Wednesday, May 13, 2009

Presumption of causation saves Lanham Act claim

Champion Laboratories, Inc. v. Parker-Hannifin Corp., 2009 WL 1269624 (E.D. Mich.)

The Lanham Act is broader than the common law of product disparagement in a variety of ways. This case illustrates one having to do with presumptions of causation.

Champion claimed that Parker-Hannifin’s Racor division disparaged its fuel filter to GM in an effort to get GM’s business, which Racor had previously lost to Champion because Champion made a similar, but cheaper, version of Racor’s Duramax filter. Duramax is a GM turbo diesel engine. Racor was GM’s Original Equipment Manufacturer (OEM), meaning that Racor made the original fuel filters inserted into the Duramax engine at the factory. Champion got a contract with GM to furnish replacement Duramax filters to GM service providers, which Champion initially fulfilled by purchasing Racor filters. This, unsurprisingly, wasn’t very profitable for Champion, and Champion began to design its own Duramax filter, which was later patented. After extensive testing, GM approved Champion’s filter, and Champion started to use its own filters for aftermarket parts. Racor is still the OEM supplier.

After Champion stopped buying Racor filters, Racor sought to regain the aftermarket filter business. It learned that the only way to reverse GM’s decision was to show that Champion’s filter didn’t meet GM’s requirements, presented a safety risk, or was defective. GM was extremely concerned about the filters because GM had previously paid out $100 million in warranty costs to replace fuel injectors in Duramax engines before starting to use Racor’s filter. Thus, Racor’s sales team asked its engineers to test the Champion filter, looking for deficiencies. The Champion filter performed at least as well as the Racor filter in the usual tests. Racor engineers began looking for a test to show Racor’s superiority in filtering out ultrafine particles (smaller than four microns), damage from which had been the source of many warranty claims for GM (such particles can pass through the filter and damage the fuel injectors). However, there was no standard testing method to measure these small particles. One Racor engineer expressed concern that he wouldn’t be able to defend such an unprecedented procedure.

Ultimately, Racor used gravimetric testing, measuring the weight of particles that passed through the filter. They got “some pretty wild results” on Wix filters suggesting Racor’s superiority, and the engineer recommended that Racor not share the data with GM until they could “get the whole picture.” The sales team, which was meeting with GM that day, did not heed this caution, and even labeled the test results as head-to-head Champion v. Racor in its presentation. The sales team also suggested that other parts of the filter were difficult to service, subject to leaks, and otherwise inferior. As it turned out, the tests run on Wix filters gave very different results from the tests run on Champion filters (even though they were from the same manufacturer). In fact, Champion and Racor filters performed about indistinguishably on the gravimetric tests. There were also no leaks during testing.

In the face of these further results, Racor persisted in its campaign against Champion, highlighting its long and fruitful relationship with GM and its successful development of a Duramax fuel filter that filtered out contaminates smaller than four microns. It also asserted that Champion was infringing on Racor’s patents and stated that it had sued Champion and other competitors for patent infringement, as well as questioning the quality of the Champion filter. Indeed, Racor stated that in previous tests “competitive product failed and leaked fuel, posing a significant safety hazard,” though it later “expanded” on this to say that neither filter leaked during impact testing.

GM forwarded the presentation to Champion, which responded with test results of its own—and with a lawsuit alleging false advertising under the Lanham Act, trade disparagement, business defamation, and interference with contractual relations.

Racor “clarif[ied]” some of its claims to GM, among other things explaining the Wix/Champion differences and requesting that GM disregard the gravimetric test. Nonetheless, GM awarded Racor the aftermarket business “due to unknown validation risks and the past issues we have had on this product [GM] determined that it is too much of a risk to continue with the Champ design.” Legal input about another lawsuit also factored into GM’s decision. Neither party deposed GM about causation. Champion lost 60-80% of its fuel filter business as a result.

Racor argued that Champion couldn’t show a causal link between the alleged falsehoods and GM’s decision. Champion argued that, because the comparative statements at issue were literally false, it was entitled to a presumption of causation and harm sufficient to survive summary judgment. The court agreed.

Racor then contended that its presentation to GM wasn’t “commercial advertising or promotion,” because it was not sufficiently disseminated to the purchasing public. The requisite level of dissemination varies by industry. The market for Duramax fuel filters, designed specifically for GM, is “relatively small.” GM is, in essence, the market. Thus, the presentation was enough to trigger the Lanham Act.

Next, Racor argued that its statements weren’t factual, only opinion. According to Racor, results allegedly from testing showing “significantly lower efficiency”; claims that the lip seal “almost always … [gets stuck],” “is difficult to remove,” and may “allow the [maintenance] tool to scratch and damage the sealing surface”; claims that the o-ring design created the possibility of leaks; and so on were all illustrating potential problems relating to structural deficiencies. As the court pointed out, Racor was confusing opinion with factual speculation. Racor asserted facts, supposedly based on tests. The presentation purported to offer data, not personal beliefs.

Finally, Racor argued that Champion couldn’t prove literal falsity. Racor’s own internal emails from its engineers sufficed to create a jury issue. Among other things, the engineers wrote about “far different results” in the Champion filter tests compared to Wix and noted that “[I]t was dangerous to give GM these first day test results without us having an idea of the limitations of our test method and understanding the implications ….”

On trade disparagement/injurious falsehood, Racor argued that there was insufficient evidence linking the disparaging statements to GM’s decision. This state-law tort does not have a presumption of injury arising from literal falsity, so Champion could only rely on the time that lapsed between the presentation and the decision; though the decision may have been made soon after the presentation, that was insufficient to show causation, and Racor prevailed on summary judgment. Similarly, Racor succeeded on the argument that the business defamation claim couldn’t survive because Champion couldn’t show that Racor’s statements prejudiced Champion in the conduct of its business or deterred others from dealing with it. And finally, Champion’s interference with contractual relations claim failed because there was no proof of an underlying breach of contract.

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