Appendix — Amway Corp. v. Procter & Gamble Co.

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APPENDIX

TABLE OF CONTENTS

Page

Amended Final Judgment of the District Court ......... la

Opinion of the Court of Appeals .................... 3a

Order of the Court of Appeals Denying Rehearing and

FDEP PT VPI ELE STEPET TEC eLEETe 57a

Pertinent Constitutional and Statutory Provisions ...... 59a

APPENDIX A

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

THE PROCTER & GAMBLE §

COMPANY, et al §

: Plaintiffs, §

versus § CIVIL ACTION

§ No. H-97-2384

AMWAY CORPORATION, etal §

Defendants. §

AMENDED FINAL JUDGMENT

On the 3rd day of May, 1999, the above-styled and

numbered case came on for trial. Both sides appeared and

announced ready for trial, and the case was tried to a jury, one

having been timely requested, from May 3 to May 14, 1999.

The Court enters a final judgment in this case in favor of

Defendants and against Plaintiffs pursuant to the findings that

the Court made on the record. Accordingly, the Court

ORDERS that Plaintiffs take nothing from Defendants.

This Order is a FINAL JUDGMENT.

Signed this 17th day of May, 1999.

/s/ Vanessa D. Gilmore

VANESSA D. GILMORE

UNITED STATES DISTRICT JUDGE

APPENDIX B

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 99-20590

The Procter & Gamble Company

and

The Procter & Gamble Distributing Company,

Plaintiffs-Appellants,

Amway Corporation, et al.,

Defendants,

Amway Corporation; The Amway Distributors

Association Council; Ja-Ri Corporation; Donald R.

Wilson; Wow International, Inc.; Wilson Enterprises,

Inc.; Ronald A. Rummel,

Individually Doing Business as Rummel Enterprises;

Kevin Shinn; Randy Haugen; Freedom Associates, Inc.;

Freedom Tools, Inc.; Randy Walker; Walker

International Network; Gene Shaw; John & Jane Does

6-10, Business Entities; Dexter Yager, Sr.; Birdie Yager;

and D&B Yager Enterprises, Inc.,

Defendants-Appellees.

Appeal from the United States District Court

for the Southern District of Texas

Before SMITH and DENNIS,

Circuit Judges, and ROETTGER,

District Judge.

JERRY E. SMITH, Circuit Judge:

The Procter & Gamble Company (“P&G”) appeals the

dismissal of its lawsuit against Amway Corporation and other

defendants for defamation, fraud, and violations of the Lanham

Act, RICO, and Texas state law. We affirm in part, reverse in

part, and remand.

P&G, a manufacturer and distributor of numerous household

products, has been plagued by rumors of links to Satanism

since the late 1970’s or early 1980’s. The most common variant

of the rumor is that the president of P&G revealed on a

television talk show that he worships Satan; that many of

P&G’s profits go to the church of Satan; and that there is no

harm in such disclosure, because there are no longer enough

Christians left in the United States for such devilish activities

to make a difference. The rumor often was circulated in the

form of a written flier that listed numerous P&G products and

called for a boycott.

P&G has spent considerable time and money unsuccessfully

trying to determine the original source of the rumor and to

squeich it. P&G has not been able to prove how the rumor

began, although it asserts here that the rumor was either started

* District Judge of the Southern District of Florida, sitting by designation.

or spread by Amway’ or its distributors in the 1980’s. P&G

offered no proof that Amway originally started the rumor, but

it did offer evidence showing that various Amway distributors

spread it in the 1980’s. Rather than suing Amway at that time,

however, P&G worked with Amway’s corporate headquarters,

which promised to help stop the rumor.

The rumor re-surfaced on April 20, 1995, when an Amway

distributor named Randy Haugen forwarded it to other Amway

distributors via a telephone messaging system for Amway

distributors known as “AmVox.”? Haugen is a highly

' Amway manufactures and distributes household products, many of which

compete directly with P&G’s products. Amway distributes its products in

a fairly distinctive manner, however, using a system of direct marketing in

which its distributors are recruited as independent contractors into a

hierarchical system of distribution. Amway has more than a million

distributors around the world, each of whom is encouraged both to sell

Amway products directly to consumers (including the distributor’s own

household) and to recruit others to be Amway distributors.

The distributors earn money both by a percentage of the income from

Amway products they personally sell and by a percentage of the income

from sales made by every distributor whom they have directly recruited, and

by those distributors further “downline” who have been recruited as recruits

of recruits. Amway’s success depends on the efforts of its distributors to

encourage downline distributors to buy Amway products and continually to

recruit new distributors to replace those lost to attrition. Amway encourages

“upline” distributors to motivate those below them in the hierarchy and

downline distributors to “emulate” those distributors above them.

> AmVox is a communication system that Amway sells to its distributors

to facilitate communication between and among them. Haugen received the

rumor about P&G from another Amway distributor via AmVox and

forwarded it to all his distributors saying, “This is a great message. Listen

to it.” The message was:

Hey, Jeff, this is Roger Patton. I wanted to run something by you real

quick that I think you’ll find pretty interesting. I was just talking to

a guy the other night about this very subject and it just so happens that

a guy brings information in, lays it on my desk this morning, so here

it goes. It says the president of Procter & Gamble appeared on the

(continued...)

successful Amway distributor with a network of tens of

thousands to possibly 100,000 distributors underneath him

throughout Utah, Nevada, Texas, Mexico, and Canada. He also

served on Amway’s Distributors Association Council

(“ADAC”), which is an advisory body for Amway distributors.

Defendants Freedom Associates, Inc.; Freedom Tools Inc.;

2 (...continued)

Phil Donahue Show on March Ist of ‘95. He announced that due to

the openness of our society, he was coming out of the closet about his

association with the Church of Satan. He stated that a large portion

of the profits from the Procter & Gamble products go to support a

satanic church. When asked by Donahue if stating this on television

would hurt his business, his reply was there are not enough Christians

in the United States to make a difference. And below it has a list of

the Procter & Gamble products, which Ill read:

Duncan Hines Bounce Cheer

Bold Cascade Joy

Comet Folgers Jif

Dawn Crisco Always

Downy Puritan Attends Undergarments

Gain Secret Oil of Olay

Mr. Clean Sure Wondra

Oxydol Head and Shoulders

Camay Spic-n-Span Pert

Coast Tide Prell

Ivory Top Job Vidal Sassoon

Lava ~ Luvs Safegard

Pampers Zest Pepto-Bismol

Charmin Scope Puffs

Crest Gleem

and says if you’re not sure about a product, look for the symbol of the

ram’s horn that will appear on each product beginning in April. The

ram’s horn will form the 666 which is known as Satan’s number. I tell

ya, it really makes you count your blessings to have available to all of

us a business that will allow us to buy all the products that we want from

our own shelf and I guess my real question is, if people aren’t being

loyal to themselves and buying from their own business, then whose

business are they supporting and who are they buying from. Love ya.

Talk to you later. Bye.

i a

Randy Walker; and Walker International Network are Amway

distributors in Haugen’s distribution network.

There is no evidence that Haugen knew the rumor was false

when he spread it; in fact, he testified that he believed it to be

true. The rumor circulated in his and other distribution

networks. Some Amway distributors printed fliers containing

the rumor, circulating them to consumers, with a message

saying, “We offer you an alternative.” The fliers also gave

contact information for Amway distributors. Although P&G

has received complaints and inquiries about this rumor for the

last twenty years, it offered evidence to show that, at the time

the rumor was circulating on AmVox, the number of

complaints and inquiries increased substantially in the states in

which the majority of Haugen’s distributors live?

Within days of the initial message containing the rumor,

Haugen sent a short retraction via AmVox.’ Shortly thereafter,

an Amway representative contacted Haugen and delivered a

copy of a P&G “truth kit,” which explains that the rumor is

false. The Amway representative asked Haugen to issue

another retraction via AmVox. Using the AmVox system,

Haugen then sent out a second, more detailed, retraction.°

* None of the complaints stated that the complainant had heard the rumor

via AmVox.

* The retraction stated:

Hey gang. We sent a message down a while back to do with

Procter & Gamble. It cannot be substantiated, that it happened

(drop out on tape ) so I’m going to assume that it didn’t actually

happen. Um, please do not call Phil Donahue and please do not

call Procter & Gamble and just drop it and don’t talk about it

anymore. We’d just appreciate that a whole bunch. We do not

think that it happened. Thank you. Good-bye.

* The second retraction stated:

Hello guys. This message is going out to all of Valerie and I’s

frontline and also to every diamond in the organization. Uh, we

(continued...)

> (...continued)

had an Amvox that came down that talked about Procter & |

Gamble. A lot of you I understand did not get this Amvox, uh,

but if you didn’t get it, still pay attention to this because if this

rumor ever comes up again you need to stamp it out. Uh, it was

rumored that on a television show, on the Phil Donahue show,

and it is rumored on other talk shows, that uh, the CEO or

officers from Procter & Gamble Company went onto the show

and told them that their symbol represents Satanism, the symbol

on all their products, and also that they practice Satanism. I’m

going to read you a statement here and see if we can get this

rumor cleared up because I know a lot of you would like to

know the truth and it is very important that you understand this.

False rumors: Unfortunately this familiar trademark has been

subjected to prosperous, excuse me, preposterous unfounded

rumors since 1980-81. The rumors falsely allege that the

trademark is a symbol of Satanism or devil worship. Typically

the story reports a Procter & Gamble executive discussed

Satanism on a national televised talk show. Another story

maintains that the trademark is a result of Procter & Gamble

being taken over by the Moonies, followers of Reverend Sun

Yung Moon and his Unification Church. The rumors are, of

course, totally false. Their trademark originated in 1851 as a

symbol for their Star brand candle. Later it was designed to

show a man in the moon looking over a field of 13 stars

commemorating the original American colonies. It represents

only Procter & Gamble. So if you hear any rumors saying

anything to the effect that they are practicing Satanism and their

symbols on their products, uh, are satanic, then it is absolutely

100% false. Uh, we don’t want any bad rumors about any

competitors or non-competitor, any company anywhere ever

going out from us. So if anybody you hear talking about this in

the organization anywhere at all brings this up, it is absolutely

not true. Not only is not just substantiated, but is not true,

period. Amway Corporation does not endorse spreading false

and malicious rumors against Procter & Gamble or any other

company. Please do your part as independent distributors by

not spreading this rumor any farther or nipping it if you hear it

from anybody else. We appreciate that a whole lot, uh, so let’s

crush that, if you’re hearing any kind of stuff anywhere let’s get

rid of it and let’s go on and build us a huge business and not

(continued...)

Despite Haugen’s retractions, the rumor continued to circulate

in Haugen’s network and at least one other network for some

time.

Il.

In response to the spread of the rumor among Amway

distributors, P&G filed a lawsuit in each of two federal district

courts. In 1995, in Utah, it sued Haugen, Freedom Associates,

Inc., and Freedom Tools, Inc., for spreading the Satanism

rumor, Claiming it lost customers as a result of the actions of

Haugen and other Amway distributors. P&G later joined

Amway, Randy Walker, and Walker International Network as

defendants. In 1996, P&G filed a second amended complaint

containing causes of action for defamation, common-law unfair

competition, violations of the Utah Truth in Advertising Act,

tortious interference, negligent supervision, violations of

Lanham Act § 43(a), 15 U.S.C. § 1125(a), and vicarious

liability. P&G then filed a third amended complaint alleging

that Amway is an illegal pyramid and alleging fraud and

product disparagement; that complaint was dismissed in 1997.

Later in 1997, P&G filed a motion for leave to file a fourth

amended complaint to assert fraud and disparagement claims;

the Utah court denied the motion as untimely.

One day after its third amended complaint was dismissed in

the Utah action, P&G filed the suit at issue in this appeal, in

Texas. This suit is based on the same transactions, and

involves substantially the same parties, as does the Utah suit.

It names Haugen, Amway Corporation, ADAC, and various

other Amway Distributors (all hereinafter referred to as

* (...continued)

have any of this kind of junk and that’s a good lesson to be

very, very, very, careful about putting anything down on Amvox

that’s not substantiated, and if anybody could take the blame on

this, I can take it. So, uh, we just don’t want anything to do

with it and it was a mistake. It did gO out to a few people ...

(drop out).

See

10a

“Amway”) as defendants.© The Texas complaint sought

remedies for the alleged conduct of defendants in (1) spreading

the Satanism rumor, (2) disparaging P&G’s Crest toothpaste,

and (3) allegedly harming sales of P&G’s products by inducing

people to become Amway distributors and consumers by luring

them into an iliegal pyramid scheme and misleading them as to

the financial rewards of selling Amway. P&G asserted various

causes of action in its Texas suit, including common-law fraud;

several violations of § 43(a) of the Lanham Act, 15 U.S.C. §

1125(a); violation of the Racketeer Influenced and Corrupt

Organizations Act (“RICO”), 18 U.S.C. § 1962(c) and (d); and

violation of Texas Business and Commerce Code § 16.29.’

The Texas district court granted Amway’s Fed. R. Civ. P.

12(b)(6) motion dismissing P&G’s RICO claim, because P&G

did not allege that it had relied on Amway’s alleged predicate

6 ADAC, Ja-Ri Corporation (“Ja-Ri”), Donald Wilson, WOW

International, Inc., Wilson Enterprises, Inc., Ronald Rummel, Kevin Shinn,

Gene Shaw, Dexter Yager, Sr., Birdie Yager, and D&B Yager Enterprises

(all listed as defendants on P&G’s brief) were not defendants in the Utah

suit, but, as Amway distributors, they were in privity with the distributors

who were defendants there. It is uncertain to what extent P&G is appealing

the dismissal of some of these defendants. Although P&G’s brief claims

error on the part of the district court in the dismissals of ADAC and Ja-Ri,

P&G admits in its initial brief that, at the time the court below dismissed the

remaining claims, “(t]he remaining defendants were Amway ... Randy

Haugen, Randy Walker, Dexter Yager, and Donald Wilson.” P&G does not

contest the earlier dismissal of any defendants except ADAC and Ja-Ri.

WOwW International, Inc., Wilson Enterprises, Inc., Ronald Rummel, Kevin

Shinn, Gene Shaw, Birdie Yager, and D&B Yager Enterprises are not even

mentioned in P&G’s initial brief other than on its cover. Thus, P&G either

does not appeal their dismissals from the suit or has waived any argument

against their dismissals. Cinel v. Connick, 15 F.3d 1338, 1345 (Sth

Cir.1994).

7 The only claim that remains on appeal from the Texas case that P&G did

not assert in the Utah case is for violation of Texas Business & Commerce

Code § 16.29. P&G brought a number of other claims in its initial Texas

complaint that it had not raised in the Utah suit, but it does not appeal the

ruling as to those claims.

bam alan teats dnl

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acts of mail and wire fraud. Then, on summary judgment, the

court held that P&G lacked standing to bring its § 43(a) claim

based on Amway’s alleged illegal pyramid scheme and that the

fraud claim was time-barred. In September 1998, the Utah

court granted defendants’ joint motion for summary judgment

and dismissed the § 43(a) claim, stating that “the

misrepresentation at issue does not relate to a product within

the meaning of the Lanham Act.” Inexplicably, in the Utah

court, P&G claimed only that Amway’s actions constituted a

violation of the Lanham Act’s prohibition on the

misrepresentation of goods or services, even though that act

also provides a cause of action for misrepresentation of

commercial activity.®

P&G did not argue that repetition of the Satanism rumor

constituted misrepresentation of its commercial activities until

its Fed.R.Civ.P. 60(b) motion for reconsideration of the Utah

court’s grant of summary judgment. The Utah court denied

P&G’s motion for reconsideration, finding no excuse for

P&G’s failure to raise the commercial activities claim earlier.

In March 1999, the Utah court granted summary judgment

to defendants on the defamation per se, vicarious liability, and

negligent supervision claims. A few days later, before the

* Section 43(a) provides:

Any person who, in or in connection with any goods or services, or

any container for goods, uses in commerce any word, term, name,

symbol, or device, or any combination thereof, or any false

designation of origin, false or misleading description of fact, or false

or misleading representation of fact, which-

(A) is likely to cause confusion, or to cause mistake, or to deceive as

to the affiliation, connection, or association of such person with

another person, or as to the origin, sponsorship, or approval of his or

her goods, services, or commercial activities by another person ....

shall be liable in a civil action by any person who believes that he or

she is or is likely to be damaged by such act. 15 U.S.C. § 1125(a)(1).

12a

Texas case went to trial, the Utah court entered a final

judgment dismissing all of P&G’s claims.

After the final judgment from the Utah court, Amway moved

for judgment as a matter of law (“j.m.1.”) in the Texas case.

The district court denied the motion because it was filed after

the deadline for pre-trial motions. At the close of P&G’s case,

Amway again moved for j.m.]. The court granted the motion

and dismissed the § 43(a) claim against Amway, Walker, and

Haugen based on the res judicata effect of the Utah court’s

decision. The Texas court dismissed the § 43(a) claim for

disparagement of commercial activities against the remaining

defendants (and against Amway, Walker, and Haugen for

purposes of vicarious liability), because it found that P&G had

not presented sufficient evidence of “actual malice,” which the

court held to be a requirement of § 43(a) suits brought by

“limited-purpose public figure” plaintiffs.? The court also

dismissed the Texas Business and Commerce Code § 16.29

claim and all remaining claims.

After oral argument had been heard in this court, the Tenth

Circuit reversed the Utah summary judgment. P&G v. Haugen,

222 F.3d 1262 (10th Cir.2000). The Tenth Circuit addressed

P&G’s misrepresentation of commercial activities claim, even

though P&G had not timely raised it before the Utah district

court. The Tenth Circuit explained its willingness by stating

that where an issue is purely a matter of law, its resolution is

certain, and public interest is implicated, it should be addressed

on appeal. Jd. at 1271. The Tenth Circuit concluded that the

repetition of the Satanism rumor raised a claim under the

“commercial activities” prong of the Lanham Act, and it

° The court ruled that P&G was a “limited-purpose public figure” with

regard to the Satanism rumor and that thus the First Amendment protection

of the New York Times v. Sullivan, 376 U.S. 254, 84 S.Ct. 710, 11 L.Ed.2d

686 (1964), “actual malice” test applied to shield erroneous but

non-malicious speech regarding an issue of public concern—in this case,

P&G’s alleged links to Satanism.

13a

therefore reversed and remanded as to the Lanham Act claim

and reversed the dismissal of P&G’s Utah state law tortious

interference claim. Jd. at 1280.

Il.

The res judicata effect of the Utah judgment is a question of

law that we review de novo. United States v. Brackett, 113

F.3d 1396, 1398 (5th Cir.1997). This question--to which both

sides direct most of their briefs--has largely been answered for

us by the Tenth Circuit.

There is no res judicata effect from the Utah case. The final

judgment has been reversed and remanded, and therefore no

judgment blocks the Texas case from proceeding. Of course,

at the time the Texas court dismissed, there was a final

judgment in Utah, so the Texas court did not err. Now that the

final judgment has been reversed and remanded, however, res

judicata no longer binds us.

Amway argues that res judicata, or, alternatively, issue

preclusion, settles this case, despite the Utah remand. It

contends that the Tenth Circuit’s holding that it is not

vicariously liable under Utah law for the acts of its distributors

precludes liability under the Lanham Act in the Texas suit.

This is a bold assertion, for the Tenth Circuit did not reach this

conclusion, but, instead, “le[ft] it to the district court to

consider whether P&G has met those elements of a § 43(a)

Lanham Act claim not before us in this appeal.” Haugen, 222

F.3d at 1276. Likewise declining to let a decision on state law

vicarious liability determine the outcome of a Lanham Act

claim, we conclude that neither res judicata nor collateral

estoppel bars the Lanham Act claim and that the Texas case

may proceed. '°

° Of course, the Texas district court retains its normal discretion in

scheduling cases and granting stays pending other developments or the

outcomes of similar trials. Should the court try this case to conclusion

(continued...)

IV.

P&G avers that the district court erred in ruling that P&G

was required to prove “actual malice”"’ to prevail on its § 43(a)

claim for disparagement of commercial activities. The

actual-malice standard has developed in cases involving

defamation of public figures. P&G argues that strict liability

and not actual malice applies in a commercial speech”* case

under the Lanham Act.

Amway makes two arguments in response. First,

acknowledging that the Lanham Act covers only commercial

speech, Amway urges that the speech here is not commercial

and that therefore a § 43(a) claim will not lie.’ Second, and

10 (...continued)

before the Utah court does, however, then the tables will be turned, and it

will be left to the Utah court and the Tenth Circuit to determine the res

judicata effect on the Utah case of the Texas court’s decision.

'! “Actual malice” is a term of art meaning that the speaker knew the

statement was false when spoken or in fact entertained serious doubt about

its truth. Peter Scalamandre & Sons, Inc. v. Kaufman, 113 F.3d 556, 560

(5th Cir.1997). Actual malice must be proven by clear and convincing

evidence. Id.

'2 The First Amendment affords less protection to commercial speech and

none to false commercial speech. Va. State Bd. of Pharmacy. v. Va. Citizens

Consumer Council, Inc., 425 U.S. 748, 771-72, 96 S.Ct. 1817, 48 L.Ed.2d

346 (1976). No party questions that the speech linking P&G to Satanism is

false.

3 In Seven-Up Co. v. Coca-Cola Co., 86 F.3d 1379, 1383 n. 6 (5th

Cir.1996), we held that the Lanham Act extends only to false or misleading

speech that is encompassed within the Supreme Court’s commercial speech

doctrine: The “commercial” requirement was inserted to ensure that § 43(a)

does not infringe on free speech protected by the First Amendment. See 135

Cong. Rec. H1216-17 (daily ed. Apr. 13, 1989) (statement of Rep.

Kastenmeier) (“[T]he proposed change in section 43(a) should not be read

in any way to limit political speech, consumer or editorial comment,

parodies, satires, or other constitutionally protected material... The section

is narrow'y drafted to encompass only clearly false and misleading

(continued...)

meas

lSa

alternatively, Amway argues that even if the speech is

commercial, the actual-malice standard should apply, because

the Satanism rumor is an issue of public concern, and P&G is

a “limited-purpose public figure” with respect to the rumor.

Thus, to determine what P&G is required to prove to prevail

on its § 43(a) claim that Amway misrepresented its associations

and commercial activities, we first must determine whether the

spreading of the false Satanism rumor is “commercial” speech.

If we decide it is, we must decide whether the fact that the false

speech was made about a “limited-purpose public figure” on an

issue of public concern brings the actual-malice standard into

play. This effectively would trump the traditional view that

there is no First Amendment protection for false commercial

speech. We review these questions of law de novo. United

States v. Brackett, 113 F.3d 1396, 1398 (5th Cir.1997).

We begin by examining what is meant by, and what

protections extend to, “commercial speech.” First, we consider

whether the commercial speech line of cases, which mainly

deals with government regulation of speech, should apply in

this case of a private action for false speech.'* Second, we

examine the historical development of the commercial speech

exception to the full protections granted by the First

Amendment. In making this examination, we pay particular

attention to the characteristics that the Supreme Court has said

make certain speech “commercial” and therefore worthy of less

'? (...continued)

commercial speech.”); 134 Cong. Rec. 31,851 (Oct. 19, 1988) (statement

of Rep. Kastenmeier) (commenting that the reach of § 43(a) “specifically

extends only to false and misleading speech that is encompassed within the

“commercial speech’ doctrine developed by the United States Supreme

Court”). See generally Gordon & Breach Science Publishers S.A., STBS v.

American Institute of Physics, 859 F.Supp. 1521, 1533-34 (1994)

(discussing the legislative history of the Lanham Act).

'* This is a question of first impression in this circuit.

16a

protection. Third, we take the facts of the case sub judice and

apply the test set out in Bolger v. Youngs Drug Products Corp.,

463 U.S. 60, 103 S.Ct. 2875, 77 L.Ed.2d 469 (1983), for

determining whether a specific instance of speech is

commercial. Our application of the Bolger test is what

ultimately determines whether the speech is commercial.

P&G relies heavily on U.S. Healthcare, Inc. v. Blue Cross,

898 F.2d 914 (3d Cir.1990), to argue that the commercial

speech line of cases developed in the context of government

regulation also should apply here in the context of a private suit

for false speech. In U.S. Healthcare, the two parties had waged

an advertising battle contrasting the benefits of HMO health

insurance plans with “traditional” and preferred provider

organization (“PPO”) plans. When U.S. Healthcare sued under

the Lanham Act, Blue Cross argued that the commercial speech

doctrine was inapplicable because the Supreme Court “views

damage claims [brought by private citizens] and government

restrictions of speech as requiring distinctly different analysis

for First Amendment purposes.” Jd. at 927.

As we do now, the court treated the issue as one of first

impression. It began by noting that under the First

Amendment, the correctness of ideas is judged not by courts,

but in the marketplace of ideas.'* With regard to commercial

'S The Third Circuit said:

Most speech is protected by the First Amendment. Bose Corp. v.

Consumers Union of U.S., Inc., 466 U.S. 485, 503, 104 S.Ct. 1949,

80 L.Ed.2d 502 (1984) (there are “few classes of ‘unprotected’

speech”). “Under the First Amendment there is no such thing as a

false idea. However pernicious an opinion may seem, we depend for

its correction not on the conscience of judges and juries but on the

competition of other ideas.” Gertz [v. Robert Welch, Inc.], 418 U.S.

[323,] 339-40, 94 S.Ct. 2997, 41 L.Ed.2d 789 [(1974)] (footnote

omitted), quoted in Jenkins v. KYW, 829 F.2d 403, 408 (3d Cir.1987).

(continued...)

17a

speech, however, the court “believe[d] the subordinate

valuation of commercial speech is not confined to the

government regulation line of cases [,]” but instead should

extend to defamation and Lanham Act cases as well. Jd at 932.

The court noted that the Supreme Court

on many occasions has recognized that certain kinds of

speech are less central to the interests of the First

Amendment than others... In the area of protected

speech, the most prominent example of reduced

protection for certain kinds of speech concerns

commercial speech. Such speech, we have noted,

occupies a “subordinate position in the scale of First

Amendment values.” QOhralik v. Ohio State Bar Assn.,

436 U.S. 447, 456, 98 S.Ct. 1912, 56 L.Ed.2d 444 (1978).

It also is more easily verifiable and less likely to be

deterred by proper regulation. Virginia State Bd. of

Pharmacy v. Virginia Citizens Consumer Council, Inc.,

425 U.S.-748, 771-772, 96 S.Ct. 1817, 48 L.Ed.2d 346

(1976). Accordingly, it may be regulated in ways that

might be impermissible in the realm of noncommercial

expression. Ohralik, [436 U.S.] at 456, 98 S.Ct. 1912;

Central Hudson Gas & Elec. Corp. v. Public Serv.

Comm'n of New York, 447 U.S. 557, 562-63, 100 S.Ct.

2343, 65 L.Ed.2d 341 (1980).

'S (...continued)

Even false statements of fact are insulated from liability in some

situations. [Philadelphia Newspapers, Inc. v.] Hepps, 475 U.S.

[767,] 778, 106 S.Ct. 1558, 89 L.Ed.2d 783 [(1986)]}; Gertz, 418 U.S.

at 340-41, 94 S.Ct. 2997. As Judge Learned Hand put it, the First

Amendment “‘presupposes that right conclusions are more likely to

be gathered out of a multitude of tongues, than through any kind of

authoritative selection.”” New York Times Co. v. Sullivan, 376 U.S.

254, 270, 84 S.Ct. 710, 11 L.Ed.2d 686 (quoting United States v.

Associated Press, 52 F Supp. 362, 372 (S.D.N.Y.1943), aff'd, 326

US. 1, 65 S.Ct. 1416, 89 L.Ed. 2013 (1945)).

U.S. Healthcare, 898 F.2d at 928.

18a

U.S. Healthcare, 898 F.2d at 932 (quoting Dun & Bradstreet,

Inc. v. Greenmoss Builders, 472 U.S. 749, 758 n. 5, 105 S.Ct.

2939, 86 L.Ed.2d 593 (1985)) (some ellipses and brackets

added). Based on this language, the U.S. Healthcare court

concluded that the lesser protection commercial speech

receives from direct government regulation also must apply to

private actions for defamation and the like. ;

We agree. If commercial speech receives less protection

from government regulation, then it also should receive less

protection from private suits, which are not much more likely

than are government regulation to infringe on those values the

First Amendment seeks to protect. Furthermore, private suits

can be a form of government regulation.

y 2

Having determined that the commercial speech line of cases

should apply here, we examine it and the characteristics of

commercial speech it reveals. We also review the instant facts

to determine whether they meet the characteristics that the

Supreme Court has said define commercial speech.

Commercial speech has been defined, at its core, as speech

that merely proposes a commercial transaction. Va. State Bd.,

425 US. at 762, 96 S.Ct. 1817. Because such speech

traditionally has been thought less valuable than political

speech, which is at the core of the First Amendment,

commercial speech is not accorded the full protections given to

political speech, speech on matters of public concern, and

speech regarding public figures.'® In fact, for a time it was

16 In Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n, 447

U.S. 557, 564 n. 6, 100 S.Ct. 2343, 65 L.Ed.2d 341 (1980), the Court

explained why commercial speech may be more heavily regulated:

Two features of commercial speech permit regulation of its content.

First, commercial speakers have extensive knowledge of both the

market and their products. Thus, they are well situated to evaluate the

(continued...)

19a

thought that commercial speech might not be worthy of any

First Amendment protection.'”

In Virginia State Board, the Court finally decided that

commercial speech should receive some protection, holding

that a state may not prohibit pharmacists from truthfully

advertising the prices at which they sell drugs. The Court

suggested, however, that instead of the strict scrutiny with

which courts review most restrictions on speech, a lower

standard of scrutiny is appropriate for commercial speech. The

Court noted that false or misleading commercial speech should

receive no protection,'* because commercial speech merely

gives information to consumers about a producer’s goods, and

any false information either has no value or is harmful.

The Court since has held that speech is commercial when it

is an “expression related solely to the economic interests of the

speaker and its audience.” Central Hudson, 447 US. at 561,

100 S.Ct. 2343 (citing Va. State Bd., 425 U.S. at 762, 96 S.Ct.

1817 (other citations omitted)). Additionally, in defining

something as commercial speech, the Court says we are to rely

on “the ‘commonsense’ distinction between speech proposing

a commercial transaction, which occurs in an area traditionally

'¢ (...continued)

accuracy of their messages and the lawfulness of the underlying

activity. In addition, commercial speech, the offspring of economic

self-interest, is a hardy breed of expression that is not particularly

susceptible to being crushed by overbroad regulation.

'’ See Valentine v. Chrestensen, 316 U.S. 52, 62 S.Ct. 920, 86 L_Ed. 1262

(1942); Breard v. Alexandria, 341 U.S. 622, 71 S.Ct. 920, 95 L.Ed. 1233

(1951); Murdock v. Pennsylvania, 319 U.S. 105, 111, 63 S.Ct. 870, 87

L.Ed. 1292 (1943); Jamison v. Texas, 318 U.S. 413, 417, 63 S.Ct. 669, 87

L.Ed. 869 (1943).

'* Va. State Bd., 425 U.S. at 771-72 n. 24, 96 S.Ct. 1817 (“[T]here can be

no constitutional objection to the suppression of commercial messages that

do not accurately inform the public about lawful activity. The government

may ban forms of communication more likely to deceive the public than to

inform it....”).

20a

subject to government regulation, and other varieties of

speech.” Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447,

455-56, 98 S.Ct. 1912, 56 L.Ed.2d 444 (1978).

Further, although Amway argues that the Satanism rumor is

a matter of public concern, which should make the speech

noncommercial, the Court “ha[s] made clear that advertising

whicii inks a product to a current public debate’ is not thereby

entitled to the constitutional protection afforded

noncommercial speech.” Bolger, 463 U.S. at 68, 103 S.Ct.

2875 (quoting Central Hudson, 447 U.S. at 563, n. 5, 100 S.Ct.

2343). Thus, in Bolger the Court held that informational

pamphlets mailed by a condom manufacturer directly to the

public constituted commercial speech, even though the

pamphlets spoke about matters of public concern."”

A recent examination of Supreme Court precedent

explaining why commercial speech receives less protection was

made in U.S. Healthcare, in which the court identified four

characteristics of commercial speech that have been set out by

the Supreme Court over the years. First, commercial speech

makes a qualitatively different contribution to the exposition of

'? Youngs Drug Products Company sent out two informational pamphlets.

The first was called “Condoms and Human Sexuality,” which specifically

referred to the advantages of a certain brand of condoms. The second

informational pamphlet was called “Plain Talk about Venereal Disease.” It

discussed venereal disease and condoms without ever referencing any

specific condoms. The only reference to Youngs Drug’s products was at the

bottom of the last page, where Youngs Drug identified itself as the

manufacturer of the Trojan-brand condoms. The Court noted that Youngs

Drug described itself as “the leader in the manufacture and sale of

contraceptives.” The Court opined that simply because “a product is

referred to generically does not, however, remove it from the realm of

commercial speech. For example, a company with sufficient control of the

market for a product may be able to promote the product without reference

to its own brand names.” Bolger, 463 U.S. at 67 n. 13, 103 S.Ct. 2875.

Even though the Court concluded that the speech in .o/ger was commercial,

it nevertheless held that the federal statute was an unconstitutional restriction

on the distribution of truthful information. /d. at 74, 103 S.Ct. 2875.

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2la

ideas.”” Second, commercial speech is more durable than other

speech because the speaker has an economic motivation and is

less likely to be chilled in its speech.! Third, “commercial

speakers have extensive knowledge of both their market and

their own products. Consequently, they are uniquely situated

to evaluate the truthfulness of their speech.” Fourth, “[{t]o

require a parity of constitutional protection for commercial and

noncommercial speech alike could invite dilution, simply by a

leveling process, of the force of the [First] Amendment’s

guarantee with respect to the latter kind of speech.”?3

If we examine the facts of this case in light of these four

characteristics, we see that the speech at issue here has some

but not all of the characteristics typically found in commercial

speech. The first characteristic--that commercial speech makes

a qualitatively different contribution to the exposition of

ideas--does not shed much light on whether the speech in this

case is commercial.

It might be that spreading the Satanism rumor does not

contribute to the exposition of ideas. Despite the falsity of the

rumor, however, it touched on the type of issues that are at the

” U.S. Healthcare, 898 F.2d at 933-34 (citing Central Hudson, 447 U.S.

at 561, 100 S.Ct. 2343 (defining commercial speech as “expression related

solely to the economic interests of the speaker and its audience”)).

7! Id. at 934 (quoting Va. State Bd., 425 U.S. at 772 n. 24, 96 S.Ct. 1817

(explaining that this quality “may make it less necessary to tolerate

inaccurate statements for fear of silencing the speaker.”)); see also Dun &

Bradstreet, 472 U.S. at 759 n. 5, 762 & n. 8, 105 S.Ct. 2939 (discussing

durability “to show how many of the same concerns that argue in favor of

reduced constitutional protection” in commercial speech actions also apply

to defamation actions concerning private speech).

2 Id. (citing Central Hudson, 447 U.S. at 564 n. 6, 100 S.Ct. 2343; Bates

v. State Bar, 433 U.S. 350, 381, 97 S.Ct. 2691 » 53 L.Ed.2d 810(1977); Va.

State Bd., 425 USS. at 772 n. 24, 96 S.Ct. 1817; Dun & Bradstreet, 472

U.S. at 758 n. 5, 762 & n. 8, 105 © Ct. 2939).

2 Id. (quoting Ohralik, 436 U.S. at 456, 98 S.Ct. 1912).

V_—

22a

heart of First Amendment protections, namely: religious issues

and issues of how corporations act and influence society.

Further, it is uncertain whether the speech was related solely to

the economic interests of the speaker or whether, instead,

Haugen and other distributors were sincerely, albeit mistakenly,

discussing the rumor.

The second characteristic--that the speaker’s economic

motivation makes the speech more durable--favors classifying

Amway’s speech as commercial. If the Satanism rumor were

true, it is doubtful that the requirement to verify it before

repeating it would stop distributors from spreading the rumor

about one of their competitors. We have some reservation

about stating this too strongly, however, for we can imagine

cases in which employees of one company might legitimately

but mistakenly repeat and discuss news about the political,

religious, or other beliefs of employees of a competitor. It

would violate First Amendment principles to quell all speech

on these issues among members of a competing company until

the news was fully and exhaustively verified.”

The third characteristic--that competitors have extensive

knowledge of their market and products--applies imperfectly to

these facts. Amway has extensive knowledge of its market and

products and is in a good position to know the acts of its

competitors. In this case, however, the rumor discusses P&G’s

use of its profits and its charitable giving--topics about which

Amway is likely to know less because they do not relate

directly to P&G’s products or sales methods. Nevertheless, if

Haugen had checked with Amway, he could have verified that

* A current example may help illustrate this point. It was recently

reported that some movie studios have conducted advertising campaigns and

focus groups on children under the age of seventeen to make some of their

R-rated movies more attractive to them. Discussion of this issue may be of

true concern to members of competing movie studios. Holding the accuracy

of such discussion to a strict-liability standard likely would violate First

Amendment values.

waisted dean Aichi) Sires * egudiags

23a

the rumor was false, because Amway had been aware of its

falsity since the 1980’s.

The fourth characteristic--a parity of constitutional protection

for commercial speech would invite dilution of the First

Amendment--is, as the Third Circuit noted, an extrinsic reason

that cannot be applied to the facts of any one case. We

accordingly do not discuss it.

In U.S. Healthcare, 898 F.2d at 935, the court determined

that the speech had all the characteristics of commercial speech.

The court concluded that

[b]ecause the thrust of all of the advertisements is to

convince the consuming public to bring its business to

one of these health care giants rather than the other, there

is no doubt that the advertisements were motivated by

economic self interest.... [W]e believe it would have to

be a cold day before these corporations would be chilled

from speaking about the comparative merits of their

products.

Id. The court added that

these are advertisements for products and services in

markets in which U.S. Healthcare and Blue Cross/Blue

Shield deal--and, presumably, know more about than

anyone else. The facts upon which the advertisements

are based-- comparative price, procedures, and services

offered--are readily objectifiable. These advertisements

were precisely calculated, developed over time and

published only when the corporate speakers were ready.

Consequently, the advertisements were unusually

verifiable.

Id.

Unlike the situation in U.S. Healthcare, the testimony here

is that at least some of the speech at issue was made

impulsively, without time to verify the facts. The US.

Healthcare court stated that “[i]t is important to note that we do

not have a situation in which a corporation addresses an issue

of public concern involving a competitor, but does so with

speech that is neither commercial nor chill resistant.” Jd. In the

instant case, the primary question is whether Amway’s

distributors addressed an issue of public concern involving a

competitor with speech that was neither commercial nor chill-

resistant.

Our analysis of the general characteristics of commercial

speech and the reasons behind its less protected status

demonstrates that the speech here does not sort cleanly into

either category: commercial or noncommercial. Although

Supreme Court precedent and the Third Circuit’s thoughtful

analysis of what is commercial speech are helpful, we still are

left with a difficult issue.

We now apply the test the Court has set out to determine

whether a specific instance of speech is commercial. In Bolger,

the Court recognized three factors that help determine whether

speech is commercial: (i) whether the communication is an

advertisement, (ii) whether the communication refers to a

specific product or service, and (iii) whether the speaker has an

economic motivation for the speech. If all three factors are

present, there is “strong support” for the conclusion that the

speech is commercial. Bolger, 463 U.S. at 67, 103 S.Ct. 2875.

Here we consider the Bolger factors in reverse order’ and

conclude that the third--the motivation of the speaker--is

2° The Bolger test easily disposes of any question as to whether the fliers

that were printed by Amway distributors and given to customers or potential

customers were commercial speech—they plainly were. These fliers,

associating P&G with Satanism and suggesting Amway products as

alternatives to P&G products, (i) were advertisements--i.e., they proposed

a commercial transaction, (ii) they referred to specific products, and (1i1) the

distributors plainly had an economic motive in distributing them.

}

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25a

determinative. This factor has not yet been decided by the trier

of fact, so we remand for that to be done.

The second factor is easily satisfied--the message did refer to

specific products of P&G’s. The first factor--whether the

speech is an advertisement-- seems to collapse into the third

factor in this case. Certainly the repetition of the rumor via

AmVox was not an advertisement in the classic sense, but

whether it could be considered as a negative advertisement

against P&G seems to depend on the determination of the third

factor--whether the speaker had an economic motivation for the

speech. If Haugen or others who repeated this rumor did have

economic motivations, then the message resembles an

advertisement seeking to encourage downline distributors to

eschew P&G and buy Amway. If the motivation was not

economic, then this looks more like a case of individuals’

repeating false speech on a matter of public concer.

This question of the speaker’s motivation will also help to

clear up the difficulty in determining whether the characteristics

of commercial speech summarized in U.S. Healthcare were

present here. Ifthe speakers were economically motivated, then

issues of the quality of the speech, its durability, and the

knowledge the speakers had of the relevant market and products

become both more relevant and easier to determine.

Thus, on remand, if the trier of fact finds that the motivation

behind the Amway distributors’ repetition of the rumor to other

distributors was not economic, the speech is not commercial,

and there can be no Lanham Act claim. On the other hand, if an

economic motivation is found, the speech is commercial, and a

violation of the Lanham Act may be found.”

* We are not simply repackaging the “actual malice” requirement as a

requirement of economic motivation. A finding of actual malice turns on the

finding of false speech knowingly made, or of false speech made with a

reckless disregard for the truth. The requirement of finding an economic

motivation to label something commercial speech does not require a finding

(continued...)

26a

The question whether an economic motive existed is more

than a question whether there was an economic incentive for the

speaker to make the speech;”’ the Bolger test also requires that

the speaker acted substantially out of economic motivation.

Thus, for example, speech that is principally based on religious

or political convictions, but which may also benefit the speaker

economically. would fall short of the requirement that the

speech was economically motivated.” We stress that we are

6 (...continued)

that the speech was false or that the speaker knew the speech was false

before making it, but only a motive to profit by the speech. Once that

motive is found, and if the other Bolger elements are present to provide

strong support that the speech is commercial, the speech is dropped to the

less-protected status of commercial speech, and a suit may be successful

against the speaker regardless of his knowledge of falsity.

” Professor Farber has pointed out that the mere existence of some

economic motivation cannot be enough to drop speech to the lower

protected status of commercial speech: “Economic motivation could not be

made a disqualifying factor {from maximum protection} without enormous

damage to the first amendment. Little purpose would be served by a first

amendment which failed to p. tect newspapers, paid public speakers,

political candidates with partially economic motives and professional

authors.” Farber, Commercial Speech and First Amendment Theory, 74

NW. U.L. REV. 372, 382-383 (1979) (footnotes omitted).

** We offer a specific example: A woman who owns a small religious

book and music store tells customers that most rock and roll music is

influenced by the devil and that the only kind of rock music they should buy

is “Christian rock,” which is, of course, the only kind she sells. The

determination of whether a Lanham Act suit could be brought will turn on

her motivation.

Evidence that she started the bookstore because of strongly-held religious

beliefs that Christian books and music need to be made available to combat

the evils of rock and roll and pulp fiction would be compelling evidence of

a primarily religious, rather than economic, motivation for her speech. On

the other hand, evidence showing that she is agnostic and opened the

bookstore only after a case study in her MBA program showed that Christian

bookstores can be extremely profitable when set up in the right locations

would be strong evidence that her speech was economically motivated and

- (continued...)

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27a

not shortening the Bolger test to a single factor--whether the

speaker’s motive was economic--but rather, we conclude that

the other two Bolger factors are not conclusive, and therefore

the motive factor is determinative.

This does not mean that whenever the primary motivation for

speech is economic, the speech is commercial.2? As the Court

said in Bolger, finding all three factors merely provides “strong

support” for the proposition that the speech is commercial. The

difference between commercial speech and*noncommercial

speech is, after all, “a matter of degree.” City of Cincinnati v.

Discovery Network, Inc., 507 U.S. 410, 423, 113 S.Ct. 1505,

123 L.Ed.2d 99 (1993). We can well imagine:cases in which a

speaker’s primary motivation is economic, but the speech

nonetheless is protected.*°

Also, in determining whether there was an economic

motivation to the repetition of the rumor, the finder of fact is

free to take into account, among other things, Amway’s unique

structure. Pertinent is the fact that Amway distributors make

money not simply by selling Amway products to the public, but

also by recruiting other distributors into the organization, who

become “downline” distributors, and upon whose sales the

“upline” distributors then get commissions.

This system gives the dist:.butors a motivation not just to sell

Amway products, but also to recruit distributors and to

encourage their sales. Thus, when Haugen and other Amway

distributors spread the Satanism rumor via AmVox to their

downline distributors, they were not simply repeating a rumor

8 (...continued)

thus commercial.

* As the Court said in Gertz v. Robert Welch, Inc., 418 U.S. 323, 344, 94

S.Ct. 2997, 41 L.Ed.2d 789 (1974), “it is often true that not all of the

considerations which justify adoption of a given rule will obtain in each

particular case decided under its authority.”

* Labor cases come to mind as an example.

28a

to co- workers or fellow independent distributors; they were

repeating a rumor to persons analogous to employees,”’ in

whose motivation and sales they have a direct interest. These

facts, and all other relevant evidence, of course, may be used by

the finder of fact in determining whether, as a matter of fact,

those who circulated the Satanism rumor via AmVox acted out

of economic motivation.

Notwithstanding Supreme Court precedent holding that false

commercial speech receives no First Amendment protection,

Amway argues that we should require a finding of actual malice

whenever speech is made about a public figure on an issue of

public concern. In making this argument, Amway looks to the

line of defamation cases setting out and developing the

actual-malice standard.

That standard was developed in New York Times v. Sullivan,

376 U.S. 254, 84 S.Ct. 710, 11 L.Ed.2d 686 (1964). There, a

group of black clergymen ran an advertisement in the Times in

the form of an editorial; they spoke of the civil rights

demonstrations by black students then occurring in the South

and of the intimidation and violence practiced against the

protestors and against Dr. Martin Luther King, Jr. The

advertisement complained of the police responses to the

demonstrators and asked for financial donations in support of

the student movement, the struggle for the nght to vote, and the

legal defense of Dr. King. L.B. Sullivan, the Montgomery

commissioner in charge of police, sued the clergymen and the

Times for civil libel, arguing that the actions ascribed to the

“police” were necessarily imputed to his leadership and that

*' We use the phrase “analogous to employees” purposely. We are merely

making an analogy and are not ruling on whether Amway distributors are

employees or independent contractors. We have not been asked to decide

this question, nor do we have sufficient evidence to do so.

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29a

some of the accusations were false. Sullivan further argued that

the Times could have discovered that the allegations were false

by checking its files of previously published articles.

The Court agreed that references to the police could be

imputed to Sullivan and that some of them were false.

Nevertheless, the Court held that proof of more than factual

inaccuracies was required to prevent speech protected by the

First Amendment from being “chilled.” The Court held:

The constitutional guarantees require, we think, a federal

tule that prohibits a public official from recovering

damages for a defamatory falsehood relating to his official

conduct unless he proves that the statement was made

with “actual malice”--that is, with knowledge that it was

false or with reckless disregard of whether it was false or

not.

Id. at 279-80, 84 S.Ct. 710.”

Three years later, the Court extended the protection of the

actual malice standard from public officials to public figures in

the companion cases of Curtis Publishing Co. v. Butts and

* See also New York Times, 376 US. at 271-72, 84 S.Ct. 710 (stating that

“erroneous statement is inevitable in free debate, and ... it must be protected

if the freedoms of expression are to have the ‘breathing space’ that they

‘need ... to survive’ “) (quoting N.A.A.C.P. v. Button, 371 U.S. 415, 433, 83

S.Ct. 328, 9 L.Ed.2d 405 (1963)). The inevitability of erroneous statements

being made in free debate is not a new concept:

[T]o argue sophistically, to suppress facts or arguments, to misstate

the elements of the case, or misrepresent the Opposite opinion ... all

this, even to the most aggravated degree, is so continually done in

perfect good faith, by persons who are not considered, and in many

other respects may not deserve to be considered, ignorant or

incompetent, that it is rarely possible, on adequate grounds,

conscientiously to stamp the misrepresentation as morally culpable:

and still less could law presume to interfere with this kind of

controversial misconduct.

J. Mill, ON LIBERTY, 47 (Oxford: Blackwell 1947).

30a

Associated Press v. Walker, 388 U.S. 130, 87 S.Ct. 1975, 18

L.Ed.2d 1094 (1967). In Gertz v. Welch, 418 U.S. 323, 342, 94

S.Ct. 2997, 41 L.Ed.2d 789 (1974), the Court explained why the

actual-malice standard is appropriate in defamation cases

involving public officials or public figures as plaintiffs. The

Court gave the reasons for the lower level of protection for

these plaintiffs:

Public officials and public figures usually enjoy

significantly greater access to the channels of effective

communication and hence have a more realistic

opportunity to counteract false statements than private

individuals normally enjoy. Private individuals are

therefore more vulnerable to injury, and the state interest

in protecting them is correspondingly greater.

Id. at 344, 94 S.Ct. 2997 (footnote omitted).

A plaintiff becomes a general purpose public figure by

attaining pervasive power and influence in society. Jd. at 345,

94 S.Ct. 2997. Alternatively, he may become a limited-purpose

public figure with regard to that controversy by thrusting

himself into a particular public controversy “to influence the

resolution of the issues involved.” Jd. “Hypothetically, it may

be possible for someone to become a public figure through no

purposeful action of his own, but the instances of truly

involuntary public figures must be exceedingly rare.” Jd.

We are powerless to decide whether this is one of those .

“exceedingly rare” cases in which plaintiff P&G involuntarily

has become a public figure, because that issue has not been

properly raised on appeal. In its opening brief, P&G noted that

the district court found it to be a “limited-purpose public figure”

for the purpose of analyzing whether it must prove actual

malice in its § 43(a) claim; that court decided that the rumor is

an issue of public concern and has been associated with P&G

long enough to render P&G a limited-purpose public figure for

purposes of discussion of the rumor. P&G did not assign error

to this ruling in its initial brief but, instead, asserted that the

atti

3la

repetition of the Satanism rumor constituted commercial speech

to which the New York Times actual malice standard does not

apply.

Amway correctly notes that because P&G did not dispute this

ruling, it is now bound thereby for purposes of this appeal.

Although in its reply brief, P&G states that it “does not concede

that it is a ‘public figure’ for purposes of defendants’

misrepresentations,” an “appellant abandons all issues not

raised and argued in its initial brief on appeal.” Cinel vy.

Connick, 15 F.3d 1338, 1345 (Sth Cir.1994) (declining to

address argument discussed only in appellant’s reply brief).

Thus, we assume for purposes of this appeal, without deciding

the issue as a matter of law, that P&G is a limited-purpose

public figure with regard to the Satanism rumor.

Amway makes two arguments in support of its theory that

P&G must prove actual malice. First, Amway turns to the

well-reasoned opinion in National Life Insurance Co. v.

Phillips Publishing, Inc., 793 F.Supp. 627, 647 (D.Md.1992),

in which the court noted that there is a tension in the law

regarding the treatment of false speech: “While defamation

tolerates some false statements, in order to give the First

Amendment the ‘breathing space’ it requires; commercial

speech does not forgive false speech so easily.” Jd. The court

opined that this tension should be considered rather than

ignored when dealing with cases of false commercial speech

about public figures.”

The National Life court reasoned that denying constitutional

protection to all false commercial speech ignores the rationale

** The court cites two examples of the tension in Supreme Court caselaw.

It compares Gertz, 418 U.S. at 340, 94 S.Ct. 2997 (holding that application

of the malice standard to public figure plaintiffs is predicated on the

recognition that error is “inevitable in free debate”), with Central Hudson,

447 U.S. at 564, 100 S.Ct. 2343 (stating that “there can be no constitutional

objection to the suppression of commercial messages that do not accurately

inform....”).

32a

of Gertz: that the need to protect one from false or misleading

speech varies, depending on whether he is a private or public

figure. The court pointed out that “[e]ven U.S. Healthcare

recognized that a state has only a ‘limited’ interest in

compensating public persons for injury to reputation by

defamatory statements, but has a ‘strong and legitimate interest’

in compensating private persons for the same injury.” National

Life, 793 F.Supp. at 648 (quoting U.S. Healthcare, 898 F.2d at

930).** Thus, the court concluded that a state’s interests in

regulating false commercial speech and in providing some

protection to public figures’ reputations must be balanced

against the free speech interest individuals have in being able to

comment freely on public issues and public figures. The court

held that the way to achieve this balance, in cases of

commercial speech about a public figure, is to require that the

plaintiff prove actual malice.

Amway’s second argument is that the use of the

actual-malice standard in commercial speech cases involving

public figures avoids unrealistically treating commercial and

noncommercial speech as though they do not overlap. Amway

contends that such treatment ignores that political speech can

* In U.S. Healthcare, the court addressed the same argument that Amway

makes here--that the actual malice standard should apply to protect even

false commercial speech if it is made about a limited-purpose public figure.

The court did not consider the argument directly, because it concluded that

the corporations that were the parties in that case were not public figures.

Nevertheless, it stated that “the [commercial] speech at issue does not

receive heightened protection under the First Amendment. Because this

speech is chill-resistant, the New York Times standard is not ... ‘necessary

to give adequate “breathing space” to the freedoms protected by the First

Amendment.”” U.S. Healthcare, 898 F.2d at 939 (quoting Hustler

Magazine, Inc. v. Falwell, 485 U.S. 46, 56, 108 S.Ct. 876, 99 L.Ed.2d 41

(1988)).

re ame!

cha ate Meee

ORL

33a ¥

arise from commercial motives or may address areas of great

public concern.*°

Although Amway raises legitimate points about the overlap

between commercial and noncommercial speech, between

economic and non-economic motivation for speech, and about

the variable interest a state has in protecting a plaintiff's

reputation depending on the plaintiff's status as a public or

private figure, Supreme Court precedent prevents us from

importing the actual-malice standard into cases involving false

commercial speech.

To begin with, the Court has rejected attempts to blur the line

between commercial speech and other types of expression. In

Central Hudson, the majority rejected the rationale set forth in

a concurrence that “[a]pparently ... would accord full First

Amendment protection to all promotional advertising that

includes claims ‘relating to ... questions frequently discussed

and debated by our political leaders.” Jd. at 563 n. 5, 100 S.Ct.

2343 (quoting id. at 581, 100 S.Ct. 2343) (Stevens, J.,

concurring). In rejecting this approach, the majority reasoned

that “we think it would blur further the line the Court has

sought to draw in commercial speech cases.” Jd.*

** Of. Bolger (holding that First Amendment protects contraceptive

manufacturer’s unsolicited mailing of informational and advertising

pamphlets to households, because contraception information even if

distributed for commercial purpose--is a matter of public concern).

** The Court noted that corporations enjoy the full panoply of First

Amendment protections for their direct comments on public issues. There

is no reason for providing similar constitutional protection when such

Statements are made only in the context of commercial transactions. In that

context, for example, the State retains the power to “insur[e] that the stream

of commercial information flow(s] cleanly as well as freely.” ... As we

stated in Ohralik, the failure to distinguish between commercial and

noncommercial speech “could invite dilution, simply by a leveling process,

of the force of the [First] Antendment’s guarantee with respect to the latter

kind of speech.” /d. (quoting Va. State Bd., 425 U.S. at 772, 96 S.Ct. 1817,

(continued...)

34a

Further, the Court has consistently said that speech protected

in one context is not protected when the purpose of the speech

is commercial. In Bolger, the Court held that “advertising

which ‘links a product to a current public debate’ is not thereby

entitled to the constitutional protection afforded noncommercial

speech.” 463 U.S. at 68, 103 S.Ct. 2875 (quoting Central

Hudson, 447 U.S. at 563 n. 5, 100 S.Ct. 2343). “Advertisers

should not be permitted to immunize false or misleading

product information from government regulation simply by

including references to public issues.” /d.

Somewhat more recently, in Zauderer v. Office of

Disciplinary Counsel of Supreme Court, 471 U.S. 626, 105

S.Ct. 2265, 85 L.Ed.2d 652 (1985), the Court affirmed its

Central Hudson and Bolger holdings. Zauderer was a lawyer

who had been sanctioned by the disciplinary committee of his

state supreme court for using deceptive newspaper

advertisements. He claimed that his speech was protected

because some of the advertisements contained statements

regarding the legal rights of pers»ns injured by a contraceptive

device. The Court held that these statements “in another

context, would be fully protected speech,” but “[t]hat this is so

does not alter the status of the advertisements as commercial

speech.” Jd. at 637 n. 7, 105 S.Ct. 2265.

Central Hudson, Bolger, and Zauderer, combined with the

Court’s plain statements that false commercial speech receives

no protection,” foreclose us from importing the actual-malice

standard from defamation into the law of false commercial

** (...continued)

and Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447, 456, 98 S.Ct. 1912, 56

L.Ed.2d 444 (1978)).

*” E.g., Ibanez v. Florida Dep't of Business & Professional Regulation,

| 512 U.S. 136, 142, 114 S.Ct. 2084, 129 L.Ed.2d 118 (1994); Shapero v.

Kentucky Bar Ass'n, 486 U.S. 466, 472, 108 S.Ct. 1916, 100 L.Ed.2d 475

| (1988); Friedman v. Rogers, 440 U.S. 1, 14-15, 99 S.Ct: 887, 59 L.Ed.2d

100 (1979); Va. State Bd., 425 U.S. at 771-72 & n. 24, 96 S.Ct. 1817.

35a

speech. Thus, if the trier of fact determines that the Amway

distributors’ motives in spreading the Satanism rumor were

economic and that the speech therefore was commercial, this

false commercial speech cannot qualify for the heightened

protection of the First Amerdment, so P&G is not required to

show actual malice in proving its Lanham Act claim.

The Tenth Circuit concluded similarly in this case, holding

that the AmVox message was economically motivated and

rejecting Amway’s argument that such commercial speech

should receive higher protection because it regarded a matter of

public concern. P&G v. Haugen, 222 F.3d at 1275.

In the present case, we are likewise dealing with a

message containing both a noncommercial, “theological”

component and a commercial component. As Bolger and

Fox indicate, however, the bare fact that the subject

message contains a “theological” component is

insufficient to transform it into noncommercial speech. If

appellees had argued that a significant theological,

political, or other noncommercial purpose underlay the

Subject message, the message might be accorded the

substantially greater First Amendment protections enjoyed

by “core” religious speech and the other varieties of

noncommercial First Amendment speech such as political

speech. See, e.g., Pleasant v. Lovell. 876 F.2d 787, 795

(10th Cir.1989) (holding “that the presence of some

commercial activity does not change the standard of first

amendment review” where the organization engaged in

such activity had a clear political purpose (citing Jn re

Grand Jury Proceeding, 842 F.2d 1229, 1235 (11th

Cir.1988))). Significantly, appellees in the instant case

have made no such claim. At no time have they argued

there is any theological purpose underlying the subject

message or its dissemination via their AmVox system.

Id.

36a

Amway has argued here, as it apparently did not in the Tenth

Circuit, that there was a theological concern underlying the

speech. We thus are foreclosed from merely calling the speech

commercial. Regardless, both the Tenth Circuit and this court

are using the same test to determine commercial speech, and

both reject Amway’s argument that the actual-malice standard

should apply.

We recognize that alternative methods of reconciling the law

of commercial speech with that of defamation have been

suggested. Professor Langvardt has suggested one tempting

alternative. He posits that courts should adopt a negligence

standard for private actions for false commercial speech.”

After thoughtfully considering this solution, we feel compelled

to reject it. While Professor Langvardt’s proposal is compelling

in a number of respects, our approach more closely adheres to

the caselaw and principles set out by the Supreme Court in the

areas of commercial speech and First Amendment law.

Langvardt agrees with our analysis that the full protection

from chill that the actual malice standard gives to core First

Amendment speech is inappropriate in the context of

less-protected commercial speech. He argues that, instead, a

standard should be used that gives commercial speech an

intermediate level of protection from chill. In his view,

“negligence effectively provides an intermediate standard that

falls between the polar extremes of actual malice and strict

liability.” Langvardt, 78 MINN. L. REV. at 393. Under such

a regime, plaintiffs would be required to prove “that the

defendant failed to use the degree of care a reasonable person

would have exercised, under the circumstances, to ascertain the

truth or falsity of the statement before making it.” Jd. at 393.

To Langvardt, the use of a negligence standard recognizes that

commercial speech is more durable than noncommercial

* Arlen W. Langvardt, Commercial Falsehood and the First Amendment:

A Proposed Framework, 78 MINN. L. REV. 309 (1993).

37a

speech, but it still prevents the former from being overly chilled

by the possibility of private suits for strict liability under the

Lanham Act.°®

Langvardt would avoid Supreme Court precedent stating that

false commercial speech receives no protection under the First

Amendment by restricting this holding to the

direct-government-regulation line of cases from which it

sprang. He points out that the Court has not held--and he

believes would not hold--that false commercial speech receives

no First Amendment protection from private suits.“” According

to Langvardt, the reason the Court would not do so is that

private suits have a greater potential to chill commercial speech

than do direct government regulations. He claims that private

Suits are not as narrowly tailored and allow large damage

awards, both of which create greater potential for chill.

Although support‘ _ this theory may be found in New York

Times, 376 U.S. at 279-80, 84 S.Ct. 710, in which the Court

said that “(t]he fear of damage awards... may be markedly more

inhibiting than the fear of prosecution under a criminal statute,”

the Court has never limited its holding that false commercial

speech receives no First Amendment protection. It is doubtful

that the prospect of a private action is a significantly greater

deterrent to a commercial speaker than is the prospect of the

a Langvardt’s theory also would vary the standard by which a party must

prove negligence, based on whether the speech is a matter of public or

private concern. Allegations regarding the former should be proven by clear

and convincing evidence, and the latter should be proven by a mere

preponderance of the evidence. /d. at 393-95.

“ Langvardt points out that before its 1989 revision, no suit could be

brought under the Lanham Act for false advertising about a competitor. The

Act was amended effective November 16, 1989, by the Trademark Law

Revision Act of 1988, 15 U.S.C. §§ 1051-1128 (1988). The pre-1989 Act

allowed only suits against companies for a company’s false advertising

- about its own products. The post-1989 Lanham Act--with its strict liability

standard for- false commercial speech—-thus has a substantially greater

potential to chill truthful commercial speech, according to Langvardt.

38a

civil and criminal penalties available to government regulators.

Further, a commercial speaker may be chilled in his speech by

the prospect of having to pay the costs of a suit to have an

overly broad regulation narrowed by a court.

Additionally, Langvardt’s proposal, if adopted, would result

in differing amounts of protection for false commercial speech

depending on whether the speaker discusses his own goods or

those of another. Langvardt acknowledges that false advertising

claims by a defendant about its own products traditionally have

been subjected to strict liability under § 43(a), and he does not

argue that this excessively chills commercial speech. He

maintains that strict liability should continue to apply to a

defendant’s claims about its own products but that a negligence

standard should be applied to false statements about a

competitor’s products.

It seems, however, that this double standard would further

confuse commercial speech law. The argument is not strong

enough to justify differing standards of liability,*’ especially in

light of the admonition that we not “blur further the line the

Court has sought to draw in commercial speech cases.” Central

Hudson, 447 U.S. at 563 n. 5, 100 S.Ct. 2343.

The district court was correct in dismissing P&G’s alter ego,

single business enterprise, and vicarious liability arguments

against Ja-Ri and ADAC, because P&G provided neither

sufficient evidence nor sufficient argument to support its

position. P&G assigns error to these dismissals based on three

grounds. First, it argues that it was unfairly surprised when the

court applied Michigan rather than Texas law to these claims.

Second, it contends that the court overlooked sufficient

‘' Moreover, such a double standard could be subverted. Instead of saying

that its product is the best, a company could state that all other products are

inferior and by doing so move from a strict liability regime to one of

negligence.

————

39a

evidence to hold Ja-Ri and ADAC liable under the single-

business-enterprise theory and vicariously liable for Lanham

Act violations of downline distributors. Third, it avers that the

court erred in sua sponte entering j.m.1. in favor of J a-Ri, which

P&G claims is a reversible violation of Fed.R.Civ.P. 50(a)(2).

We review a j.m.1. de novo. King v. Ames, 179 F.3d 370, 373

(Sth Cir.1999),”

None of P&G’s arguments is adequately supported in its

brief. First, P&G could not have been unfairly surprised that

Michigan law might be applied to ADAC’s motion for j.m.1.

ADAC moved for j.m.1. based on Michigan law on May 7,

1999--six days before P&G rested its case--and, on May 10,

P&G filed a memorandum in opposition to ADAC’s

memorandum on choice of law.

Second, P&G does not describe how it was prejudiced by the

application of Michigan law. It does not provide examples of

how the elements of Michigan and Texas law differ. Both

Texas and Michigan law require that to prevail on an alter ego

theory or otherwise to pierce the corporate veil, one must prove

that failing to do so would promote injustice. See Mancorp,

Inc. v. Culpepper, 836 S.W.2d 844, 846 (Tex.App.--Houston

[1st Dist.) 1992, no writ); Wells v. Firestone, 421 Mich. 641,

364 N.W.2d 670 (1984); Foodland Distributors y. Al-Naimi,

220 Mich.App. 453, 559 N.W.2d 379 (1996). P&G does not

even claim to have offered such proof. Thus, its argument that

the court overlooked evidence sufficient to find against Ja-Ri

and ADAC fails.

Third, rule 50 neither prohibits a court from suggesting that

a party move for j.m.1. nor forbids a court from granting j.m.1.

sua sponte. The rule merely states that if there is no sufficient

evidentiary basis for the issue to go to the jury, “the court may

“ See Boeing Co. v. Shipman, 411 F.2d 365, 374-75 (Sth Cir.1969) (en

banc), overruled on other grounds, Gautreaux v. Scurlock Marine, Inc., 107

F.3d 331 (Sth Cir.1997) (en banc).

40a

determine the issue against that party and may grant a motion

for [j.m.1.] against that party ...” (emphasis added).

Finally, P&G advances not a single theory as to why Ja-Ri

and ADAC should be held liable under alter ego, single

business enterprise, or vicarious liability law. Instead, P&G

merely asserts that they should be. “A party who inadequately

briefs an issue is considered to have abandoned the claim.”

Cinel v. Connick, 15 F.3d 1338, 1345 =» Cir.1994) (citation

omitted).

VI.

The districtcourt is correct that P&G does not have standing

to bring a } 43(a) claim based on Amway’s alleged

misrepresentations to its distributors about its allegedly illegal

pyramid scheme. P&G asserted its claim based on Amway’s

alleged misrepresentations to its distributors of the financial

rewards of bang an Amway distributor. The court granted

summary judgment based on its conclusion that P&G lacks

prudential standing to bring this claim.

We review summary judgment rulings de novo. Prytania

Park Hotel, Ltd. v. Gen. Star Indem. Co., 179 F.3d 169, 173

(5th Cir.1999.. Summary judgment is proper when, taking the

evidence in tte light most favorable to the non-moving party,

there is no geauine issue of material fact and the moving party

is entitled to ajudgment as a matter of law. Fed.R.Civ.P. 56(c);

Celotex Corp v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91

L.Ed.2d 265 (1986).

Standing tas constitutional and prudential components.

Bennett v. Spar, 520 U.S. 154, 117 S.Ct. 1154, 137 L.Ed.2d

281 (1997). To meet the constitutional standing requirement,

a plaintiff mist show (1) an injury in fact (2) that is fairly

traceable to the actions of the defendant and (3) that likely will

be redressed by a favorable decision. Bennett, 520 U.S. at 162,

4la

117 S.Ct. 1154; Lujan v. Defenders of Wildlife, 504 U.S. 555,

560-61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992).

Prudential standing requirements exist in addition to “the

immutable requirements of Article III,” ACORN v. F, owler, 178

F.3d 350, 362 (Sth Cir.1999), as an integral part of “judicial

seif-government,” Lujan, 504 U.S. at 560, 112 S.Ct. 2130. The

goal of this self-governance is to determine whether the plaintiff

“is a proper party to invoke judicial resolution of the dispute

and the exercise of the court’s remedial powers.” Bender vy.

Williamsport Area Sch. Dist., 475 U.S. 534, 546 n. 8, 106 S.Ct.

1326, 89 L.Ed.2d 501 (1986).*

These judicially created limits concer whether a

plaintiffs grievance arguably falls within the zone of

interests protected by the Statutory provision invoked in

~ the suit, whether the complaint raises abstract questions or

a generalized grievance more properly addressed by the

legislative branch, and whether the plaintiff is asserting his

or her own legal rights and interests rather than the legal

nghts and interests of third parties.

ACORN, 178 F.3d at 363.

Although Congress cannot change constitutional standing

requirements, it “can modify or even abrogate prudential

standing requirements, thus extending standing to the full extent

permitted by Article II.” Jd. (citing Bennett, 520 U.S. at 162,

117 S.Ct. 1154) (other citation omitted). We therefore look to

the statute in question to determine whether Congress expressed

“ See also Phillips Petroleum Co. v. Shutts, 472 US. 797, 804, 105 S.Ct.

2965, 86 L.Ed.2d 628 (1985) (opining that federal courts adopt prudential

limits on standing “to avoid deciding questions of broad social import where

no individual rights would be vindicated and to limit access to the federal

courts to those litigants best suited to assert a particular claim”) (quoting

Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 99-100, 99 S.Ct.

1601, 60 L.Ed.2d 66 (1979)).

42a

an intent to negate the background of prudential standing

doctrine.“

The question whether, in § 43, Congress intended to abrogate

the background of prudential standing doctrine is one of first

impression in this circuit. Congress did not expressly negate

the background of prudential standing in § 43(a), which states:

(1) Any person who, on or in connection with any goods

or services, or any container for goods, uses in commerce

any word, term, name, symbol, or device, or any

combination thereof, or any false designation of ongin,

false or misleading description of fact, or false or

misleading representation of fact, which--

(A) is likely to cause confusion, or to cause mistake or to

deceive as to the affiliation, connection, or association of

such person with another person, or as to the origin,

sponsorship, or approval of his or her goods, services, or

commercial activities by another person, or

(B) in commercial advertising or promotion, misrepresents ~

the nature, characteristics, qualities, or geographic origin

of his or her or another person’s goods, services, or

commercial activities,

shall be liable in a civil action by any person who believes

that he or she is or is likely to be damaged by such act.

15 U.S.C. § 1125(a) (1994) (emphasis added). The words “any

person” might lead one to conclude that Congress intended to

abrogate the background of prudential standing for purposes of

the Lanham Act and allow anyone to sue who could achieve

Article II standing. Section 45, however, states in pertinent

part:

“ See Bennett, 520 U.S. at 163, 117 S.Ct. 1154 (“Congress legislates

against the background of our prudential standing doctrine, which applies

unless it is expressly negated.”).

43a

The intent of this chapter is to regulate commerce within

the control of Congress by making actionable the

deceptive and misleading use of marks in such commerce;

to protect registered marks used in such commerce from

interference by State, or territorial legislation; to protect

persons engaged in such commerce against unfair

competition; to prevent fraud and deception in such

commerce by the use of reproductions, copies,

counterfeits, or colorable imitations of registered marks,

and to provide rights and remedies stipulated by treaties

and conventions respecting trademarks, trade names, and

unfair competition entered into between the United States

and foreign nations.

15 U.S.C. § 1127 (1994).“° We agree with Conte Bros.

Automotive, Inc. v. Quaker State-Slick 50, Inc., 165 F.3d 221,

229 (3d Cir.1998):

This section makes clear that the focus of the statute is on

anti-competitive conduct in a commercial context.

Conferring standing to the full extent implied by the text

of § 43(a) would give standing to parties, such as

consumers, having no competitive or commercial interests

affected by the conduct at issue.... The

congressionally-stated purpose of the Lanham Act, far

from indicating an express intent to abrogate prudential

standing doctrine, evidences an intent to limit standing to

a narrow class of potential plaintiffs possessing interests

the protection of which furthers the purposes of the

Lanham Act.

The court also pointed out that the Lanham Act was passed

to codify statutory and common law of unfair competition that

had developed before Erie R.R. v. Tompkins, 304 U.S. 64, 58

“* This language has been part of the Lanham Act since it was enacted in

1946. See Pub. L. No. 489, reprinted in 1946 U.S.C.C.A.N. 412, 429.

EES OEE OS LAL DETTE LN ORT

44a

S.Ct. 817, 82 L.Ed. 1188 (1938). The court analyzed the

earlier unfair competition laws and noted that “these earlier acts

were drafted against the backdrop of common law doctrine

similar to today’s prudential standing doctrine that limited the

eligible plaintiff class.” Conte Bros., 165 F.3d at 230 (citing

Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, 102 S.Ct.

2182, 72 L.Ed.2d 606 (1982)). This led the court to conclude

that “[t]here is no indication that Congress intended in any of

the Lanham Act’s statutory precursors, or in the Lanham Act

itseif for that matter, to abrogate the common law limitations on

standing to sue.’ Having found that § 45 of the Lanham Act

plainly sets out Congress’s intent to maintain prudential

standing requirements, we see no need to examine the

legislative history or common law background of the Act, as the

Third Circuit did. We nonetheless join that court in deciding

that Congress did not intend to abrogate prudential standing

limitations when it enacted the Lanham Act.

Also of first impression in this court is what test we should

adopt in determining whether a plaintiff has statutory or

“ See Inwood Laboratories, Inc. v. lves Laboratories, Inc., 456 U.S. 844,

861 n. 2, 102 S.Ct. 2182, 72 L.Ed.2d 606 (1982) (White, J., concurring)

(opining that the “purpose of the Lanham Act was to codify and unify the

common law of unfair competition and trademark protection”); see also

Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 109 S.Ct.

971, 103 L.Ed.2d 118 (1989) (stating that the “law of unfair competition has

its roots in the common-law tort of deceit”); see generally 1 J. THOMAS

MCCARTHY, MCCARTHY ON TRADEMARKS AND UNFAIR

COMPETITION § 5:2 (4th ed.1996) (discussing common-law origins of

Lanham Act).

*’ Conte Bros., 165 F.3d at 230 (citing by analogy Associated General

Contractors of Call., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519,

531-34, 103 S.Ct. 897, 74 L.Ed.2d 723 (1983) (describing congressional

intent to incorporate common-law principles constraining class of plaintiffs

entitled to sue under Clayton Act)).

45a

“prudential” standing under the Lanham Act.** After a survey

of the caselaw of other circuits,” we adopt the test recently set

forth in Conte Bros. That court adopted the test for prudential

standing under the Clayton Act that the Supreme Court set forth

in Associated General Contractors, 459 US. at 538-44, 103

S.Ct. 897,”' in which the Court identified a number of factors to

“* We have stated in dictum that consumers should be denied prudential

standing under the Lanham Act. Seven-Up Co. v. Coca-Cola Co., 86 F.3d

1379, 1383 (Sth Cir.1996) (noting that “most courts that have addressed the

issue agree that in light of the pro-competitive purpose language found in §

45, ‘consumers fall outside the range of “reasonable interests” contemplaied

as protected by the false advertising prong of Section 43(a) of the Lanham

Act.” (quoting Serbin v. Ziebart Int’] Corp., 11 F.3d 1163, 1177 (3d

Cir.1993))).

“Much of our prudential standing jurisprudence in this circuit has

focused on whether a particular injurious act is within the “zone of interests”

of a particular administrative statute. £. g., Stockman v. Fed. Election

Comm'n, 138 F.3d 144 (Sth Cir.1998); Asbestos Information Ass 'n/North

America v. Reich, 117 F.3d 891 (Sth Cir.1997). This is not an

administrative law case, however, so standing is not governed by

administrative law’s “zone of interests” test. See Clarke, 479 U.S. at 400 n.

16, 107 S.Ct. 750 (observing that the “zone of interest” test has been applied

primarily in claims brought under the Administrative Procedure Act and “‘is

most usefully understood as a gloss on the meaning of § 702 [of that Act]...

While inquiries into reviewability or prudential standing in other contexts

may bear some resemblance to a ‘zone of interest’ inquiry under the APA,

it is not a test of universal application.”); Bennett, 520 U.S. 154, 163, 117

S.Ct. 1154, 137 L.Ed.2d 281 (1997) (“The breadth of the zone of interests

varies according to the provisions of law at issue, so that what comes within

the zone of interests of a statute for purposes of obtaining judicial review of

administrative action under the ‘generous review provisions’ of the [APA]

may not do so for other purposes.”) (citations omitted); see also William A.

Fletcher, The Structure of Standing, 98 YALE L.J. 221, 255-63 ( 1988)

(criticizing use of “zone of interest” test outside of administrative context).

* Both P&G and Amway used the test from Conte Bros. in

whether P&G met prudential standing requirements in pursuing its § 43(a)

claim based on Amway’s allegedly illegal pyramid scheme.

" Although the Third Circuit is the first circuit to use this standing

(continued...)

46a

be considered in determining prudential standing: (1) the nature

of the plaintiff's alleged injury: Is the injury "of a type that

Congress sought to redress in providing a private remedy for

violations of the antitrust laws"?; (2) the directness or

indirectness of the asserted injury; (3) the proximity or

remoteness of the party to the alleged injurious conduct; (4) the

speculativeness of the damages claim; and (5) the nisk of

duplicative damages or complexity in apportioning damages.

The first factor directs us to decide whether the alleged injury

is of a type Congress sought to redress in providing a private

remedy for violations of the Lanham Act. We conclude that

P&G’s injury based on Amway’s alleged illegal pyramid

scheme is not that type of injury. As stated in Conte Brothers:

[T]he focus of the Lanham Act is on "commercial interests

[that] have been harmed by a competitor’s false

advertising,” Granite State Ins. Co. v. Aamco

Transmissions, Inc., 57 F.3d 316 (3d Cir.1995), and in

"secur[ing] to the business community the advantages of

reputation and good will by preventing their diversion

from those who have created them to those who have not.”

S.Rep. No. 1333, 79th Cong., 2d Sess. (1946), reprinted in

1946 U.S.C.C.A.N. 1274, 1275.

Conte Bros., 165 F.3d at 234.

*! (...continued)

analysis in the context of the Lanham Act, it noted, 165 F.3d at 233, that two

prominent commentaries have endorsed the adoption of the standard. See

4 MCCARTHY, MCCARTHY ON TRADEMARKS AND UNFAIR

COMPETITION § 27:32 n.1 (4th ed. 1996) (“In the author’s opinion, some

limit on the § 43(a) standing of persons remote from the directly impacted

party should be applied by analogy to antitrust law, such as use of the

criteria listed in Associated General Contractors....”), Restatement (Third)

of Unfair Competition § 3, cmt. f (1995) ("In determining whether an

asserted injury is sufficiently direct to justify the imposition of liability, the

Supreme Court’s analysis of similar issues under federal antitrust law may

offer a useful analogy.”).

47a

The Lanham Act was enacted to provide protection against

the unfair and misleading use of another’s trademark. Given

this, it seems unlikely that the injury alleged here--fraudulent

misrepresentations made to potential employees to convince

them to work for and buy from Amway, resulting ultimately in

lower sales of some of P&G’s products--is of a type that

Congress sought to redress in providing the Lanham Act. P&G

has alleged attenuated harm arising from the alleged fraudulent

inducements but not alleged loss of good will or reputation as

a result of Amway’s alleged pyramid scheme.

The second factor--directness of the alleged injury--also

suggests no standing. This is not the case of one competitor’s

directly injuring another by making false statements about his

own goods and thus inducing customers to switch from a

competitor. Rather, the injury is alleged to arise from a

competitor’s fraudulently inducing a workforce--not necessarily

its competitor’s--to work for it and sell its product by promises

to the workers that they will be handsomely compensated.

There are no allegations that the workers otherwise would

have worked for P&G. Instead, the attenuated claimed harm is

alleged to come from the fact that an increase in sales of

Amway products eventually will lead to lower sales for its

competitor. If standing is allowed here, one could argue that

any competitor’s fraudulent act in running its business that

gives it an advantage could be sued upon as a violation of the

Lanham Act. Opening up standing to this extent would not be

prudent.

The third factor--the proximity of the party to the alleged

injurious conduct--also undercuts standing in this case. In

Associated General Contractors, 459 U.S. at 542, 103 S.Ct.

® See S.REP. NO: 79-1333 (1946), reprinted in 1946 U.S.C.C.A.N. 1274,

1275 (stating that "there is no essential difference between trade-mark

infringement and what is loosely called unfair competition").

es Nee wea 5 a teal

48a

897, the Court held that “the existence of an identifiable class

of persons whose self-interest would normally motivate them to

vindicate the public interest ... diminishes the justification for

allowing a more remote party ... to perform the offices of a

private attorney general.” The distributors who are more

immediate to the injury than is P&G probably do not have

standing to sue under the Lanham Act, which does not give

consumers standing to sue. See Seven-Up, 86 F.3d at 1383.

These distributors could vindicate the public interest, however,

by suing for fraud. Thus, there is no need to empower P&G as

a private attorney general in this case.

The fourth factor--speculativeness of the damages--also

weighs against standing. In fact, P&G did not even attempt to

submit evidence on lost profits resulting from Amway’s alleged

pyramid scheme. In its reply brief, P&G argues that it is not

bound to submit such evidence, but that damages instead should

be determined based on P&G’s relative market share. Given

the hundreds of P&G products and potential competitors, as

well as the difficulty of determining what percentage of

Amway’s distributors were fraudulently induced to work for

Amway, it is hard to see how any damages awarded would not

be highly speculative.

Finally, the fifth factor--the risk of duplicative damages or

complexity of apportioning damages--informs us to deny

standing. Not only could every competitor in the market sue

Amway if P&G is allowed standing here, but there would be

nothing to stop other companies not in direct competition with

Amway from suing based on harm suffered by having moun

workers fraudulently induced away.

This analysis shows that all five factors unanimously (though

to various degrees) counsel against granting standing in this

circumstance. Granting prudential standing “would result in a

great increase in marginal litigation in the federal courts and

would not serve the underlying purposes of the Lanham Act--to

ferret out unfair competition methods and protect businesses

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from the unjust erosion of their good will and reputation.”

Conte Bros., 165 F.3d at 236.

vil.

The district court dismissed P&G’s RICO claims under

Fed.R.Civ.P. 12(b)(6). P&G argues that Amway’s repetition of

the Satanism rumor and its alleged illegal pyramid scheme

constitute violations of RICO, 18 U.S.C. § 1962(c) and (d).

P&G listed mail fraud and wire fraud as the predicate acts for

its RICO claims but does not claim to have relied on any of the

misrepresentations that Amway allegedly made via mail and

wire. Instead, P&G argues that it is not required to allege and

prove reliance. We affirm in part and reverse and remand in

part on this issue.

We review de novo the dismissal of a complaint for a failure

to state a claim for which relief can be granted under rule

12(b)(6). Fernandez-Montes v. Allied Pilots Ass’n, 987 F.2d

278, 284 (Sth Cir.1993). A claim may not be dismissed unless

it appears beyond doubt that the plaintiff cannot prove any set

of facts in support of his claim that would entitle him to relief.

Benton v. United States, 960 F.2d 19, 21 (Sth Cir.1992). For

purposes of our review, we must accept the plaintiff's factual

allegations as true and view them in the light most favorable to

the plaintiff. Campbell v. City of San Antonio, 43 F.3d 973, 975

(Sth Cir.1995).

In civil RICO claims in which fraud is alleged as a predicate

act, reliance on the fraud must be shown: “[WJhen civil RICO

damages are sought for injuries resulting from fraud, a general

requirement of reliance by the plaintiff is a commonsense

liability limitation.” Summit Properties, Inc. v. Hoechst

Celanese Corp., 214 F.3d 556 (Sth Cir.2000), cert. denied, ---

US. ----, 121 S.Ct. 896, 148 L.Ed.2d 802 (2001).

P&G points out that in Summit we also set out a narrow

exception to this rule. “In general, fraud addresses liability

between persons with direct relationships--assured by the

requirement that a plaintiff has either been the target of fraud or

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has relied upon the fraudulent conduct of defendants.” Summit,

214 F.3d at 561.

Thus, in Summit we ruled that a target of a fraud that did not

itself rely on the fraud may pursue a RICO claim if the other

elements of proximate causation are present. We cited with

approval Mid Atlantic Telecom, Inc. v. Long Distance Services,

Inc., 18 F.3d 260, 263-64 (4th Cir.1994), which “held open the

possibility that a plaintiff company may not need to show

reliance when a competitor lured the plaintiffs customers away

by a fraud directed at the plaintiff's customers.” Summit, 214

F.3d at 561.

Consequently, P&G’s RICO claims based on Amway’s

alleged spreading of the Satanism rumor to lure customers from

P&G are claims on which relief can be granted. P&G has

alleged that using the wire and the mail, Amway attempted to

lure P&G’s customers away by fraud. Although P&G did not

rely on the fraud, this falls into the narrow exception carved out

by Summit, in which we said that “[iJn the current case, for

example, the defendants’ competitors might recover for injuries

to competitive position...” Summit, 214 F.3d at 561. Thus, if

P&G’s customers relied on the fraudulent rumor in making

decisions to boycott P&G products, this reliance suffices to

show proximate causation.

P&G’s RICO claims for injury based on Amway’s alleged

illegal pyramid structure cannot meet the requirement that the

alleged predicate acts proximately caused P&G’s damages,

however. Although some Amway distributors may have bought

more P&G products “but-for” being lured into joining Amway,

injury to P&G did not flow directly from such inducements.

* Although in Holmes v. Securities Investor Protection Corp., 503 U.S.

258, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992), the Court held that simple

“but-for” causation is not enough to confer civil RICO standing, that

conclusion “is no more than that common law ideas about proximate

causation inform the understanding of RICO.” Israel Travel Advisory Serv.,

Inc. v. Israel Identity Tours, Inc., 61 F.3d 1250, 1257 (7th Cir.1995).

Sla

Further, there are too many intervening factors for proximate

causation to be proven here. Allowing RICO claims for such

tenuous causation would open floodgates similar to those that

we are unwilling to open under the Lanham Act. See Holmes,

503 U.S. at 267, 272, 112 S.Ct. 1311. “Life is too short to

pursue every human act to its most remote consequences; ‘for

want of a nail, a kingdom was lost’ is acommentary on fate, not

the statement of a major cause of action against a blacksmith.”

Holmes, id. at 287, 112 S.Ct. 1311 (Scalia, J., concurring).

We affirm the dismissal of P&G’s RICO claims based on

Amway’s allegedly illegal pyramid scheme, and we reverse the

dismissal of the RICO claims based on Amway’s spreading of

the Satanism rumor. The complaint, as pleaded, does state a

claim upon which relief may be granted.

Vill.

The district court erred in dismissing P&G’s claim for

product disparagement under the Lanham Act and its claims

under § 16.29 of the Texas Business and Commerce Code.

During trial, P&G argued that Amway had disparaged P&G’s

Crest toothpaste by alleging that Crest scratches teeth. The

district court initially found that “there is evidence in this case

that was presented to the jury that the challenge advertisement

was literally false. And, so, [the Crest claim] stays under the

Lanham Act.” Later, however, the court dismissed the

remaining claims without addressing the disparagement claim.

We review these dismissals de novo. King v. Ames, 179 F.3d

370, 373 (Sth Cir. 1999).

This presents an interesting dilemma. The court first ruled

that there was enough evidence to go to the jury on the product

disparagement claim, but later dismissed the claim with the rest

of the case, without explanation. We are left wondering

whether the court inadvertently dismissed the disparagement

claim along with the rest of the case or whether, instead, the

court realized that there was not enough evidence to go to the

jury. Because there is nothing in the record to resolve this

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puzzle, we reverse and remand the dismissal of the

disparagement claim under the Lanham Act.

Amway argues in its brief that P&G has effectively waived

this issue, “since P&G makes no effort in this court to show that

it even had a case under either [the product disparagement or

the § 16.29] claim ...” (citing Frazier v. Garrison Indep. Sch.

Dist., 980 F.2d 1514, 1528 (Sth Cir.1993) (“This court is

entitled to a reasoned statement of why the district court erred.

By the brief nature of their claim, the [appellants] wholly fail to

demonstrate any error on the part of the district court.”’)).

It would have been more helpful if P&G had provided us

with more information on the product disparagement claim. It

is enough, however, that P&G points out that at one point the

district court found that there was enough evidence of

disparagement to get to a jury--including evidence that Amway

had made a factually false claim that Crest scratches teeth--and

then later dismissed the claim without explanation. This alone

is sufficient to show reversible error.

As to the § 16.29 claim, the court dismissed it based on its

finding that res judicata from the Utah case barred the claims

against Haugen and Walker, and based on its ruling that P&G

was required to prove actual malice to prevail on its Lanham

Act claim. The court stated:

[T]he only other issue that would have been left alive in

the case would have been the Section 1629 case under the

business of commerce code, which essentially allows for

injunctive relief without any of the other claims in the

case, the Court dismisses as a matter of law the Section

1629 of the Texas Business & Commerce Code claim for

injunctive relief.

Because we are reversing and remanding on res judicata and

actual malice, the dismissal of which formed the basis for the

dismissal of the § 16.29 claim, we also reverse and remand the

§ 16.29 claim.

IX.

The district court did not err in ruling that P&G’s fraud claim

was barred by the statute of limitations. P&G alleged a claim

of common law fraud: against Amway arising from falsely

assuring P&G that Amway would help fight the Satanism

rumor. The court granted summary judgment to Amway on this

issue, finding the claim time-barred. P&G assigns error to this

ruling, which we review de novo. Prytania Park Hotel, 179

F.3d at 173.

In Texas, the statute of limitations for fraud claims is four

years. In Jackson v. Speer, 974 F.2d 676, 679 (Sth Cir.1992),

we explained:

If, however, the injured party is not aware of the fraud or

the fraud is concealed, the statute of limitations begins to

run from the time the fraud is discovered or could have

been discovered by the defrauded party’s exercise of

reasonable diligence. Knowledge of facts that would lead

a reasonably prudent person to make inquiry which would

lead to a discovery of the fraud is knowledge of the fraud

itself.

(Emphasis added.)

P&G claims that, even exercising reasonable diligence, it

could not have discovered the fraud until 1995. Evidence

submitted by Amway that was uncontroverted by P&G shows,

however, that P&G knew, or reasonably should have known, by

the mid-to-late 1980’s that it could not rely on Amway’s

statements that Amway would help stop the Satanism rumor.

Gerald Gendall, head of public affairs at P&G, testified that he

“thought P&G should have sued Amway almost on a

continuous basis.” Gendall also stated that after 1983, he did

not rely on any representations that Amway was doing all it

could to stop the rumor. Executive Vice-President Laco also

testified that he believed P&G could have sued Amway for the

acts of its distributors in the early to mid-1980’s. Finally, John

Smale, P&G’s CEO from 1981 to 1986, testified:

54a

Q: When did you first come to the realization that you

should have gone after Amway sooner?

A: I don’t--I suspect in the--I don’t know, towards the late

‘80s as these rumors continued and as we got more and

more lack of response from Amway.

Given this undisputed testimony, a reasonable jury could not

have concluded that P&G did not know that it could not rely on

Amway’s representations that Amway would do all it could to

combat the Satanism rumor. P&G’s argument that Amway is

estopped from arguing that this claim is time-barred because

Amway concealed its fraudulent behavior was also correctly

dismissed on summary judgment, for the same reason.

We summarize, as follows: The judgment is reversed as to

the res judicata effect of the Utah judgment. Further, the

judgments of the Utah court and the Tenth Circuit do not

present any issues of collateral estoppel that bind the Texas

court. P&G’s Lanham Act claim for disparagement of its

commercial activities is remanded for fact-finding to determine

whether the primary motivation of the Amway disseminators of —

the Satanism rumor was economic. If it was, then the speech is

commercial; if not, the speech was noncommercial, and no

Lanham Act claim is available. The judgment that P&G must

prove actual malice to succeed on its Lanham Act claim for

disparagement of commercial activities is reversed; no actual

malice need be found.

The judgment dismissing P&G’s alter ego, single business

enterprise, and vicarious liability arguments against Ja-Ri and

ADAC is affirmed. The judgment that P&G did not have

prudential standing to bring a Lanham Act claim based on

Amway’s alleged misrepresentations to its own distributors is

affirmed. The judgment dismissing P&G’s RICO claims based

on spreading the Satanism rumor is reversed and remanded.

55a

The judgment dismissing P&G’s RICO claims based on

Amway’s alleged illegal pyramid structure is affirmed. The

judgment dismissing P&G’s Lanham Act product

disparagement claim for the alleged disparagement of Crest

toothpaste is reversed, as is the judgment dismissing P&G’s

Texas Business and Commerce Code § 16.29 claim. Finally,

the judgment that P&G’s fraud claim is time-barred is affirmed.

AFFIRMED in part, REVERSED in part, and REMANDED

for further proceedings in accordance with this opinion.

56a

57a

APPENDIX C

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 99-20590

The PROCTER & GAMBLE COMPANY; THE PROCTER

& GAMBLE DISTRIBUTING COMPANY

Plaintiffs - Appellants

AMWAY CORPORATION, ET AL

Defendants

AMWAY CORPORATION; THE AMWAY DISTRIBUTORS

ASSOCIATION COUNCIL, JA-RI-CORPORATION;

DONALD R WILSON; WOW INTERNATIONAL INC;

WILSON ENTERPRISES INC; RONALD A RUMMEL,

Individually doing business as Rummel Enterprises; KEVIN

SHINN; RANDY HAUGEN; FREEDOM ASSOCIATES INC;

FREEDOM TOOLS INC; RANDY WALKER; WALKER

INTERNATIONAL NETWORK; GENE SHAW; JOHN &

JANE DOES 6-10, Business Entities; DEXTER YAGER, SR;

BIRDLE YAGER; D&B YAGER ENTERPRISES INC.

Defendants - Appellees

Appeal from the United States District Court for the Southern

District of Texas, Houston

58a

BANC

(Opinion 2/24/01, 5 Cir., 2001, 242 F.3d 539)

Before SMITH and DENNIS, Circuit Judges, and

ROETTGER*, District Judge.

PER CURIAM:

(v) The Petition for Rehearing is DENIED and no member of

this panel nor judge in regular active service on the court having

requested that the court be polled on Rehearing En Banc, (FED.

R. APP. and STH CIR. R. 35) the Petition for Rehearing En Banc

is also DENIED.

( ) The Petition for Rehearing is DENIED and the court

having been polled at the request of one of the members of the

court and a majority of the judges who are in regular active

service not having voted in favor, (FED. R. APP. and STH CIR. R.

35) the Petition for Rehearing En Banc is also DENIED.

( ) Amember of this court in active service having requested

a poll on the reconsideration of this cause en banc, and a

majority of the judges in active service not having voted in

favor, Rehearing En Banc is DENIED.

ENTERED FOR THE COURT:

a. joined

United States Circuit Judge

*United States District Judge sitting by designation.

~ nee ee Ll

59a

APPENDIX D

PERTINENT CONSTITUTIONAL AND

STATUTORY PROVISIONS

The First Amendment to the United States Constitution

states, in pertinent part, that “Congress shall make no law. . .

abridging the freedom of speech, or of the press.”

The Lanham Act states in pertinent part:

15 U.S.C. § 1125. False designations of origin, false

descriptions, and dilution forbidden

(a) Civil action

(1) Any person who, on or in connection with any goods or

services, or any container for goods, uses in commerce any

word, term, name, symbol, or device, or any combination

thereof, cr any false designation of origin, false or misleading

description of fact, or false or misleading representation of fact,

which —

(A) is likely to cause confusion, or to cause mistake, or to

deceive as to the affiliation, connection, or association of such

person with another person, or as to the origin, sponsorship, or

approval of his or her goods, services, or commercial activities

by another person, or

(B) in commercial advertising or promotion, misrepresents

the nature, characteristics, qualities, or geographic origin of his

or her or another person’s goods, services, or commercial

activities,

shall be liable in a civil action by any person who believes that

he or she is or is likely to be damaged by such act.

60a

The Texas Business and Commerce Code states in pertinent

part:

16.29. Injury to Business Reputation or Trade Name or

Mark

A person may bring an action to enjoin an act likely to injure

a business reputation or to dilute the distinctive quality of a

mark registered under this chapter or Title 15, U.S.C., or amark

or trade name valid at common law, regardless of whether there

is competition between the parties or confusion as to the source

of goods or services. An injunction sought under this section

shall be obtained pursuant to Rule 680 et seg. of the Texas

Rules of Civil Procedure.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.