The Greatest Article Ever Written on Puffery!

Though the puffery concept's roots lie in contract law, the passage of the Dodd-Frank Act and the strengthening of the nation's efforts to stop securities fraud has increased the importance of puffery as a part of the legal vernacular of business. Puffery exists somewhere between basic claims about a product's qualities, and outright lies about the same product. In a publicly traded corporation, landing on the wrong side of the line can result in liability for securities fraud. The question then, is when does puffery cross the line into fraud?

Cases on “puffery” tend to hinge on what is reasonable for a consumer to believe, or in the investor context, what is reasonable for a company spokesperson to say. These are distinct ways to analyze the same concept, but ultimately each comes down to the kinds of evidence needed to demonstrate the other party's knowledge and intent.

Thankfully for the cheeky-but-bold proclamation that forms the title of this piece, interpretations of what is and is not puffery have repeatedly coincided with interesting pop culture vignettes to allow for what may actually be the greatest article ever written on puffery.

Jet Puffery: Contract Roots In Leonard v. Pepsico

One of the most famous uses of the term “puffery” comes from the case of Leonard v. Pepsico, Inc., 88 F.Supp.2d 116 (S.D.N.Y. 1999), aff'd 210 F.3d 88 (2d Cir. 2000). The case is one now widely read by law students in contracts classes in part because it demonstrates the perils of unintentionally making a contract offer and in part because it is notoriously entertaining. The case grows from a 1990s-era promotional campaign by Pepsi, in which one could earn “Pepsi Points” by purchasing Pepsi products, and exchange those points for “Pepsi Stuff” from a catalog, including clothing, accessories and furniture. One of the commercials for the promotion, clearly targeted at a young audience, featured a young man donning Pepsi-branded merchandise, with a pause at various intervals to show the cost in Pepsi points for each item. The young man proceeds to fly to school in a Harrier jet, and in the landing process, he wreaks minor havoc on the school grounds. He touches down on the schoolyard, opens the cockpit, and quips, “Sure beats the bus.” Here the commercial once again pauses to indicate that the jet costs 7 million Pepsi points. Inevitably, someone in “real life” managed to acquire 7 million Pepsi Points, and proceeded to attempt to order a Harrier jet by writing it into the catalog's order form. Pepsi's failure to provide the jet prompted the suit.

While the opinion is as famous for Judge Kimba Wood's description of the commercial and breakdown of the humor as it is for its jurisprudence on the subject of contract offers, it is discussed here because it states that “a reasonable viewer would understand such advertisements as 'mere puffery,' not as statements of fact ' and refrain from interpreting the promises of the commercial as being literally true.” Ultimately, the humorous nature of the commercial, combined with the $23 million cost of a real Harrier jet led the court to find that a reasonable person would not believe that the commercial constituted an offer.

Here, the puffery distinction saved Pepsico approximately $23 million ' no meaningless sum, even to a company the size of Pepsico. Had the commercial been less clearly intended to be a joke, or had the number of Pepsi points jokingly suggested to purchase a Harrier jet been more in line with the actual cost of the jet, the case presumably could have come out differently.

Battlefield Puffery: The Modern Investor Application in Kelly v. Electronic Arts, Inc.

Fast forward 15 years to 2014. In the interim, a massive economic crisis occurred reverberating in a public outcry for legislation. Congress thereafter sought to strengthen the SEC's enforcement mechanisms via the Dodd-Frank Act, and created and implemented a statute that provides a reward for those who report publicly traded corporations that mislead investors. Though the concept of puffery has its roots in contract law, it has developed newly sharpened teeth in the realm of financial regulation and litigation. A publicly traded company's communications with its investors must now be careful not to step over the line from puffery into outright falsehood.

Like Pepsico, the the case of Kelly v. Electronic Arts, Inc., 2014 WL 5361641 (N.D.Cal.), *7 (N.D.Cal., 2014), touches on matters related to popular culture. In 2013, the latest installment of EA's popular video game series “Battlefield” launched with a number of technical problems. The game's technical failures frustrated customers and incurred the online wrath of the notoriously unforgiving video game enthusiast commentariat. Reviews for the game were generally bad, and sales were significantly weaker than expected for a game that was well known to be one of EA's biggest money- makers.

Of course, poor product launches and weaker-than-expected sales are not normally the basis for a lawsuit. Indeed, the suit is based not the poor launch, but EA's confident statements in advance of the launch that it had taken the proper precautions to prevent such a bug-riddled product landing on store shelves. EA indicated that it had worked closely with Microsoft and Sony, manufacturers of the primary devices on which Battlefield would run, to ensure that bugs were minimal. It also stated repeatedly that it had “de-risked” the game's code, and even referred to previous problematic entries in the series to indicate that it was “not going to repeat that mistake.” After the buggy launch and general perception of market failure, EA's investors brought suit claiming that EA had in fact repeated its mistakes, and misled investors into providing support for those repeated failures.

Again, the judge found the statements to be puffery, and not misstatements of fact. Using a rubric developed in a previous California case, the Kelly court noted that “[a] projection of optimism or statement of belief is a 'factual' misstatement ' if: 1) the statement is not actually believed; 2) there is no reasonable basis for the belief; or 3) the speaker is aware of undisclosed facts tending seriously to undermine the statement's accuracy. Id . at *7 (quoting Kaplan v. Rose , 49 F.3d 1363, 1375 (9th Cir.1994)).

The Takeaway: Specificity, Knowledge and Reasonableness

The takeaway then, is that in the investor communications context, one of the most important distinctions between non-actionable puffery and a sort of unreasonable, actionable puffery is the knowledge of the speaker. What might ordinarily be run-of-the-mill puffery can be transmogrified into large scale liability for a company where the company representative knows what he or she says is not reasonably supportable. Unlike in Leonard , where the focus was on the reasonable interpretation of a message that a cola company was actually offering a sensitive military aircraft for seven figures in Pepsi points, the Kelly case focuses on the reasonableness of the speaker given the speaker's knowledge of facts not known to the recipient.

This is more than a law school lesson in subjective versus objective analysis; the lesson here is related to evidence. While the cases described above both lead to findings of puffery, with different evidence, the cases may have turned out differently. In Kelly in particular, the evidence would have benefitted from greater specificity, given that
“[r]epresentations about forecasts are material to a reasonable investor, and may constitute material representations when they are sufficiently specific. For example ' statements that defendants were optimistic about future growth in the market for a particular product were material. ' ” S.E.C. v. Loomis, 969 F. Supp. 2d 1226, 1236 (E.D. Cal. 2013) (citations omitted, emphasis added). As further demonstration, the same court found that statements involving specific interest rate returns on financial products were sufficiently specific to overcome an assertion that corporate statements were simply puffery or corporate optimism. Id.

This is consistent with our own practice. When approaching the SEC and Justice Department officials with a case under the Dodd-Frank Act's investor protection provisions, the questions a plaintiff must answer are primarily related to two things: materiality (is the alleged statement actually important to an investor's decision-making process?) and scienter (did company officials have reason to believe the statements were false or misleading?).

To use the Kelly case as an example, this means that had the plaintiffs been able to marshall evidence that EA had not actually worked with Microsoft or Sony in any meaningful capacity, that the game's developers had not taken significant efforts to “de-risk” the game's engine, or perhaps even that the bugs in the launch were substantially the same bugs in the previous iterations of the series, then the decision might have come out differently. This would mean that the statements were not simply “projections of optimism,” but rather statements that the speakers had reason to believe were false.

These evidentiary lessons should be a guide in developing or defending cases like these going forward. The power of puffery has only expanded since the days when preening teenagers flew harrier jets to school. The concept has reached the litigation battlefield repeatedly, including through the virtual battlefield of ' well, Battlefield. The key is to watch for statements that are specific, to probe speakers based on their knowledge at the time they made their statements, and to shore up the message recipient's reasonableness in interpreting the message based on its context.

The statement that a coffee shop makes the “world's best cup of coffee” is self-evidently subjective and lacking in specificity (e.g., best according to what authority?). The barista likely lacked any specific information suggestinvworld's greatest, and certainly had no reason to believe that the bold proclamation would be taken as literal truth. And, of course, Will Ferrell's iconic Elf character should be no one's model for reasonableness.

R. Scott Oswald is the managing principal and Adam Augustine Carter is a principal of The Employment Law Group, P.C., based in Washington, DC. Mr. Oswald handles all manner of employment discrimination cases, including those litigated under Title VII and the Fair Labor Standards Act. Mr. Carter works closely with clients who suffer discrimination or retaliation under civil rights and whistleblower laws.

There is a moment in the modern Christmas film classic “Elf” in which the titular character, a full-grown man who believes himself to be an elf from the North Pole, enters a seemingly run-of-the-mill coffee shop in New York City after passing what most would consider a forgettable neon sign on the facade of an equally forgettable storefront boasting “world's best cup of coffee.” The “elf” runs into the shop and excitedly shouts to everyone in the shop, “You did it! Congratulations! World's best cup of coffee! Great job everybody!” The employees and patrons in the shop simply gaze at the display of enthusiasm with befuddled expressions.

Although this moment in the film is likely intended to show the viewer the comic extent of the character's naivet', it perhaps unwittingly provides a perfect demonstration of the precarious relationship between a company's boasting and the potential impact on those to whom it crows. In the parlance of the law, communication of this type has come to be known as “puffery.” The word “puffery” is a gem of the judicial lexicon. It is one of those rare words that holds enough legal significance to bring down major corporations, but sounds altogether silly when used in conversation. The brilliance of it lies in the fact that its silliness makes it a unique word, ripe for molding through the legal process.

Puffery and the Law

Though the puffery concept's roots lie in contract law, the passage of the Dodd-Frank Act and the strengthening of the nation's efforts to stop securities fraud has increased the importance of puffery as a part of the legal vernacular of business. Puffery exists somewhere between basic claims about a product's qualities, and outright lies about the same product. In a publicly traded corporation, landing on the wrong side of the line can result in liability for securities fraud. The question then, is when does puffery cross the line into fraud?

Cases on “puffery” tend to hinge on what is reasonable for a consumer to believe, or in the investor context, what is reasonable for a company spokesperson to say. These are distinct ways to analyze the same concept, but ultimately each comes down to the kinds of evidence needed to demonstrate the other party's knowledge and intent.

Thankfully for the cheeky-but-bold proclamation that forms the title of this piece, interpretations of what is and is not puffery have repeatedly coincided with interesting pop culture vignettes to allow for what may actually be the greatest article ever written on puffery.

Jet Puffery: Contract Roots In Leonard v. Pepsico

One of the most famous uses of the term “puffery” comes from the case of Leonard v. Pepsico, Inc. , 88 F.Supp.2d 116 (S.D.N.Y. 1999), aff'd 210 F.3d 88 (2d Cir. 2000). The case is one now widely read by law students in contracts classes in part because it demonstrates the perils of unintentionally making a contract offer and in part because it is notoriously entertaining. The case grows from a 1990s-era promotional campaign by Pepsi, in which one could earn “Pepsi Points” by purchasing Pepsi products, and exchange those points for “Pepsi Stuff” from a catalog, including clothing, accessories and furniture. One of the commercials for the promotion, clearly targeted at a young audience, featured a young man donning Pepsi-branded merchandise, with a pause at various intervals to show the cost in Pepsi points for each item. The young man proceeds to fly to school in a Harrier jet, and in the landing process, he wreaks minor havoc on the school grounds. He touches down on the schoolyard, opens the cockpit, and quips, “Sure beats the bus.” Here the commercial once again pauses to indicate that the jet costs 7 million Pepsi points. Inevitably, someone in “real life” managed to acquire 7 million Pepsi Points, and proceeded to attempt to order a Harrier jet by writing it into the catalog's order form. Pepsi's failure to provide the jet prompted the suit.

While the opinion is as famous for Judge Kimba Wood's description of the commercial and breakdown of the humor as it is for its jurisprudence on the subject of contract offers, it is discussed here because it states that “a reasonable viewer would understand such advertisements as 'mere puffery,' not as statements of fact ' and refrain from interpreting the promises of the commercial as being literally true.” Ultimately, the humorous nature of the commercial, combined with the $23 million cost of a real Harrier jet led the court to find that a reasonable person would not believe that the commercial constituted an offer.

Here, the puffery distinction saved Pepsico approximately $23 million ' no meaningless sum, even to a company the size of Pepsico. Had the commercial been less clearly intended to be a joke, or had the number of Pepsi points jokingly suggested to purchase a Harrier jet been more in line with the actual cost of the jet, the case presumably could have come out differently.

Battlefield Puffery: The Modern Investor Application in Kelly v. Electronic Arts, Inc .

Fast forward 15 years to 2014. In the interim, a massive economic crisis occurred reverberating in a public outcry for legislation. Congress thereafter sought to strengthen the SEC's enforcement mechanisms via the Dodd-Frank Act, and created and implemented a statute that provides a reward for those who report publicly traded corporations that mislead investors. Though the concept of puffery has its roots in contract law, it has developed newly sharpened teeth in the realm of financial regulation and litigation. A publicly traded company's communications with its investors must now be careful not to step over the line from puffery into outright falsehood.

Like Pepsico, the the case of Kelly v. Electronic Arts, Inc., 2014 WL 5361641 (N.D.Cal.), *7 (N.D.Cal., 2014), touches on matters related to popular culture. In 2013, the latest installment of EA's popular video game series “Battlefield” launched with a number of technical problems. The game's technical failures frustrated customers and incurred the online wrath of the notoriously unforgiving video game enthusiast commentariat. Reviews for the game were generally bad, and sales were significantly weaker than expected for a game that was well known to be one of EA's biggest money- makers.

Of course, poor product launches and weaker-than-expected sales are not normally the basis for a lawsuit. Indeed, the suit is based not the poor launch, but EA's confident statements in advance of the launch that it had taken the proper precautions to prevent such a bug-riddled product landing on store shelves. EA indicated that it had worked closely with Microsoft and Sony, manufacturers of the primary devices on which Battlefield would run, to ensure that bugs were minimal. It also stated repeatedly that it had “de-risked” the game's code, and even referred to previous problematic entries in the series to indicate that it was “not going to repeat that mistake.” After the buggy launch and general perception of market failure, EA's investors brought suit claiming that EA had in fact repeated its mistakes, and misled investors into providing support for those repeated failures.

Again, the judge found the statements to be puffery, and not misstatements of fact. Using a rubric developed in a previous California case, the Kelly court noted that “[a] projection of optimism or statement of belief is a 'factual' misstatement ' if: 1) the statement is not actually believed; 2) there is no reasonable basis for the belief; or 3) the speaker is aware of undisclosed facts tending seriously to undermine the statement's accuracy. Id . at *7 (quoting Kaplan v. Rose , 49 F.3d 1363, 1375 (9th Cir.1994)).

The Takeaway: Specificity, Knowledge and Reasonableness

The takeaway then, is that in the investor communications context, one of the most important distinctions between non-actionable puffery and a sort of unreasonable, actionable puffery is the knowledge of the speaker. What might ordinarily be run-of-the-mill puffery can be transmogrified into large scale liability for a company where the company representative knows what he or she says is not reasonably supportable. Unlike in Leonard , where the focus was on the reasonable interpretation of a message that a cola company was actually offering a sensitive military aircraft for seven figures in Pepsi points, the Kelly case focuses on the reasonableness of the speaker given the speaker's knowledge of facts not known to the recipient.

This is more than a law school lesson in subjective versus objective analysis; the lesson here is related to evidence. While the cases described above both lead to findings of puffery, with different evidence, the cases may have turned out differently. In Kelly in particular, the evidence would have benefitted from greater specificity, given that
“[r]epresentations about forecasts are material to a reasonable investor, and may constitute material representations when they are sufficiently specific. For example ' statements that defendants were optimistic about future growth in the market for a particular product were material. ' ” S.E.C. v. Loomis , 969 F. Supp. 2d 1226, 1236 (E.D. Cal. 2013) (citations omitted, emphasis added). As further demonstration, the same court found that statements involving specific interest rate returns on financial products were sufficiently specific to overcome an assertion that corporate statements were simply puffery or corporate optimism. Id.

This is consistent with our own practice. When approaching the SEC and Justice Department officials with a case under the Dodd-Frank Act's investor protection provisions, the questions a plaintiff must answer are primarily related to two things: materiality (is the alleged statement actually important to an investor's decision-making process?) and scienter (did company officials have reason to believe the statements were false or misleading?).

To use the Kelly case as an example, this means that had the plaintiffs been able to marshall evidence that EA had not actually worked with Microsoft or Sony in any meaningful capacity, that the game's developers had not taken significant efforts to “de-risk” the game's engine, or perhaps even that the bugs in the launch were substantially the same bugs in the previous iterations of the series, then the decision might have come out differently. This would mean that the statements were not simply “projections of optimism,” but rather statements that the speakers had reason to believe were false.

These evidentiary lessons should be a guide in developing or defending cases like these going forward. The power of puffery has only expanded since the days when preening teenagers flew harrier jets to school. The concept has reached the litigation battlefield repeatedly, including through the virtual battlefield of ' well, Battlefield. The key is to watch for statements that are specific, to probe speakers based on their knowledge at the time they made their statements, and to shore up the message recipient's reasonableness in interpreting the message based on its context.

The statement that a coffee shop makes the “world's best cup of coffee” is self-evidently subjective and lacking in specificity (e.g., best according to what authority?). The barista likely lacked any specific information suggestinvworld's greatest, and certainly had no reason to believe that the bold proclamation would be taken as literal truth. And, of course, Will Ferrell's iconic Elf character should be no one's model for reasonableness.

R. Scott Oswald is the managing principal and Adam Augustine Carter is a principal of The Employment Law Group, P.C., based in Washington, DC. Mr. Oswald handles all manner of employment discrimination cases, including those litigated under Title VII and the Fair Labor Standards Act. Mr. Carter works closely with clients who suffer discrimination or retaliation under civil rights and whistleblower laws.