General Steel Domestic Sales, LLC v. Chumley, --- Fed.Appx. ----, 2015 WL 4591924, Nos. 14–1119, 14–1121 (10th Cir. July 31, 2015)
Chumley formerly worked for General Steel, then founded Armstrong after an unfriendly parting. The parties compete to sell prefabricated steel buildings directly to consumers.
That’s where the lies began. One Internet posting purported to detail Armstrong’s community service efforts in the Middle East, offering quotations from the company’s Vice President of International Affairs, J.P. Remington, III. The problem? The charity didn’t exist. Neither did Mr. Remington. And the false claims didn’t stop with phony philanthropy: soon General Steel was in the crosshairs. Ads on Google, for example, claimed that Armstrong sold “General Steel” buildings. It didn’t. The company’s website claimed that Armstrong fabricates the steel it uses to assemble its buildings. It doesn’t. And one ad on Armstrong’s website—entitled “May the Best Building Win”—offered a side-by-side comparison of Armstrong’s and General Steel’s products and claimed that General Steel provided consumers with fewer options than, in truth, it did.
General Steel sued under the Lanham Act and the Colorado Consumer Protection Act, and here we find out that presumptions matter. The district court granted summary judgment on the state-law claims for failure to show harm, but granted an injunction and disgorgement of profits on the Lanham Act claims based on the statements that Armstrong fabricated its own steel; that Armstrong offered “general steel” buildings for sale; and that General Steel failed to offer pregalvanized steel or stainless fasteners for its buildings. The court of appeals affirmed.
The court of appeals heartily agreed that the statements at issue were literally false. Steel fabrication: Armstrong isn’t a steel manufacturer but purchases steel from others and then assembles it into buildings. Armstrong argued that its discussion of “each piece of steel we fabricate” was ambiguous, but it wasn’t. “General steel” buildings: Armstrong didn’t sell its rival’s products. Armstrong again argued ambiguity (say that three times fast), reasoning that its statement could also mean “Armstrong makes ‘general’ (i.e., all-purpose) steel buildings.” However, there was no credible evidence in the record that the term “general steel” is used in the industry to describe steel buildings sold by anyone else. (Note that we determine meaning here without resort to dictionaries or surveys!) Meanwhile, Armstrong’s ads included side-by-side comparisons between its products and those of General Steel, even using General Steel’s logo and sometimes capitalizin “General Steel.” “In this light, there’s just no doubt what Armstrong’s ads were talking about—or that they were literally false.”
And finally: Armstrong argued that its statements about providing “pre-galvanized secondary framing” and “stainless steel fasteners” where General Steel didn’t were literally true because Armstrong includes these items unless the customer declines them, while General Steel doesn’t include them unless the customer requests them. But Armstrong’s ads didn’t explain anything like that, for example by comparing “standard” features. Instead, they purported to compare available features, and thus were literally false. The evidence at trial showed that both companies provided these features at additional cost and that customers could choose whether to buy them.
Materiality: without deciding the appropriate burden or standard, the court of appeals held that the third set of false statements was “material under any conceivable standard,” using Armstrong’s own evidence at trial that “steel fasteners and pregalvanized framing were important to Armstrong’s brand, giving the company a competitive edge and improving the quality of its buildings.” The district court found that both “general steel” and fabrication of steel went to the products’ inherent qualities or characteristics and thus presumed materiality; the court of appeals saw no reason to find error.
Injury: the district court found that the literal falsity was willful and in side-by-side comparative advertising, and thus presumed injury to General Steel. Assuming, without deciding, that this presumption was appropriate, Armstrong failed to show that the presumption was unwarranted on the grounds that some of its false statements weren’t made in comparative advertising. True, they were all made on Armstrong’s expressly comparative “May the Best Building Win” webpage. But Armstrong argued that that two of the three statements were in small print after side-by-side columnar comparisons between the two brands, which is like a separate ad. The court of appeals was unimpressed. It wasn’t willing to split a single webpage in two.
Remedies: in calculating disgorgement of profits, the district court used a burden-shifting framework: General Steel had to prove Armstrong’s gross profits during the period of false advertising and Armstrong had to prove what part of those profits wasn’t attributable to its false advertising. Armstrong didn’t produce any such evidence. The district court used a procedure that fit well with the statute, which says: “In assessing profits the plaintiff shall be required to prove defendant’s sales only; defendant must prove all elements of cost or deduction claimed.” The cases Armstrong cited said that, “unless there is some proof that plaintiff lost sales or profits, or that defendant gained them, the principles of equity do not warrant an award of defendant’s profits.” “We don’t question the propriety of this principle, only its relevance when it comes to determining not whether monetary relief should be awarded but whether (as here) to employ the statutorily prescribed burden-shifting procedure to ascertain its amount.”
General Steel cross-appealed on its state law consumer protection claims. The district court granted summary judgment because General Steel didn’t have sufficient evidence of harm. Armstrong wasn’t required to show lack of harm to win on summary judgment. The differing results on the two claims show the importance of presumptions—but also highlight a continuing problem with state law/Lanham Act interactions, which is that courts apply the same standards to both most of the time and then randomly diverge, usually at the behest of the parties.