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Lanham Act Class Action Defense Cases-Phoenix v. McDonald’s: District Court Properly Granted Defense Motion To Dismiss Lanham Act Class Action For Lack Of Prudential Standing Eleventh Circuit Holds

As Matter of First Impression in the Circuit, Eleventh Circuit Holds that Fast Food Franchisee Lacked Prudential Standing to Prosecute Lanham Act False Advertising Class Action Against McDonald’s and Affirms Order Granting Defense Motion to Dismiss Class Action Complaint

Plaintiff, a Burger King fast food franchisee, filed a putative class action lawsuit against McDonald’s alleging false advertising in violation of § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), arising out of McDonald’s claims in connection with various promotional games (such as Monopoly) that each customer had an equal chance of winning. Phoenix of Broward, Inc. v. McDonald’s Corp., 489 F.3d 1156, 2007 WL 1791886, *1 (11th Cir. 2007). Defense attorneys moved to dismiss the class action complaint on the ground that plaintiff lacked prudential standing to prosecute the putative class action; the district court agreed with the defense and dismissed the class action. Id. On appeal to the Eleventh Circuit, the issue on appeal concerned “the proper test for determining whether a party has prudential standing to bring a false advertising claim under § 43(a) of the Lanham Act,” id.; ultimately, the Circuit Court adopted the Third Circuit test set forth in Conte Bros. Automotive, Inc. v. Quaker State-Slick 50, Inc., 165 F.3d 221, 225 (3d Cir. 1998), and affirmed the dismissal of the class action complaint.

The McDonald’s promotional games at issue ran from 1995 through 2001, and generally allowed customers to win the $1 million grand prize “by obtaining one of the rare $1 million, instant-winner game pieces or by collecting and matching a combination of certain other game pieces.” Phoenix of Broward, at *1. McDonald’s represented that each customer had an equal chance of winning, and “also represented the specific odds of winning certain prizes, including the high-value prizes.” Id. Beginning in April 2000, however, the FBI began investigating these promotional games and “informed McDonald’s that there were problems with the random distribution of its game pieces,” id. Nonetheless, McDonald’s continued to represent that each customer had an equal chance of winning its promotional games, id.

In August 2001, the U.S. Department of Justice and the FBI revealed that from 1995 to August 2001, an employee of the marketing company hired by McDonald’s to operate its promotional games had “diverted at least $20 million in high-value prizes by embezzling winning, high-value game pieces and distributing them to a network of ‘winners’ who claimed (or recruited others to claim) the prizes from McDonald’s.” Phoenix of Broward, at *2. Numerous individuals were arrested for what McDonald’s described as “a highly sophisticated inside game of fraud and deception,” id., and the federal government stated that the fraud “denied McDonald’s customers a fair and equal chance of winning” the games, id. In all, about 50 people – including the ringleader – pleaded guilty or were convicted of conspiracy and mail fraud, id.

Predictably, customers filed numerous class action lawsuits against McDonald’s, which the company settled by in April 2002. Phoenix of Broward, at *2. Almost four years later, in February 2006, plaintiff filed its putative class action against McDonald’s “on behalf of itself and all similarly situated Burger King franchisees” for alleged false advertising in violation of § 43(a) of the Lanham Act.” Id. The class action complaint alleged that McDonald’s promotional games “lured customers away from Burger King” but were “rigged” and thus diverted business from Burger King by advertisements known by McDonald’s to be false, id. Defense attorneys moved to dismiss the class action for lack of prudential standing under the Lanham Act, and the district court granted the motion. Id. The Eleventh Circuit affirmed.

Preliminarily, the Circuit Court explained that “standing jurisprudence is comprised of ‘two strands: Article III standing, which enforces the Constitution’s case-or-controversy requirement, and prudential standing, which embodies judicially self-imposed limits on the exercise of federal jurisdiction.’” Phoenix of Broward, at *3 (quoting Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, 11-12 (2004)). Defense attorneys did not dispute the first test for jurisdiction and the Eleventh Circuit concluded that it had been satisfied, id. The appeal centered on the question of prudential standing.

As a matter of first impression in the Eleventh Circuit, the Court agreed with the Third and Firth Circuits and held that in enacting § 43(a) of the Lanham Act, Congress did not eliminate the requirement for prudential standing. Phoenix of Broward, at *4-*5. The Circuit Court refused to follow the “categorical approach” to determining prudential standing, which has been adopted by some circuit courts, id., at *6. Instead, the Eleventh Circuit adopted the five-part test for prudential standing set forth by the Third Circuit in Conte Bros., noting that the Fifth Circuit had adopted this test as well. Id., at *6. Thus, the Eleventh Circuit held that “to determine whether a party has prudential standing to bring a false advertising claim under § 43(a) of the Lanham Act, a court should consider and weigh the following factors: [¶] (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 [Lanham Act]? [¶] (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. [¶] (5) The risk of duplicative damages or complexity in apportioning damages.” Id. (citing Conte Bros., 165 F.3d at 233). The Circuit Court extensively analyzed its decision to follow Conte Bros., see id., at *6-*9, but ultimately concluded that it was the correct test, id., at *9.

Applying the five-factor test, the Eleventh Circuit concluded that prudential standing did not exist because of the directness of the injury asserted, Phoenix of Broward, at *10, because of the speculative nature of plaintiff’s injury, id., at *13, and because of the risk duplicative damages or complexity of apportioning damages, id., at *14. Accordingly, the Circuit Court concluded that prudential standing did not exist, and affirmed the dismissal of the class action complaint, id. at *15.

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