Int'l Code Council, Inc. v. UpCodes Inc.

• Decision Date: 29 July 2022
• Docket Number: Docket Nos. 21-826,21-827,August Term, 2021
• Citation: 43 F.4th 46
• Parties: INTERNATIONAL CODE COUNCIL, INC., Plaintiff–Counter-Defendant–Appellant, American Society of Civil Engineers, Plaintiff, v. UPCODES INC., Defendant–Counter-Claimant–Appellee, Garrett Reynolds, Scott Reynolds, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

43 F.4th 46

INTERNATIONAL CODE COUNCIL, INC., Plaintiff–Counter-Defendant–Appellant,American Society of Civil Engineers, Plaintiff,

v. UPCODES INC., Defendant–Counter-Claimant–Appellee,Garrett Reynolds, Scott Reynolds, Defendants-Appellees.

Docket Nos. 21-826

21-827

August Term, 2021

United States Court of Appeals, Second Circuit.

Argued: October 13, 2021

Decided: July 29, 2022

J. Kevin Fee (James Hamilton, Raechel Keay Kummer, Jane W. Wise, Jason Y. Siu, on the brief), Morgan, Lewis & Bockius LLP, Washington, D.C., for Appellant;

Eugene Novikov, (Joseph C. Gratz, Ragesh K. Tangri, Catherine Y. Kim, on the brief), Durie Tangri LLP, San Francisco, CA, for Appellees.

Before: Walker, Sack, and Carney, Circuit Judges.

Sack, Circuit Judge:

International Code Council, Inc. ("ICC"), a nonprofit organization that develops model building codes and standards, sued a for-profit competitor, UpCodes, Inc., for false advertising in violation of the Lanham Act, 15 U.S.C. § 1125(a), New York General Business Law §§ 349 and 350-a, and New York's common law of unfair competition. ICC alleges that UpCodes falsely asserted that its codes are always up to date, that its codes integrate all amendments enacted by local jurisdictions, and that it is the sole provider of such integrated amendments. The United States District Court for the Southern District of New York (Marrero, J. ) sua sponte and without notice converted the parties' pre-motion letters into a motion to dismiss and a response, and then granted that motion.

On appeal, we conclude that the district court erred by failing to provide ICC with notice and an opportunity to fully defend the sufficiency of its complaint. We reach the merits because the pleadings are before us, the parties have fully briefed all issues raised in the appeal, and we review a grant of a motion to dismiss de novo . We conclude that ICC adequately pled falsity as to UpCodes's assurances of accuracy, statements regarding integration of all amendments, and assertions of unique services. We also conclude that ICC sufficiently alleged the materiality of the challenged statements. We affirm the district court's decision only to the extent that it dismissed claims premised on UpCodes's promises that its customers would gain a "complete understanding" of relevant code, but we do so on different grounds from those relied upon by the district court.

BACKGROUND

Factual Background

Unless otherwise noted, "[a]ll facts are taken from plaintiff['s] complaint, and because plaintiff[ ] appeal[s] from an order granting a motion to dismiss, we accept all factual allegations in the complaint as true." Salazar v. King , 822 F.3d 61, 68 n.5 (2d Cir. 2016).

ICC is a nonprofit organization that develops model building codes, fire safety codes, plumbing codes, and other similar materials. It publishes updated versions of these codes—known as "International Codes" or "I-Codes"—every three years. Many state and local governments adopt these model codes into their statutes and regulations, establishing them as binding law within their jurisdictions. When a local government adopts an I-Code, it often does not publish the entirety of the code; rather, it codifies the code by reference and then publishes its own amendments. ICC also publishes "Custom Codes" that integrate these amendments into the I-Codes, to reflect the governing law in those jurisdictions. Although the public can view I-Codes free of charge, ICC covers the cost of developing codes by selling physical and electronic copies of the I-Codes and Custom Codes and by offering enhanced services that allow customers to access code commentaries and use tools such as highlighting, bookmarking, and annotation.

In 2016, defendants Garrett Reynolds and Scott Reynolds founded UpCodes, a for-profit company that directly competes with ICC. UpCodes's business model allegedly relies on "selling and giving away unauthorized copies of the I-Codes and the Custom Codes." App'x 27, ¶ 28. UpCodes allegedly charges their subscribers a premium to access versions of ICC's publications with integrated amendments.

As relevant to ICC's claims, UpCodes made three categories of statements on its website and Twitter account about its products: (1) representations relating to the accuracy of the codes available on UpCodes's website, including claims that its codes were "always up to date," App'x 33-34, ¶ 50, and that the website "provides a complete understanding of relevant material," id. at 34-35, ¶ 52; (2) statements relating to UpCodes's publication of codes with integrated amendments, including claims such as, "UpCodes hosts the adopted codes as enacted by the state or local jurisdiction," id. at 36, ¶ 54; and (3) statements relating to UpCodes being the sole source of codes with integrated amendments, including claims that UpCodes is the "only place where all the codes are kept up-to-date with all the amendments integrated natively into the code," id. at 34, ¶ 51.

ICC alleges that these statements were false and misleading. First, ICC claims that UpCodes's assertions of accuracy were false because its codes contained significant errors. These alleged errors fall into four categories: (1) scanning errors; (2) posting non-law, i.e., publishing I-Code material as law when it had not been adopted; (3) omitting law, i.e., failing to post I-Code material that had been adopted as law; and (4) failing to integrate various state and local amendments. Second, ICC claims that UpCodes's statements that it hosts codes as enacted by jurisdictions were false because of the errors relating to amendment integration. Finally, ICC alleges that UpCodes falsely advertised that it is the sole provider of integrated amendments when ICC also offers Custom Codes with integrated amendments.

Procedural History

On August 17, 2017, ICC filed a separate copyright infringement action against UpCodes in the United States District Court for the Southern District of New York, claiming that UpCodes infringed ICC's copyrights by posting the I-Codes and integrated codes that incorporated the I-Codes by reference. See Int'l Code Council, Inc. v. UpCodes, Inc. , No. 17 CIV. 6261, 2020 WL 2750636, at *4 (S.D.N.Y. May 27, 2020). After discovery was completed in that action, ICC moved for summary judgment, and UpCodes filed a cross motion for partial summary judgment. The district court denied both motions in May 2020.

On June 5, 2020, shortly after the denial of summary judgment in the copyright action, ICC filed this suit against UpCodes and its founders for false advertising in violation of the Lanham Act, 15 U.S.C. § 1125(a), and New York General Business Law §§ 349 and 350-a, and for unfair competition under New York common law. On June 15, 2020, the district court consolidated the false advertising action with the copyright action for pre-trial purposes only.

Prior to UpCodes's filing of a motion to dismiss and pursuant to Judge Marrero's published individual practices, the parties exchanged pre-motion letters—which were limited to three pages by those practices—outlining their arguments for or against dismissal. Instead of scheduling the post-letter conference called for by those same individual practices, however, on March 1, 2021, the district court sua sponte and without notice converted the parties' pre-motion letters into a motion to dismiss and opposition. Based on those three-page letters alone and without providing the parties an opportunity to file a motion and response, much less to be heard with full briefing, the court dismissed ICC's complaint in its entirety. See Int'l Code Council, Inc. v. UpCodes, Inc. , No. 17 CIV. 6261, 2021 WL 1236106 (S.D.N.Y. Mar. 1, 2021).

According to the district court, although ICC had adequately pled that UpCodes's representations of accuracy and completeness were false, those statements were "nonactionable puffery" because they were "exaggerated" claims "upon which no reasonable buyer would be justified in relying." Id. at *6-8 (internal quotation marks omitted). The court further concluded that ICC failed to plead falsity as to UpCodes's representations regarding integrated amendments, determining that those claims "are neither literally nor impliedly false" because ICC conceded that UpCodes's website does include "some but not all" integrated amendments. Id. at *6. Finally, the court determined that ICC had abandoned its claim that UpCodes made false statements about being the exclusive provider of codes with integrated local amendments. In their pre-motion letter, the defendants had argued that ICC did not adequately allege falsity because one of the statements touting UpCodes as "the only source of integrated amendments" was limited to "jurisdictions [that] do not provide integrated code books." Id. at *8. Based on ICC's pre-motion letter, the court determined that "Plaintiff d[id] not respond to this argument," and the court "consider[ed] it conceded." Id.

The court therefore dismissed all of ICC's false advertising claims under the Lanham Act and New York statutory law and dismissed ICC's New York common law claims for unfair competition claims because they "mirror the Lanham Act claims." Id. at *9 (internal quotation marks omitted).

DISCUSSION

On appeal, ICC argues that the district court erred by relying solely on pre-motion letters and dismissing its complaint without allowing the parties to brief the issues in the ordinary course. ICC also argues that the district court erred by holding that UpCodes's promises of accuracy were nonactionable puffery and by concluding that it failed to adequately plead the falsity of the other categories of statements. ICC further asserts that it adequately pled the materiality of challenged statements. For reasons given below, we agree with ICC on nearly all counts.

I. Standard of Review

We review the dismissal of a complaint for failure to state a claim upon which relief can be granted de novo . See Dane v. UnitedHealthcare Ins. Co. , 974 F.3d 183,...