BY:
Michael I. Rudell(Originally published in the Entertainment Law column in the New York Law Journal, February 25, 2000.)
A New York court has dismissed a complaint which charges Buena Vista Publishing with false advertising and fraud concerning the claims on the cover of “The Beardstown Ladies’ Common-Sense Investment Guide” (the “Book”) that it distributed.1 In so doing, it reached a different conclusion from a California Appellate Court in a similar action.
In the early 1980’s, sixteen women (the “Beardstown Ladies”) formed an investment club in Beardstown, Illinois. Defendant Seth Godin Productions, Inc. (“SGP”), a book packager, negotiated, arranged and helped implement a deal between Central Pictures, Inc., the owner of the literary rights to books written by and on behalf of the Beardstown Ladies, and Buena Vista Publishing, Inc., doing business as Hyperion. The Book is described on its cover, on the flyleaf and throughout as an “investment guide” based upon the extraordinarily successful “secret” investment strategy of the Beardstown Ladies. It was advertised, marketed and sold on the basis of the assertion that they had achieved an annual rate of return of 23.4% over a ten year period in their securities investments using the methods described in the Book. In early 1998, after the claimed annual return of 23.4% was challenged, an audit by Price Waterhouse of the Beardstown Ladies investment portfolio for the period from 1984 through 1993 revealed that the actual annual return for that period was 9.1%. During the same period, the S&P 500 average return was 14.9% and the average general stock fund return was 12.6%. On March 30, 1998, the senior partner of the Beardstown Ladies issued a statement in which she admitted that the claimed annual return for ten years was inaccurate and apologized for the error and for failing to check the figures for themselves. Shortly thereafter, Hyperion shipped a notice to booksellers for insertion in all copies of the Book in which the Beardstown Ladies acknowledged, corrected and apologized for the error. A consumer class action suit then was brought on behalf of all persons who purchased the Book prior to April of 1998. In its complaint, plaintiffs allege that they were induced to buy the Book on the basis of the claims initially made by the Beardstown Ladies and the suggestion that the Book would impart “secrets” that enabled them to achieve the claimed remarkable earnings. They assert that the Book does not contain any secrets and that the investment advice is general, unsophisticated and readily available from other sources for free.
The complaint contains four causes of action: deceptive trade practices under New York General Business Law §349 based on defendants’ false claims, misrepresentations and omissions, allegedly made in order to market and sell copies of the Book; false advertising under General Business Law §350; fraud based on plaintiffs’ purchase of the Book in reliance upon the various statements, claims, representations and omissions regarding the annual return and the secret investment strategy used by the Beardstown Ladies that defendants allegedly knew were false and misleading and upon which defendants intended plaintiffs and other purchasers of the Book to rely; and, unjust enrichment from the sale of the Book on the fraudulent claims, misrepresentations and omissions. Plaintiffs seek repayment of the purchase price plus punitive damages, costs and attorneys fees.
Defendants moved to dismiss the complaint on the ground that the content of the Book, the cover and the flyleaf all are protected by the First Amendment. They assert that as publisher of the Book they cannot be made the guarantor of the accuracy of the factual statements contained therein and that at most, plaintiffs’ allegations amount to a charge of negligence. Defendants assert that they had no duty to investigate or verify the factual statements made in the Book and that the constitutional protection for such content cannot be evaded by characterizing the Book or the material that appears on its cover or flyleaf as commercial speech. Defendants also contend that the purpose of the Book is not purely commercial, its content cannot be subject to scrutiny under the sections of the statutes referred to by plaintiffs and that the contents of the Book do not lose their constitutional protection because portions are also used on the flyleaf and cover.
In opposition, plaintiffs assert that their claims are based on the words used to advertise, market and sell the Book and not the content of the Book itself. They contend that they need discovery to determine the role of the defendants in the creation of the Book and the false performance claims. They also assert that discovery will demonstrate that the motivation for the content of the advertising material was to maximize defendants’ profit and, thus, that such material constitutes commercial speech.
In its discussion, the Court notes that the right of free expression guaranteed by the First Amendment is circumscribed only by narrowly constructed and finely drawn restraints in areas such as copyrights, defamation, unfair competition, incitement and obscenity.
An erroneous statement of fact is inevitable in free debate and if such an error were made actionable there would be a risk of inducing cautious and restrictive exercise of the constitutionally guaranteed freedoms of speech and the press. Thus, the First Amendment requires that even some falsehoods be protected in order to protect speech that matters. The decision states that it is clear that the Book is protected under both the Federal and New York State Constitutions for both its truthful and erroneous statements of fact. That being so, the plaintiffs chose to sue, not the Beardstown Ladies, but the publisher and packager on the theory that false statements on the cover, flyleaf and in the introduction are purely commercial speech, subject to commercial fraud claims under New York statutes.
The false performance claims regarding the ten-year annual rate of return appear in the text of the Book as well as on the cover, the flyleaf and in the introduction. This speech, according to the Court, is not purely commercial and thus is protected from false advertising and deceptive practice claims. First Amendment safeguards are relaxed with respect to commercial speech, but such speech, if it is to be afforded no First Amendment protection must be purely commercial. If is found to be noncommercial speech, even falsehoods in the speech will be given full First Amendment protection.
The Supreme Court has defined commercial speech as “speech which does no more than propose a commercial transaction” and “is so removed from any exposition of ideas.” Economic motivation alone is insufficient to turn material into commercial speech; for, if a publisher’s economic motivation were sufficient to convert protected expression into commercial speech, every article published in newspapers and periodicals would become such because they are sold for profit.
Even paid advertisements can be noncommercial speech, fully protectible by the First Amendment. The Appellate Division has emphasized that only “purely commercial speech … can be subject to scrutiny under the false advertising and deceptive practice statutes.” When a document contains both commercial and noncommercial messages, referred to as hybrid speech, there are several factors that can be evaluated to determine if the speech is commercial. These factors include whether the material is conceded to be an advertisement, whether it refers to a specific product and whether the disseminator of the information had an economic motivation to disseminate it.
Here the Book is noncommercial speech. It clearly was not designed to sell another product. Neither the fact that it was sold for a profit nor the publisher’s economic motivation is sufficient to turn the Book into commercial speech. The main purpose of the work is to tell the story of the Beardstown Ladies, to educate as to investment clubs and the Beardstown Ladies’ investment strategy and to entertain. The words and phrases contained on the cover, the flyleaf and the introduction are not “core” commercial speech. At best, they could be considered hybrid commercial speech. Although they have a commercial element — to entice readers to buy the book — they also have artistic or content-related expression, which is entitled to full First Amendment protection. The specific product here is a Book, the content of which is fully protected by the First Amendment, and the challenged statement (the 23.4% annual return) explicitly comes from within the contents of the Book. It cannot be transformed into purely commercial speech because of its change in location.
Further, advertising that promotes noncommercial speech, such as a book, is accorded the same constitutional protection as the speech it advertises. It is actionable only if it fails to accurately reflect the content of the protected speech being promoted. The fact that a mistake in the text was repeated on the cover does not change the constitutional protection it is afforded.
The Court then notes the California decision in Keimer v. Buena Vista Books, Inc.2 holding that the challenged statement on the same book cover is purely commercial speech. The Court differs with the Keimer Court’s approach in that it recognizes as paramount that the speech is not referring to a product such as condoms (the product in Bolger v. Young’s Drug Products Corp.,3 a case heavily relied upon in Keimer,) but rather to a book, the contents of which are themselves protected by the First Amendment.
Contrary to the cases relied upon by the plaintiffs in their brief, the complaint here does not allege that plaintiffs were misled as to the content of the product or service being offered. The false performance claims are not being challenged because they failed to accurately reflect the content of the protected speech being promoted. Accordingly, the claims against defendants for false and deceptive advertising under General Business Law §349 and §350 are dismissed. The common law causes of action are dismissed for failing to state a claim. The Court cites a series of cases supporting its contention that defendants have no duty to investigate the accuracy of the contents of the Book it published. Further, with respect to the fraud cause of action, plaintiffs have provided no factual basis for their allegations that the defendants knew and intended to mislead book buyers as the Beardstown Ladies’ annual rate of return. In fact, this information was published by the Beardstown Ladies before the Book was published in their videotape, on news programs and in investment and retirement newsletters. For the above reasons the Court grants the defendants’ motions to dismiss.
Plaintiffs have indicated that they intend to appeal. The publishing community will await with interest further developments in this action.
¹ Lacoff v Buena Vista Publishing, Inc. QDS:22311581-NYLJ, February 2, 2000.
² 75 Cal. App. 4th 1220.
³ 463 U.S. 60 (1983).