Wednesday, February 01, 2006

Born in the USA, but not stamped here

Colgan v. Leatherman Tool Group, Inc., --- Cal.Rptr.3d ----, 2006 WL 45836 (Cal.App. 2 Dist.) (amended)

Leatherman labeled and advertised 22 multifunction tools as “Made in U.S.A.,” when in fact parts were manufactured outside the US. The trial court granted summary judgment to the class plaintiffs under California’s (say it with me) False Advertising Law, Unfair Competition Law, and Consumer Legal Remedies Act, awarding restitution, an injunction (which included a mandatory component requiring corrective advertising on Leatherman’s website and in California newspapers), and attorneys’ fees.

The California Business & Professions Code prohibits Made in the USA representations when the goods or any part thereof “has been entirely or substantially made, manufactured, or produced outside of the United States.” Even though Leatherman’s products were designed, processed, and assembled in the US, parts of the tools were still “substantially made, manufactured or produced" outside the United States” as a matter of law. Significant working parts were cast, stamped, formed, hardened, cut, forged, polished or machined in various foreign countries. Plier jaws cast in Mexico, which were used in 20 of the 22 products at issue, had “USA” stamped onto the jaws themselves. After the lawsuit was filed, Leatherman stopped stamping “USA” onto the plier jaws and changed its packaging to state “Made in U.S.A. of U.S. and foreign components,” but didn’t do anything about existing packaged inventory, and didn’t change its unqualified “Made in U.S.A.” advertising.

Leatherman offered a number of reasons why it didn’t violate the law; the court rejected them all. As noted above, the court declined to rely on the fact that the tools were designed in the US; not only is design not manufacturing, but “made, manufactured or produced” is disjunctive, so all parts of the definition must be satisfied in order to make a Made in USA claim.

Leatherman also argued that “substantially” should be measured quantitatively rather than qualitatively, and that the comparison should involve an objective measure such as domestic and foreign production costs or relative worker hours. Domestic and foreign production costs … I wonder which of those is likely to be greater, and why, and whether that has any relationship at all to why a seller might want to make Made in USA claims without actually making the whole product in the US. In any event, the court declined to adopt such a standard. Its determination was bolstered by the FTC’s 1997 inquiry into the meaning of Made in the USA claims, which found that consumers are likely to understand such claims as meaning “all or virtually all” US origin.

In an unusual move for a consumer lawsuit, Leatherman alleged that extrinsic evidence such as a consumer survey was required to prove its advertising deceptive. The court of appeals disagreed, holding that the evidence that components were manufactured abroad was sufficient to make Leatherman’s claims deceptive without further evidence. Under California law, the primary evidence of whether an advertisement is misleading is the words of the ad itself, compared to the actual facts. Leatherman cited various federal cases that had applied Lanham Act standards, requiring a consumer survey, to misleading claims under the Unfair Competition Law. But the federal courts simply had not applied the proper standard under California law, as several California appellate courts have already held.

Given the rest of the holding – that the tools were not entirely or substantially made in the US – the same result could have occurred under the Lanham Act, as “Made in the U.S.A.” is explicitly false. Ruling this way allowed the court to define “made” as a matter of law rather than trying to assess consumer understanding of the term. Generally, courts applying the Lanham Act are also willing to resolve the meaning of single words without a consumer survey; it’s only when a claim requires putting several concepts together that implicit falsity comes into the picture. Explicit and implicit claims are really on a spectrum, as even the most explicit claim depends on consumer context as well as ad context. The growing importance of “falsity by necessary implication” and “falsity by absence of any susbtantiation” in Lanham Act cases indicates that courts are struggling to recognize the ways in which all advertising depends on consumer interpretation. Sometimes, as here, we can be pretty sure what that interpretation will be, in which case there’s no good reason to put the plaintiff to the expense and risks of a survey, which itself is subject to the manipulations of the surveyor’s black arts.

The court did reverse the restitution award because there was no evidence to support the trial court’s computation of the amount awarded ($13 million, 25% of the average wholesale unit price per tool sold in California during the relevant period). Substantial evidence is required to support a restitution award, and, though it was plain that Leatherman could charge a higher price for Made in the USA-labeled tools, the exact amount of the price premium couldn’t be determined with the available evidence. Remand was necessary to allow recomputation, and the resulting recomputation of attorneys’ fees.

Question: Will federal courts in California stop applying Lanham Act standards to UCL claims in competitor lawsuits, or will they wait for the California Supreme Court to rule? It seems that there’s little justification for waiting, since California case law points all in one pro-plaintiff direction.

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