A Cambridge software company could pursue statutory false advertising claims against a competitor that touted on its website a “white paper” disparaging the plaintiff’s products without disclosing that the defendant had commissioned the study, a U.S. District Court judge in Massachusetts has found.

The competitor, defendant Appian Corp., argued that its failure to publicly disclose its commissioning of the white paper did not constitute a material omission that was actionable under either the federal Lanham Act or G.L.c. 93A.

“Lauding a report or survey as independent validation of a product over another when it is not truly independent, or when the report or survey is fundamentally unreliable, is cause for concern.”

— Tory A. Weigand, Boston

But Chief Judge Patti B. Saris concluded that plaintiff Pegasystems’ allegations were sufficient to survive a motion to dismiss.

“Nowhere in the Report or Appian’s statements promoting it would a reader learn that Appian was involved in the Report’s production — they would likely be left with the opposite impression,” Saris wrote. “The allegation that the Report and website, when viewed in their entirety, are at the very least misleading is plausible because their description conveys neutrality.”

The 20-page decision is Pegasystems, Inc. v. Appian Corp., et al.

Cautionary tale

Boston commercial litigator Tory A. Weigand called Pegasystems a “close case” but said the ruling was understandable given the lenient plausibility standard for surviving a motion to dismiss.

“The difference between surviving a motion to dismiss and ultimately prevailing is obviously significant, particularly in a Lanham Act matter due to the need to show actual deception and injury,” Weigand said.

However, he noted that the decision has a concerning aspect in that, by allowing a case to proceed past a motion to dismiss, the court is opening the door to the plaintiff’s discovery into a competitor’s files.

Weigand said it is not uncommon for businesses to rely on supportive surveys, market studies and reports in the promotion of products and services.

He added that the “lesson” of the decision is that the failure to disclose any involvement or sponsorship of a report could be deemed misleading when relied on as part of a promotional effort, particularly when the favorable report is used to compete with and compare the products of a direct competitor.

“Lauding a report or survey as independent validation of a product over another when it is not truly independent, or when the report or survey is fundamentally unreliable, is cause for concern,” Weigand said. “Here, the court felt that the failure to disclose Appian’s involvement in the report elevated the matter beyond such a quibble to a potentially unfair, false or misleading representation.”

Eric P. Carnevale, an intellectual property litigator in Cambridge, said he was not surprised Saris found at the pleading stage that such an omission would be sufficiently alleged to be material to survive a motion to dismiss.

“There’s a certain amount of consumer trust that you’re getting the complete story more or less when these kinds of advertisements are put online,” he said.

Carnevale added that the best course is to advise clients to disclose sources of funding and other material information underlying a white paper or other publication referenced on their websites.

“The more influential a statement is or is likely to be perceived to be, the more scrupulous you have to be in being truthful and non-misleading about it,” Carnevale said.

The plaintiff was represented by Kristopher N. Austin. The Boston attorney said in an emailed statement that his client was pleased by the result.

“We believe strongly in our claims and will pursue them vigorously,” Austin wrote.

Defendant Appian Corp. was represented by Timothy H. Madden of Boston. Co-defendant Business Process Management was represented by Boston attorney David M. Magee. Neither defense attorney responded to requests for comment.

Undisclosed relationship

Plaintiff Pegasystems develops and licenses business process management software.

Defendant Appian, based in Virginia, is a major competitor of the plaintiff.

Defendant Business Process Management, located in Cohasset, operates BPM.com. The website holds itself out as “the leading destination for research, white papers and community forums” on business process management and process automation.

According to the plaintiff’s complaint, BPM.com published a white paper in May titled “Market Report: Analysis of Process Automation Investments and Total Cost of Ownership (TCO): Appian, IBM, and Pega.” Appian, IBM, and Pegasystems are the top three vendors of BPM software.

Appian allegedly commissioned the white paper, but that commission was not disclosed in the report or in any public communications about the report.

The BPM.com report was purportedly based on an online survey of 500 respondents. The survey found that organizations that run on Pegasystems products have spent the most in upfront costs. The study pegged Pegasystems average upfront costs at $46 million, approximately 2.5 times more than the average. Meanwhile, the report found that Appian customers reported incurring the lowest average upfront costs, in the $4 million range.

The report also found “those using IBM or Pega cited requiring an average of 4-6 times more outside consultants than those using Appian” and that “Appian customers report on average 3 times faster application delivery compared to the overall market, and notably 3-5 times faster than what IBM or Pega customers have reported.”

The report concluded that “Appian was distinguished as the clear leader” measured by low total cost of ownership and faster time to market.

Appian allegedly created a page on its own website allowing potential customers to request a copy of the report by submitting their contact information. The Appian website allegedly summarized the BPM.com whitepaper as concluding that Appian customers built enterprise solutions five times faster using 79 percent fewer resources and that Appian customers were twice as likely to see a return on investment within two years.

In July, the plaintiff sued Appian and Business Process Management in federal court in Boston. The plaintiff’s complaint alleged the defendants made false and misleading claims in violation of the Lanham Act and G.L.c. 93A. In addition, the plaintiff asserted common-law claims for unfair competition, false advertising and commercial disparagement.

Actionable omission

As a threshold issue, the defendants argued that the plaintiff’s claims required its complaint to satisfy the heightened pleading standard for fraud under Federal Rule of Civil Procedure 9(b). Saris noted that the 1st Circuit had not addressed whether Rule 9(b) applies to a Lanham Act false advertising claim.

Rather than deciding the reach of Rule 9(b), Saris found that even if the rule applied, the plaintiff’s complaint satisfied the requirement for pleading fraud with particularity.

The judge wrote that “Pegasystems has pleaded the ‘who’ (Appian and BPM.com), ‘what’ (survey results and associated statements), ‘where’ (in the Report and the web pages promoting it), and ‘when’ (continuously) of the allegedly fraudulent statements.”

Saris focused her analysis on whether the defendants were entitled to dismissal on the ground that the plaintiff failed to state a plausible claim under Rule 12(b)(6). She concluded that the plaintiff plausibly pleaded the elements of a Lanham Act false advertising claim.

First, she found the plaintiff adequately pleaded that the defendants made false or misleading representations in a commercial advertisement.

“False statements under the Lanham Act include those ‘conveyed by necessary implication when, considering the advertisement in its entirety, the audience would recognize the claim as readily as if it had been explicitly stated,’” Saris wrote. “While Defendants did not state that the Report was independently developed, ‘the audience would recognize the claim as readily as if it had been explicitly stated.’”

Saris further found that the plaintiff’s complaint adequately alleged consumer deception, noting in its first amended complaint the company alleged “[c]ustomers have informed Pegasystems that Appian has distributed or drawn their attention to the Report. These customers have been confused or deceived by the false and misleading conclusions of the Report.”

Finally, Saris concluded that the plaintiff’s complaint adequately alleged injury for purposes of the Lanham Act.

“Pegasystems alleges that Defendants’ statements have been disseminated to ‘major customers for which Appian and Pegasystems compete,’ representing ‘prospective revenue streams in the millions of dollars,’” Saris wrote “The Court can reasonably infer that an explicit unfavorable comparison between Appian and Pegasystems is likely to divert those customers from Pegasystems to Appian, injuring Pegasystems.”

Appian argued for dismissal of the 93A false advertising claim on the ground that the plaintiff failed to adequately allege that the challenged conduct occurred “primarily and substantially” in Massachusetts.

Saris found that argument unavailing.

“Here, the complaint alleges the plaintiff is based in Massachusetts, the injury occurred in Massachusetts, one of the defendants is in Massachusetts and another has an office here, and the document at issue was created here,” the judge wrote. “These allegations suffice to survive a ‘primarily and substantially’ challenge.”

The judge similarly denied the defendants’ motion to dismiss the plaintiff’s common-law claim for commercial disparagement. On the other hand, Saris found that the plaintiff’s complaint failed to adequately plead claims for unfair competition and false advertising under Massachusetts common law.