttal to objections regarding the CPI market emphasizes that prices for subscriptions are negotiated individually rather than predetermined by sellers. He argues that as the perceived values of competing products shift, prices will adjust accordingly, leading to a price effect without a corresponding quantity effect. However, this reasoning overlooks the reality that service providers have limitations in their price negotiations. If a consumer's willingness to pay for Reed's service is lower than Reed's asking price, the consumer may switch to McGraw-Hill only if it offers a lower price. As the perceived value of McGraw-Hill's service rises relative to Reed's, more consumers are predicted to switch. Warren-Boulton's model assumes that the range of acceptable prices for consumers is less than that for service providers, but lacks evidence for this assumption, undermining his analysis and rendering it inadmissible under the Daubert standard.
Additionally, the issue of omitted variable bias is raised, specifically regarding the exclusion of construction volume data from Warren-Boulton's model. This data is crucial as it may explain the disparity between national and local prices. While regression analyses can be valid even when key variables are omitted, it is the responsibility of the proponent to demonstrate that significant factors are accounted for. Warren-Boulton contends that construction volume could influence demand in opposing ways, but McGraw-Hill counters that excluding a variable due to uncertain effects contradicts standard statistical practices. McGraw-Hill's expert argues that ignoring such a variable reflects a refusal to engage with the data meaningfully.
Construction-volume data is expected to have a more substantial impact on the national market compared to the local market, as national firms were more adversely affected by the 2008 recession. The Court acknowledges that Warren-Boulton admits to a strong negative correlation between price indices and construction-volume data, indicating that the latter is a significant and negative variable, which is critical in assessing Dr. Warren-Boulton’s first model.
Warren-Boulton attempted to include construction volume data in his model to address McGraw-Hill's claims that this data could explain the results attributed to McGraw-Hill's alleged misconduct. However, this inclusion introduced multicollinearity, making it difficult to isolate the independent variable's effect on the dependent variable—a core objective of regression analysis. The presence of multicollinearity led to low statistical significance in the independent variables, as construction volume is highly correlated with both the independent and dependent variables, diminishing the explanatory power of other variables in the model.
McGraw-Hill argues that the observed effects in Warren-Boulton’s analysis are likely due to construction-volume data rather than misconduct. In contrast, Warren-Boulton contends that construction volume cannot explain the price effects identified, citing inconsistent results when construction volume is analyzed independently. However, the Court finds this reasoning insufficient, noting that unexamined factors could also account for these effects. Additionally, Warren-Boulton’s assumption that economic downturns similarly affect local and national prices is questioned, given that national firms would typically experience greater impacts. The correlation between construction volume and the dependent variables further complicates Warren-Boulton's position.
Ultimately, the Court concludes that Warren-Boulton's methodology does not meet the admissibility standards set by Rule 702, compounded by McGraw-Hill's assertion that Warren-Boulton’s models lack statistical significance.
McGraw-Hill argues that Dr. Warren-Boulton’s second model, which includes construction-volume data, yields no statistically significant results for quarterly time variables. This concern overlaps with previous objections related to multicollinearity, as the addition of construction-volume data creates this issue. Without this data, the analysis would not face statistical significance problems. McGraw-Hill also contests Dr. Warren-Boulton’s method of calculating price indices, suggesting flaws due to the lack of control for construction-volume data. However, Dr. Warren-Boulton maintains that the price indices focus solely on service prices, independent of construction-volume data, which is irrelevant for this analysis. These objections do not affect the court's determination of the inadmissibility of Dr. Warren-Boulton's testimony under Rule 702.
Additionally, McGraw-Hill criticizes Warren-Boulton's approach of pooling national and local pricing data in his regressions. They argue that pooling is inappropriate as the two markets respond differently to the factors being measured. Pooling issues arise when data from significantly different categories are combined, similar to analyzing varied apartment prices across distinct cities. The Chow test is a common method for assessing these pooling problems, and Dr. Warren-Boulton claims his model fails this test but argues that it only serves as a guideline, not an absolute barrier. He cites examples from scholarly articles where analysts pooled data despite failing the Chow test. McGraw-Hill contends these examples are not applicable since they do not involve comparisons between national and state-level data as in Warren-Boulton's case.
McGraw-Hill successfully challenges Warren-Boulton's methodology regarding the pooling of national and local data, asserting that national observations are limited and the risk of data manipulation is minimal. Warren-Boulton argues that both data types should respond similarly to control variables, despite differing responses to the independent variable, and criticizes the unpooled data for yielding “economically nonsensical” outcomes. At the Daubert hearing, he explained that pooling was necessary because unpooled data contradicted his prior expectations, which he acknowledged could not justify his decision. He also conceded that there was no strong statistical rationale for pooling the data, asserting that judgment is required to interpret the data. However, his reliance on subjective judgment raises concerns about the scientific validity of his conclusions. Warren-Boulton's choice of end dates for data analysis is particularly criticized; he admitted that this selection was somewhat arbitrary, and Dr. Addanki's adjustments to the end dates resulted in a finding of no damages, highlighting the manipulability of Warren-Boulton's methodology. This lack of robustness and reliance on judgment undermines the admissibility of his findings under Rule 702.
Issues regarding the expert's choice of time-frame for data examination are typically matters of credibility for the jury. However, if minor changes in model parameters significantly alter the model's conclusions, the model fails to meet the robustness required by Rule 702. Dr. Warren-Boulton's selection of parameters lacked methodological rigor, rendering his testimony inadmissible under Daubert standards. As the proponent of this testimony, Reed must demonstrate by a preponderance of the evidence that it meets Rule 702 criteria, which he has failed to do. Consequently, McGraw-Hill's motion to exclude Dr. Warren-Boulton’s testimony is granted, and his testimony will not be considered for McGraw-Hill's summary judgment motion.
Summary judgment is warranted when there are no genuine disputes over material facts, allowing the movant to secure judgment as a matter of law. A material fact affects the suit's outcome, and a genuine dispute means a rational jury could favor the non-moving party. The movant bears the initial burden to evidence their claim or defense, and if successful, the non-moving party must present specific facts to show a genuine trial issue. The court evaluates evidence favorably towards the non-moving party, and summary judgment is only granted if no reasonable jury could rule in their favor. Conclusory statements or speculation are insufficient for the non-moving party to meet their burden.
Reed's claims under Section 43(a) of the Lanham Act allege false or misleading descriptions in commerce about goods or services. Plaintiffs can recover under two theories: by proving an advertisement is literally false, which presumes consumer deception, allowing for relief without considering the ad's actual market impact.
Plaintiffs can argue that an advertisement, while not literally false, is likely to mislead consumers. To succeed under this theory, they must present extrinsic evidence demonstrating consumer confusion. If willful deception is proven, confusion is presumed, shifting the burden to defendants to show that consumers were not confused. Plaintiffs must also establish that the misleading statement was material to consumers and involved an inherent quality of the product, as per the Lanham Act.
Reed claims several misleading statements made by McGraw Hill, including:
1. Claims regarding Roper’s oversight of the comparison process, which Reed argues could be seen as a sham.
2. Misrepresentation in Roper Report comparisons, wherein McGraw Hill allegedly overstated project numbers and made misleading comparisons between Reed’s and McGraw Hill’s databases.
3. Ad hoc comparisons replicating previous methodological flaws, deemed literally false.
4. Use of outdated Executive Briefs that conveyed a misleading impression due to reliance on stale data.
5. Claims of exclusivity regarding access to projects that were also available through Reed Connect, which Reed argues are literally false.
6. Assertions of project ratios favoring McGraw Hill, which Reed claims are also literally false.
The court must first ascertain whether these statements qualify as “advertising and promotion” under the Lanham Act, encompassing a three-part inquiry established by the Second Circuit, which stipulates that the contested representations must constitute commercial speech.
To establish a false advertising claim under the Lanham Act, three criteria must be met: the communication must be made to influence consumer purchases, it must concern the defendant's goods or services, and it must be disseminated sufficiently to the relevant purchasing public. In this case, the first two criteria are not disputed; the contention lies in the sufficiency of dissemination. McGraw-Hill asserts that certain misrepresentations were not distributed broadly enough, arguing that the Court should analyze the statements individually. Conversely, Reed contends that the statements should be viewed as part of a collective advertising campaign.
The Court must determine whether to evaluate the statements as a single advertisement or as multiple advertisements warranting separate consideration. Relevant case law indicates that courts typically assess the entirety of a potentially false advertisement rather than engaging in a fragmented analysis. However, the specific context of the statements—individual communications versus a comprehensive campaign—necessitates a decision on the appropriate level of generality for evaluation.
McGraw-Hill references the case of Seven-Up Co. v. Coca-Cola Co., where presentation materials targeting independent bottlers were deemed advertising despite being individually presented. This supports the notion that a presentation, evaluated in its entirety, constitutes advertising under the Lanham Act. The case contrasts with McGraw-Hill's proposed approach of isolated examination. Additionally, in Gordon. Breach, the court assessed a misleading campaign that included various elements, distinguishing between commercial speech and protected editorial speech. This precedent emphasizes the necessity of considering the broader context of advertising campaigns rather than dissecting individual elements.
The court has distinguished between different categories of speech but refrained from further dissecting the components of McGraw-Hill's promotional campaign. It noted that the threshold for what constitutes advertising varies significantly across industries and cases. The court will assess whether McGraw-Hill's collective efforts amount to "advertising" under the Lanham Act, which encompasses more than traditional advertising campaigns but excludes individual sales representatives' oral statements to customers.
McGraw-Hill's attempts to demonstrate the superiority of its services through individual conversations were part of a broader competitive strategy against Reed. Evidence suggests that McGraw-Hill management actively instructed salespeople to spread several allegedly false statements, blurring the line between these conversations and a conventional advertising campaign in both intent and outcome.
Regarding falsity under the Lanham Act, a statement can be categorized as "false" in two ways: literally false or implicitly false due to being misleading. Literal falsity requires a direct comparison to reality, while implicit falsity focuses on the listener's impression versus reality. Context is crucial in interpreting statements, leading to the adoption of the "false by necessary implication" doctrine, which allows for a statement to be considered literally false if it implies a false message when viewed in context. This message must be clear and unambiguous to be deemed literally false.
A statement may be considered literally false in two scenarios: if it is factually incorrect or if it conveys an unambiguous message that contradicts reality. Additionally, a statement can be implicitly false if it creates a misleading impression for a significant portion of the audience. The determination of literal falsity is generally factual. Reed identifies six categories of allegedly false statements, specifically focusing on Roper’s involvement in the reports. These reports claimed that Roper, described as an independent firm, managed the evaluation process to ensure comparability. However, evidence suggests that Roper's role may have been minimal, with a project director indicating that McGraw-Hill paid Roper merely to claim oversight. This director admitted to lacking knowledge about the specifics of the services being compared. Reed argues that a jury could infer that Roper’s participation was superficial and thus the statements regarding their independence and objectivity were literally false. McGraw-Hill counters by asserting that its employee confirmed Roper's active role in verifying data and ensuring comparability, claiming this evidence supports the truthfulness of the statements. Nevertheless, Reed presents conflicting testimony from a Roper employee that undermines McGraw-Hill's assertions, suggesting that the reports were not independent or unbiased. The evidence presents a genuine dispute regarding the literal truth of these statements, warranting further examination by a jury. Reed also claims that additional statements in the Roper Reports and ad hoc comparisons are literally false, which is yet to be detailed in this excerpt.
Reed identifies three issues with the Roper Reports that result in allegedly false statements. First, a Roper Report compared Reed Connect to Dataline rather than McGraw-Hill’s Dodge Network. McGraw-Hill contends that the report indicated comparisons were based on “F.W. Dodge electronic listings,” which could include Dataline. However, neither party has provided evidence to clarify whether Dataline qualifies as an “F.W. Dodge electronic listing.” Consequently, Reed faces the burden of proving falsity without sufficient evidence, making it unlikely for a jury to find the statement literally false.
Second, Reed argues McGraw-Hill double-counted projects. McGraw-Hill explains that the Dodge Network might list projects pursued in parallel as separate entries, while Reed Connect would count them as one. Reed claims this misrepresents the total number of projects, but has not demonstrated that the term “projects” is inaccurately used in this context. Thus, a reasonable juror would likely find Reed has not met its burden of proof regarding this claim.
Lastly, Reed asserts that McGraw-Hill omitted ASAP projects from its Roper Report comparisons. McGraw-Hill asserts that its searches did include ASAP projects. Reed’s expert, Sonya Kwon, contends that McGraw-Hill's methodology excluded these projects because Reed lists them by leaving the bid date blank. McGraw-Hill claims any omission was due to an error in Reed’s search algorithm, which Kwon corrected only after analyzing the Reed Connect database.
Kwon indicated that she re-included ASAP projects in the project counts using backend databases supporting both companies. It is agreed that searching for projects with an “ASAP” bid-date yields results in the Dodge Network but not in Reed Connect; however, the cause—either an error by Reed or deception by McGraw-Hill—is disputed. Reed has not provided evidence to prove that the claims regarding the search results being based on “ASAP” bid-dates were false, thus failing to meet the burden of proving literal falsity.
Regarding stale executive briefs, Reed alleges that McGraw-Hill claimed to reference a “recent” comparison of Reed Connect and Dodge Network from 2007 in executive briefs released between 2008 and 2012. Since “recent” is open to interpretation and the Lanham Act does not require the most current data, the statement is not deemed false just because the comparison is five years old. Consequently, Reed has not proven the statements in the executive briefs to be literally false.
On claims of exclusivity, Reed asserts that McGraw-Hill misled customers by stating certain projects were exclusive to the Dodge Network, when they were also available on Reed Connect. McGraw-Hill counters that Reed’s evidence of availability comes from searches made after the claims were made, providing no proof that the exclusivity statements were false at the time. Nonetheless, Reed has circumstantial evidence suggesting that at least one search for exclusive projects occurred the day after McGraw-Hill made its claims, indicating a possible falsehood in the exclusivity assertion.
Lastly, Reed contends that McGraw-Hill frequently reported a 5:1 ratio in exclusive projects and a 3:1 ratio over all competitors.
Reed argues that McGraw-Hill's claims about project ratios of 5:1 and 3:1 are literally false, supported by expert testimony and internal data indicating the actual advantage is significantly lower. McGraw-Hill counters that Reed's estimates are based on different comparisons and asserts that Reed has not provided evidence on how these ratios were calculated or why they are false. Instead, Reed has shown that McGraw-Hill employees were uncertain about the calculation methods. The evidence suggests other calculations indicate lower advantages but lacks clarity on McGraw-Hill's methods. Thus, a reasonable juror could conclude the ratios are false, leading to a presumption of consumer deception.
Three specific statements by McGraw-Hill survive summary judgment as potentially literally false: those regarding Roper's involvement, exclusives to individual customers, and the project ratios. For these, consumer deception is presumed. Conversely, other statements are deemed misleading, requiring Reed to demonstrate actual consumer confusion or prove egregious deception by McGraw-Hill.
To establish an implicit falsity claim under the Lanham Act, Reed must show evidence of consumer confusion, although this burden does not apply to statements already proven to be literally false or intentionally deceptive. Reed has not provided sufficient evidence of consumer confusion for the remaining statements.
Reed presents three arguments for intentional deception by McGraw-Hill: significant spending to access Reed Connect, timing of comparisons favoring McGraw-Hill, and misleading consumers about the independence of the Roper Reports. However, these arguments are deemed insufficient to withstand summary judgment, as no reasonable juror could conclude that McGraw-Hill intentionally deceived customers.
Evidence suggests McGraw-Hill may have acted recklessly regarding potential consumer confusion, but this alone is insufficient for Reed to prevail. Reed must provide evidence demonstrating actual consumer confusion. The declaration from Pat McCoy is cited by Reed to support claims of confusion; however, McGraw-Hill presents substantial evidence indicating that consumers were not misled. Consumer confusion is typically shown through surveys, but alternative evidence can suffice under the Lanham Act, which does not set a numerical threshold for what constitutes a "substantial" number of confused consumers. However, mere handfuls of instances from large markets have been deemed inadequate in previous cases. For example, two instances of confusion were insufficient against a backdrop of hundreds of thousands of products sold. Reed's evidence relies on one customer from a market of at least 70,000, which is deemed insufficient, particularly as this customer was not a decision-maker in purchasing. This diminishes the weight of the testimony. Thus, the combination of McGraw-Hill's counterarguments and the limited nature of Reed’s evidence does not establish a genuine issue regarding consumer confusion.
No reasonable juror could determine that a significant number of consumers were misled by McGraw-Hill’s statements, leading to a failure of Reed's claims under the misleadingly-false theory of the Lanham Act due to the absence of consumer confusion. The materiality of statements in question pertains only to those potentially literally false, specifically: (1) statements regarding Roper’s involvement, (2) claims of exclusivity to certain customers, and (3) statements about project ratios of 5:1 and 3:1. The court finds that no reasonable juror could deem these statements material.
There is a dispute over the legal standard for materiality. Reed asserts that materiality is established if a statement misrepresents an inherent quality of a product, while McGraw-Hill contends that it must also show that the statement is likely to influence purchasing decisions. Citing a 1974 Second Circuit case, the court states that actionable statements under the Lanham Act must relate to the inherent qualities of a defendant's product. In that case, the court dismissed claims against advertisements for fake furs that misrepresented the ecological impact of purchasing the product, emphasizing that there were no false representations about the products themselves.
The standard has evolved, as demonstrated in Vidal Sassoon, Inc. v. Bristol-Myers Co., where the court found that misstatements about test results relating to a product's effectiveness could also fall under Section 43(a), despite not directly addressing the inherent quality of the product itself. This reflects a broader interpretation of materiality in advertising claims as the legal landscape has become more complex.
The court is evolving its evaluation of advertising statements to focus more on their impact on consumer purchases, while still retaining references to "inherent quality." In a cited case, National Basketball Association v. Motorola, Inc., the court reiterated this concept but framed it within the broader context of materiality. The court dismissed a Lanham Act claim, concluding that inaccuracies in statements did not influence consumer behavior. Although the Second Circuit combined "inherent quality" and "materiality" standards, it aligned its approach with consumer-impact-focused models from other circuits, ultimately finding that the statements in question did not materially misrepresent the product's qualities.
In the case at hand, McGraw-Hill's marketing campaign was scrutinized for its influence on consumer purchasing decisions. Reed failed to provide adequate evidence to demonstrate materiality or consumer confusion, with only one customer suggesting influence from McGraw-Hill's statements, while others deemed them immaterial. Consequently, McGraw-Hill effectively rebutted any presumption of materiality, leading the court to grant summary judgment in favor of McGraw-Hill regarding Reed's Lanham Act claims.
On antitrust claims, specifically regarding alleged monopolization under Section 2 of the Sherman Act, McGraw-Hill contended that its advertising had at most a negligible effect on competition, arguing that the presumption of de minimis impact applies unless Reed can show that the statements were clearly false or materially misleading. The court will first determine if the Ayerst presumption applies and whether Reed successfully rebuts it.
The de minimis presumption applies to third-party disparagement claims, as established in Ayerst, where several conditions must be met to overcome this presumption. Reed contends that the presumption should not apply for two reasons: first, that special rules govern third-party advertising per the Roper Reports, and second, that an exception exists for markets with only two competitors. However, Ayerst undermines both claims. Reed cites Ninth Circuit cases indicating the presumption is inapplicable when third-party advertisers increase customer reliance on disparaging ads. Nonetheless, the Second Circuit does not share this view, maintaining that the likelihood of inducing reliance is just one element in the six-factor test required to rebut the presumption. The Ninth Circuit demands that all six factors be satisfied to overcome the presumption, which is particularly strong in that jurisdiction, indicating that merely showing increased reliance is insufficient. Reed's argument regarding two-competitor markets is also unpersuasive, as the Eighth Circuit has not adopted the Ayerst framework and instead utilizes a different analysis for disparagement claims. Ultimately, the Court affirms that the de minimis presumption applies to Reed’s claims, necessitating a careful evaluation of the presumption's strength and the relevant factors before proceeding.
The court in Council of Certified Podiatric Physicians. Surgeons v. Am. Bd. of Podiatric Surgery clarified that the Ayerst case establishes that plaintiffs do not need to satisfy all factors to rebut the presumption of no antitrust injury. The case originated as a motion to dismiss, later converted to a motion for summary judgment, where the court noted that discovery might support the plaintiffs' claims regarding certain advertising being false, material, likely to induce reliance, and not easily neutralized. However, skepticism remained about the plaintiffs' ability to demonstrate success on all factors, particularly the fifth factor regarding the duration of disparaging representations, which were deemed to have occurred for only a short time.
The court emphasized that the de minimis presumption allows a case to proceed even if all factors are not satisfied. The Ayerst factors guide the inquiry into whether disparaging advertisements are so misleading that they constitute anticompetitive conduct. It was noted that a monopolist can promote its product unless such promotion creates an unreasonable entry barrier, and isolated torts like false disparagement typically do not violate antitrust laws unless they harm competition.
To rebut the Ayerst presumption, a plaintiff must demonstrate that the challenged statements are "clearly false," with evidence indicating three specific statements were literally false: claims about Roper’s involvement, exclusivity to certain customers, and project ratios. The distinction between "literal" and "clear" falsity lies in the degree of obviousness regarding the truth of the statements, suggesting that while a statement is either false or not, the clarity of its falsity can vary based on how evident it is in context. Each of the challenged statements presents a nuanced evaluation of clarity.
Roper’s involvement in the case is viewed as credible, with an employee present during the comparisons, ensuring the search terms were comparable, which counters the notion of a sham. The evidence suggests that Reed acted quickly to add projects after discovering McGraw-Hill’s claims of exclusivity, indicating that the claims were true at the time they were made. There is no evidence on how the 5:1 and 3:1 ratios were derived, but it is reasonable to assume McGraw-Hill's methodology was accurate. Reed has not demonstrated that any false statements were materially significant or that consumers relied on McGraw-Hill's alleged misstatements, with the only evidence being the weak McCoy declaration. The debate over buyer knowledge centers on whether Reed’s customers could competently evaluate McGraw-Hill's claims. McGraw-Hill argues that customers do not require statistical expertise to assess project counts, supported by evidence showing that buyers conducted their own analyses. Both parties agree on the prolonged exposure of the statements. Reed's argument that McGraw-Hill’s statements were not subject to neutralization fails, as the claims were based on empirical facts and Reed had the ability to counter McGraw-Hill's comparisons. Ultimately, Reed has only demonstrated one of the six Ayerst factors necessary for its claims.
The presumption that McGraw-Hill's conduct minimally affected competition allows for summary judgment in favor of McGraw-Hill regarding its antitrust claims. Reed has filed six common-law claims against McGraw-Hill: fraud, misappropriation of trade secrets, misappropriation of confidential information, unfair competition, tortious interference with contractual relations, and unjust enrichment. The applicable law is contested, with Georgia and New York being considered, and the Court will apply New York's conflict rules given its jurisdiction.
Reed contends that McGraw-Hill waived its right to argue for Georgia law by raising this argument only in its third amended answer, filed over four years into the litigation. McGraw-Hill counters that Reed cannot demonstrate any prejudice from this delay, rendering the waiver argument ineffective. Courts typically do not regard choice-of-law arguments as waived until a later stage in litigation, such as during summary judgment motions. Reed maintains that McGraw-Hill's timing was inappropriate, while McGraw-Hill argues that the main consideration should be whether Reed experienced prejudice due to the timing of the argument.
The Court concludes that, although the close of discovery typically limits the introduction of new factual issues, a late legal argument is permissible if there is no demonstrated prejudice. Consequently, the Court holds that Reed’s unfair competition claim will proceed, while the other claims are dismissed.
McGraw-Hill maintains that it has not forfeited its position regarding the application of Georgia law. Under New York's choice-of-law rules in tort cases, courts evaluate which jurisdiction has the most significant interest in the specific issue at hand. They categorize state laws as either "conduct regulating," which prevent injuries, or "loss allocating," which manage liability post-tort. If the laws are conduct-regulating, the jurisdiction where the tort occurred generally applies. In contrast, if they are loss allocating, the "Neumeier rules" are invoked, favoring the law of the common domicile of the parties or, if they are not co-domiciliaries, the law where the tort occurred, unless compelling reasons exist to apply a different law. New York courts assess tort claims issue-by-issue rather than applying a single jurisdiction's law to all issues. In terms of the fraud claim, Reed asserts that McGraw-Hill misrepresented that consultants Lewin and Lorenz were not its employees, leading to customer losses due to misleading advertising facilitated by unauthorized access to Reed Connect. The specifics of how these customer losses occurred remain unclear, centering primarily on the alleged false advertising.
To ascertain whether the rules in question are conduct-regulating or loss-allocating, the Court examines the differences between Georgia and New York fraud claims, notably the Georgia Trade Secrets Act (GTSA). This statute consolidates common-law claims based on trade secret misappropriation into a singular statutory tort, effectively preempting fraud claims that arise from trade secrets. McGraw-Hill argues this categorizes the rule as loss-allocating, suggesting that Georgia would limit recovery unless plaintiffs meet the GTSA's strict requirements, while New York would permit ordinary fraud claims to proceed. Conversely, Reed contends the conflict pertains to fraud, typically viewed as a conduct-regulating doctrine.
New York courts adopt an atomistic approach to choice-of-law, favoring the jurisdiction with the strongest interest in the issue at hand, suggesting the GTSA conflict is loss-allocating and that the law of the tort's location should apply. The incident involved McGraw-Hill's consultants, based in New York, purchasing subscriptions over the phone from Reed's representatives in Georgia. New York courts generally identify the "locus" of a tort as where the last event necessary for liability occurs, which in this case is Georgia, where reliance on the misstatements allegedly occurred. However, under the Restatement Second approach, fraud cases are primarily governed by the location of the defendant's conduct, which is New York in this scenario.
Under New York law, a fraud plaintiff must demonstrate several elements, including a false representation made to induce reliance, justifiable reliance, and resultant injury. The primary issue in this case pertains to the injury, as New York law stipulates that losses must directly result from the misrepresentation and be independent of other causes. Reed claims lost profits due to lost customers from McGraw-Hill's misleading advertisement, a claim that may extend the definition of "direct, immediate, and proximate" losses beyond acceptable bounds.
Reed's claims against McGraw-Hill are intertwined, with Reed alleging no additional damages from McGraw-Hill's fraudulent actions, leading to McGraw-Hill's entitlement to summary judgment on the fraud claims. Regarding trade secrets, Reed accuses McGraw-Hill of misappropriating its trade secrets under the Georgia Trade Secrets Act (GTSA) and New York law, but McGraw-Hill argues that the information was not "secret." The court determines that it need not choose between Georgia or New York law, as both require the information to be secret for trade-secret protection. Reed's confidential proprietary information (CPI) lost its trade-secret status when it was distributed through free trial subscriptions without restrictions. This conclusion is supported by case law from both jurisdictions, which emphasizes that once information is publicly disclosed or readily observable, it cannot be considered a trade secret. Consequently, Reed's CPI is not protected under either Georgia or New York law.
For the tortious interference claim, Reed contends that McGraw-Hill wrongfully lured customers to Dodge Network through misleading advertisements. Although Reed acknowledges that the GTSA preempts this claim under Georgia law, it asserts that New York law should apply due to the nature of the misconduct. However, the court indicates that even under New York law, Reed's claims would not succeed, as the necessary elements for tortious interference with prospective economic advantage have not been met.
The plaintiff, Reed, claims McGraw-Hill tortiously interfered with its business relationships by using wrongful means, leading to injury; however, Reed fails to provide evidence of any actual injury to its relations, as the sole supporting evidence from Patrick McCoy indicates consumer confusion but not a direct impact on Reed’s contractual relationships. Consequently, Reed's tortious interference claim cannot withstand summary judgment under New York law and is preempted under Georgia law, entitling McGraw-Hill to summary judgment on this claim.
In terms of unjust enrichment, Reed argues that McGraw-Hill's use of misleading comparisons resulted in unjust enrichment. McGraw-Hill counters that Reed has not shown any value was taken or that it gained customers at Reed's expense. The undisputed evidence reveals that the only customer Reed claims to have lost did not make the purchasing decision, meaning Reed cannot substantiate its unjust enrichment claim.
Regarding unfair competition, McGraw-Hill admits to minor infractions by utilizing leads from Reed's database but argues these were minimal and that Reed also engaged in similar behavior. Under Georgia law, McGraw-Hill asserts that unfair competition is not recognized as a tort, while New York has a well-established doctrine for it. The determination of governing law hinges on where the tort occurred, as McGraw-Hill accessed Reed's database in Georgia and utilized that information in New York. Thus, New York law applies, which recognizes the tort of unfair competition stemming from historical federal common law.
The Supreme Court case International News Service v. Associated Press established that a news-gatherer possesses a "quasi-property" right against the unauthorized republication of its news content by competitors. The International News Service (INS) misappropriated news collected by the Associated Press (AP) by using telegraph technology to relay and publish AP news as its own, creating unfair competition. This ruling has faced criticism for resembling copyright law, with some arguing that federal copyright law preempts state unfair competition claims. New York maintains a robust unfair competition doctrine, protecting against various forms of commercial immorality based on principles of conscience, justice, and equity. Under New York law, a claim of unfair competition through misappropriation requires the plaintiff to demonstrate that the defendant appropriated something of value and that the defendant's actions constitute free-riding on the plaintiff's efforts. McGraw-Hill contends it did not commit unfair competition because Reed lacks a property interest in its project counts and claims no evidence of misappropriation. However, McGraw-Hill admits to misappropriating Reed's project leads on several occasions, which contradicts its defense. While re-publishing publicly available project counts is permissible, the allegation of misappropriating Reed's underlying data suggests that McGraw-Hill's actions fall within the scope of unfair competition.
McGraw-Hill engaged in deceptive practices by using fictitious entities to subscribe to Reed’s database service, subsequently incorporating project leads from Reed into its own database. Reed holds a property interest in these project leads, which McGraw-Hill's actions exploited without consent, constituting "free riding" on Reed’s efforts. Despite McGraw-Hill's claim that the alleged misconduct did not cause significant damage, this does not dismiss Reed's right to proceed with its claim at this stage.
Concerning the statute of limitations, McGraw-Hill contends that a one-year limit applies to Reed’s unfair competition claim, arguing it centers on misleading marketing tactics. However, the claim's core lies in the misappropriation of project leads, which is subject to a three-year statute in New York. Evidence indicates that the alleged misappropriation occurred in 2008, well within the limit, allowing Reed's claim to proceed.
In conclusion, the court partially granted McGraw-Hill's motion for summary judgment, dismissing most of Reed's claims but allowing the unfair competition claim to survive. The court also granted McGraw-Hill’s motion to exclude Dr. Frederick Warren-Boulton's testimony. The admissibility of Dr. Warren-Boulton's liability opinion was assumed for the sake of argument, despite the court's decision that Reed’s antitrust claims ultimately could not succeed. The court noted the use of ordinary least-squares (OLS) regression analysis by Dr. Warren-Boulton, clarifying its application and adjustments made in response to criticism. The case was transferred to a new judge on September 30, 2011, and additional declarations submitted by Reed were precluded from consideration.
Bazemore, though decided prior to Daubert, has been consistently referenced by the Second Circuit, as seen in Bickerstaff. While Robert Giffen’s writings lack a clear definition of "Giffen goods," Alfred Marshall attributes the concept to him, illustrating that a rise in bread prices compels poorer families to reduce consumption of more expensive foods while increasing bread consumption. In legal proceedings, the Chow test is relevant for assessing statistical models, with the formula involving the sum of squared residuals from different data groups and accounting for the number of observations and variables. Under the Lanham Act, plaintiffs must demonstrate a likelihood of consumer confusion to stop deceptive advertising, but must prove actual confusion to recover damages, with the heightened standard applicable in Reed's case. The relevant consumers are independent bottlers in the soda industry. Reed's argument regarding "egregious" deception is dismissed, as the Court finds insufficient evidence of deliberate deception by McGraw-Hill. The exclusion of Dr. Warren-Boulton's testimony further undermines Reed's claims. McGraw-Hill contends that the Court's allowance for a third amended answer does not imply a ruling on the choice-of-law argument. The text also touches on ongoing academic debates regarding the purpose of tort law, referencing various scholars who have differing views on the justifications for tort liability.
Scott Hershovitz's analysis in "Two Models of Tort" and related scholarly works highlight the legal landscape surrounding tort law and trade secrets. The New York Court of Appeals' methodology simplifies the case by establishing that both parties agree on their domiciles—Reed in Georgia and McGraw-Hill in New York. Reed asserts that McGraw-Hill is judicially estopped from claiming Reed’s project leads are not trade secrets, referencing the prior positions taken by McGraw-Hill's predecessor, F.W. Dodge Company. Judicial estoppel prevents parties from adopting positions that are clearly contradictory to earlier claims.
However, Reed's argument fails as McGraw-Hill does not categorically deny that certain information can be a trade secret; it claims Reed's information is not secret because it was provided during free trials without a confidentiality agreement. This stance does not conflict with the idea that trade secrets exist under confidentiality. Reed further alleges that McGraw-Hill misappropriated its methodologies related to construction project data management. Yet, since McGraw-Hill only accessed information available to free trial users, Reed lacks evidence of misappropriation of its methodologies, which weakens its trade secret claim but supports its unfair competition claim. Additionally, McGraw-Hill's counterclaims and the issue of unclean hands are deemed irrelevant to the current motion.
