The parties compete in the market for high-speed turbo
blowers used in waste water treatment plants.
Neuros was the first company to offer these in the North American
market, while KTurbo began selling two years later, with little success. In 2008, Neuros won a bidding contest in
Utah, while KTurbo came in third (last).
KTurbo’s CEO Lee prepared PowerPoint slides and tables accusing Neuros
of fraud in its claim to the Utah buyer that its blowers would achieve a “total
efficiency” “that Lee claimed, probably correctly, was unattainable.” His slides, aimed at the consulting engineers
who select and install blowers, alleged that Neuros engaged in “total
efficiency cheating,” and that its numbers were “impossible,” “unrealistic,”
and a “crime.”
Turbo blowers use a lot of expensive electricity. “Total efficiency” “is the ratio of input power
(electrical current) to output power (a specified volume of air blown by the
blower at a specified speed).” The
figure that the slide accused Neuros of claiming, 82.5%, appears to be
unattainable. But Neuros didn’t make
total efficiency representations.
Instead, it represented “wire power,” the ratio of an electrical current
to work. Total efficiency requires
considering other factors, like temperature and humidity, along with wire
power. KTurbo’s slides challenged some
of Neuros’s wire power claims, but the challenges were based on computational
errors and incorrect assumptions; Lee eventually admitted that the wire power
claims implied at most 76% total efficiency, which apparently was attainable. Though KTurbo’s expert argued that Neuros
overclaimed its efficiency by 2-7%, that didn’t make its accusations substantially
truthful, since KTurbo claimed overstatements from 15-26%.
This presentation, which was made to
engineering firms, published on a KTurbo website, and sent to sales reps,
nonetheless failed to move any business from Neuros, despite KTurbo’s vow to
“break” and “terminate” Neuros. Neuros sued for violations of the Lanham Act, the Illinois
UDTPA, and defamation. After a bench
trial, Neuros won the defamation claim, with an award of $10,000 in general
damages and $50,000 in punitive damages.
KTurbo argued that it had a qualified privilege to make the
false statements, but the privilege doesn’t apply if a statement is made with
knowledge of its falsity or with reckless disregard for the truth. “KTurbo was warned repeatedly, not only by
Neuros but also by disinterested sources, that its accusations were false; it
ignored the warnings and refused to investigate the truth of the accusations.
Its conduct was not only disreputable but reprehensible.”
As for the punitive damages, there was no evidence of actual
injury, but defamation per se is an exception to the general rule “no injury no
tort.” And accusations of criminal fraud
constitute defamation per se. “It's hard
to imagine a more damaging accusation to make against a business.” Defamation per se entitles a plaintiff to
general compensatory damages and, in cases of gross negligence or worse,
punitive damages. Yet what is there to
compensate here? Judge Posner explains:
[T]here can never be assurance that
an accusation, however groundless, is not believed by someone, and doubtless
employees or sales reps of Neuros had to answer questions put to them by
consulting engineers, and perhaps even by shareholders of the parent companies,
concerning Lee's inflammatory accusations. So a modest award of damages, though
not based on evidence (what kind of “evidence” would enable an accurate estimate
of the type of cost that we've suggested Neuros incurred from the defamation?),
can reasonably be thought compensatory. The judge may have pulled the $10,000
figure out of his hat, but the figure is appropriately modest, considering that
a single high-speed turbo blower costs more than $100,000 and that [Neuros]
sold some 500 of them in the first few years of its existence.
He continued that $50,000 was too little in punitive damages. KTurbo’s
conduct was outrageous, and it was a “substantial” company. The district judge may have been concerned
that more than a slap on the wrist would have run afoul of the Supreme Court’s
due process/punitive damages cases. But
those cases merely find a presumption
against big multiples, which can be rebutted when the compensatory damages
award is very small. The gravity of the
injury is only one consideration in determining punitive damages; deterrence
also matters, and this award might not be a big deterrent, “considering the
potential gains to KTurbo had it succeeded in expelling its foremost competitor
from the North American market. It should consider itself fortunate that Neuros
hasn't challenged the adequacy of the punitive-damages award.”
Judge Posner turned to the appeal of the dismissal of the
Lanham Act claims. Without provable
injury, general damages were unavailable under the Lanham Act, as was trebling
of actual damages. But the Act permits injunctions
along with fee awards in “exceptional cases,” including especially egregious
violations of the law.
“Without meaning to prejudge the determination on remand, we
point out that KTurbo persisted in its false representations to the engineering
community concerning Neuros's blowers even after the suit was filed and
compelling evidence was presented that the representations were false.” Though KTurbo’s argument that it wasn’t
engaged in advertising or promotion was a “respectable” argument, the part of
its defense that went to non-falsity was “objectively unreasonable.”
In First Health Group Corp. v. BCE Emergis Corp., 269 F.3d
800 (7th Cir. 2001), the court stated (note Judge Posner’s careful avoidance of
the word “held”) that “commercial advertising or promotion” is limited to
“promotional material disseminated to anonymous recipients.” This over-stringent language has been followed
by a number of district courts, but Judge Posner said that the appellate cases “do
not hold that ‘advertising or promotion’ is always limited to published or
broadcast materials—an interpretation that would put us at odds with all seven
other federal courts of appeals to have considered the issue.” First
Health evinced no intention to create an intercircuit conflict (comment:
other than the words it used, I guess?).
The Seventh Circuit cases at the appellate level finding no advertising
or promotion involved (1) three person-to-person communications at trade shows
and (2) letters to the plaintiff’s customers threatening suit for patent
infringement.
So, we now learn that a “classic advertising campaign” isn’t
the only form of marketing covered by the Lanham Act. Rather, we need only “some medium or means”
through which the defendant disseminated information “to a particular class of
consumers.” The required amount of
dissemination varies by industry. “If ‘advertising
or promotion’ just meant ‘advertising,’ then ‘promotion’ would do no work in
the statute.” But we’re used to
redundant language in statutes, so more important is that “there are industries
in which promotion—a systematic communicative endeavor to persuade possible
customers to buy the seller's product—takes a form other than publishing or
broadcasting.” So here, where KTurbo
made presentations to most of the “de facto customers,” the engineers who act
as the purchasers’ agents, in the market.
Its negative ads reached fewer people than a conventional campaign would
have, but that was because the market was smaller. Anyway, the type of “road show” KTurbo put on
is “a common method of promotion.” And
some of the false statements were also posted on a KTurbo website: “methods of
advertising and promotion are changing with innovations in communications
media; they are no longer, if they ever were, confined to newspaper and
magazine ads, radio and television commercials, and billboards.”
The district court ruled against Neuros in part because “there
is no evidence that the statements at issue were presented to any members of
the general public.” But no one would
expect that of ads for high-speed turbo blowers, or indeed of ads for almost
anything, since rarely is the true market for a product “314 million
individuals and millions of firms.” “There
is no basis for limiting the Lanham Act to advertising or promotion directed to
the general public, and the case law does not do that.” (Look, I could snark or ask whether this
should have gone en banc, but the “anonymous” standard was poorly reasoned to
begin with, and district courts largely felt bound by it; I’m just glad it’s
gone.)
Thus, the Lanham Act and parallel UDTPA claims shouldn’t
have been dismissed.
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