09/16/2014 10:31 am ET Updated Nov 16, 2014

Must a Business Tell Consumers About Competitors?

The federal Court of Appeals for the Second Circuit recently issued a preliminary injunction against the enforcement of a new Connecticut statute that restricted insurers and claims administrators from mentioning the name of or scheduling an appointment with an affiliated glass company unless they also give the name of a competing glass company in the area (Safelite Group, Inc. v Jepsen). Does this statute primarily protect consumers or competitors?

Safelite operates a national insurance claims management company and also has an affiliate, Safelite AutoGlass. They challenged the new Connecticut statute that became effective January 1, 2014. The pre-existing statute prohibited insurers and claims administrators from requiring repairs to be made at a specific shop and to give a notice on estimates of a right to choose where damage might be repaired. Safelite argued that the new statute violated the First Amendment as an impermissible restriction on commercial speech, and also asserted that it discriminated against interstate commerce.

The Court noted that there was no legislative history of consumer dissatisfaction but there were concerns by competing glass dealers. Several Connecticut legislators spoke of protecting local businesses when the Connecticut Insurance Department stated that the current law adequately protected consumers and that the new statute was unnecessary.

The Second Circuit stated that the regulation of commercial speech is subject to various levels review, depending on the circumstances. The trial court had viewed the new statute as simply an information disclosure law that rationally met that purpose. The Second Circuit determined that the correct standard of review was "intermediate scrutiny." Intermediate scrutiny requires that the regulation must address a substantial governmental interest and the regulation must not be overly restrictive. The Second Circuit distinguished regulations that mandated disclosures from those that restricted speech. Thus, requiring that products containing mercury to disclose the mercury content or requiring calorie content be disclosed on menus had been upheld. However, these situations involved a disclosure about the company's own product and not a competitor.

There was no indication that Safelite's current communications to consumers were false or misleading. While the government may have an interest in consumer choice, this is only a means to consumer satisfaction. Price is not an issue since insurance is paying for the repairs and Safelite provided a quality product. Connecticut could simply require an initial disclosure that consumers may choose their glass shop. However, the new statute in question requires the mention of a competitor and only applies to insurance companies with an affiliated glass shop. There is no general requirement in the new statute to provide consumers with the names of glass shops. Consequently, the Second Circuit, unlike the trial court, issued a preliminary injunction against the enforcement of the new statute pending additional legal proceedings.

There is considerable legal discussion concerning compelled speech, such as tobacco warning labels. Courts reviewing compelled speech require a substantial governmental interest be addressed in the least restrictive manner. Regulating false and deceptive advertising generally comes under a rational basis standard. Courts, however, consistently write of protecting consumers and not competitors. Hence, generally a business has no legal obligation to tell consumers about competitors.