Harold H. Hudgins Realty, Inc. v. FNC, Inc.: Appraisers’ Lawsuit against Software Company Reinstated

A federal appellate court has considered whether to reinstate a possible class action lawsuit against a vendor that had allegedly promised its appraiser clients that information submitted through its system would be confidential but the vendor actually collected the information and offered it for resale.

Four real estate appraisal firms (collectively, “Appraisers”) brought a lawsuit against FNC, Inc. (“Company”). The lawsuit sought class action status for other similarly-situated appraisers and alleged that the Company had violated the Lanham Act (“Act”) by informing the Appraisers that their appraisals submitted through the Company’s AppraisalPort would be confidential when the Company was actually repackaging the data for resale.

AppraisalPort is an internet-based data transmittal system that is used by appraisers to transmit appraisals to financial institutions. The financial institutions would order the necessary appraisals through AppraisalPort, and appraisers would accept their assignments and submit their appraisals through the system. AppraisalPort collected the data from the appraiser, and submitted the information to the financial institutions on industry-standard appraisal forms. Appraisers paid fees to the Company for the use of AppraisalPort.

The Company marketed AppraisalPort to appraisers as being secure and private, representing that the only data available to lenders is from the specific appraisal submitted through AppraisalPort. The Company also represented to appraisers that it was not building a database or otherwise using the data submitted through AppraisalPort. However, the Appraisers allege that these representations were false, as the Company used appraisal data submitted through AppraisalPort to populate a database known as the National Collateral Database (“NCD”).

NCD is a real-estate valuation service owned by the Company that collects information about residential properties. The Company makes this database available to financial institutions, which may choose to use NCD instead of ordering an appraisal for a property. Lenders may use either a prior property appraisal found in NCD or could use the database to find comparable sales data. Thus, NCD is a competitor to the Appraisers.

The Company filed a motion to dismiss the lawsuit, and the trial court ruled that the Appraisers lacked prudential standing to bring the lawsuit and so dismissed the lawsuit. The Appraisers appealed.

The United States Court of Appeals for the Fifth Circuit reversed the trial court and reinstated the Appraisers’ lawsuit. The Act is federal statute that allows private actions for false advertising, such as misrepresenting the qualities of a product or service. A private action is only available to those who suffer a commercial harm as a result of anticompetitive conduct, meaning that private right of action is not available to consumers but rather to those whose business is harmed by the conduct.

“Prudential standing” is a judicially-created requirement that only allows the parties that the legislature intended to protect through the legislation to bring actions to enforce the law. Courts have developed a five-step test to determine who has prudential standing under the Act: first, is the nature of the injury what Congress intended to protect; second, the directness or indirectness of the injury; the proximity or remoteness of the party to the alleged injurious conduct; the speculativeness of the damage claim; and the risk of duplicative damages. The court considered each of the factors.

Looking at the first factor, the court found that the Appraisers had alleged the type of injury the Act was intended to provide relief. The Appraisers had claimed commercial injury from the Company’s false advertising, as they had provided the appraisal information to the Company under the belief obtained from the Company’s misleading statements that the appraisal data would remain confidential. The Appraisers also claimed that the Company stole their goodwill by offering their appraisal information in the NCD.

The second factor did not support the Appraisers’ allegations, as the alleged harm caused by the Company’s misconduct was indirect. Direct harm would result if the misrepresentations caused the other party to purchase a specific good or service, whereas here the alleged misrepresentation was related to another database. Also, the Appraiser’s damages were not caused by the advertisements but rather by the alleged misappropriation of their appraisal data.

The court ruled that the Appraisers had satisfied the third factor, as the their alleged injuries were directly caused by the Company’s false promises which led the Appraisers to entrust their work to the Company, who then created a competing product to the detriment of the Appraisers. Similarly, the fourth factor was satisfied, as the damage claims are not speculative, because the Appraisers could show lost income from the use of their appraisals by the Company.

Since there was little risk of exposing the Company to duplicative damages by allowing the action to move forward, the court determined that the Appraisers had also satisfied the fifth factor. The only target for the alleged misrepresentations by the Company was residential appraisers and these are the members of the proposed class for this lawsuit.

Based on the court’s rulings, the Appraisers had satisfied four elements of the five-factor test and so had met the requirements for prudential standing. Therefore, the court reinstated the Appraisers’ lawsuit for violations of the Act and sent the matter back to the trial court.

Harold H. Hudgins Realty, Inc. v. FNC, Inc., 634 F.3d 787, (5th Cir. 2011)

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