Tuesday, August 24, 2010

Cherry-picking wood leads to affirmed injunction

Osmose, Inc. v. Viance, LLC, --- F.3d ----, 2010 WL 2977988 (11th Cir.)

Viance issued press releases expressing serious safety concerns about wood treated with Osmose’s copper-based wood preservative, MCQ. Osmose sued for false advertising, arguing that Viance’s studies didn’t support the broad safety claims in the ads. Viance counterclaimed for false statements about MCQ. The district court granted Osmose’s motion for a preliminary injunction and denied Viance’s motion; Viance appealed only the injunction entered against it. The court of appeals affirmed in part and remanded to modify the injunction in light of First Amendment concerns.

The parties compete in the wood preservative market. Viance sells ACQ, which has copper solubilized in an alkaline solution. It was the dominant product in the early part of the decade, and at that time, Osmose licensed the technology from Viance. Osmose then developed a competing product using micronized copper suspended in solution, MCQ. “Osmose has obtained certification from the ICC Evaluation Service--an association that issues evaluation reports for building products and material to determine whether they comply with model building codes--for its MCQ product, but MCQ has not been certified by the America Wood Protection Association (AWPA). Viance's ACQ is approved by both organizations.” MCQ began to draw market share from ACQ, and Viance began to test it.

Viance believed that the copper in MCQ didn’t penetrate wood in sufficient quantities tp protect against microorganisms that produce soft rot. It used scanning electron microscope (SEM) testing to show lower copper concentration in the cell walls of MCQ-treated wood, though the Viance employee who performed the testing concluded that the long term performance implications of this finding were unknown. Viance also engaged in field stake testing, an accepted method of testing wood preservatives’ effectiveness. A wood scientist at Mississippi State University concluded that the MCQ stakes were performing poorly, but recommended additional data. Viance then hired a PI to search central Florida for in-use MCQ-treated posts. The firm visited 18 sites and interviewed numerous retailers and builders, none of whom had experienced or heard of any problems with premature decay in MCQ-treated products.

Viance continued to search, and discovered posts allegedly showing premature decay in Baton Rouge, Louisiana. Viance hired Timber Products Inspection, Inc., an independent company that inspects and tests wood products, to test eleven posts it chose from the Baton Rouge site. Timber Products rated the posts as 9 or 9.5 on a 10 point AWPA scale of soundness in which 10 represents sound wood and 0 represents total failure, noting that its report shouldn’t be considered acceptance or rejection. Viance also had 45 posts from Alpharetta, Georgia tested. On visual inspection, twenty-six posts rated a 10, eleven rated a 9.5, five rated a 9, two rated an 8, and one rated a 7. Of the fourteen posts subjected to further examination, four posts rated a 10, five posts rated a 9.5, two posts rated a 9, two posts rated an 8, and one post rated a 7. Over the course of its search, Viance inspected roughly 530 MCQ-treated posts.

Viance then issued two press releases titled: "Decaying 4x4 Posts Confirm Performance Concerns with Micronized Copper Wood Preservatives" and "Hidden Danger in Your Backyard." Statements included: "Findings on 4x4 posts at residential locations reveal dramatic evidence that wood treated with micronized copper preservative (MCQTM) is decaying more rapidly than anticipated." Safety-related statements included: “The decay, verified by Timber Products Inspection (TPI), is considered unacceptable for providing long-term structural integrity for residential and commercial uses" and " ... the severity of the decay on these micronized copper-treated posts raises alarming consumer safety concerns about structures built using micronized copper treated wood." Viance also sent an email with the subject line "Is a Treated Wood Lawsuit in Your Future?" containing the statement: "the safety of your customers and clients is at stake if your projects' support structures are being built with Micronized treated wood that cannot adequately resist decay."

Osmose responded with a press release criticizing Viance’s studies. Timber Products also issued a press release clarifying its role and the limitations of its report, rather pointedly noting, among other things, that Viance didn’t give it a random sample to test and that its report shouldn’t be used to make unsupported generalizations. Osmose then sued.

After a hearing, the district court issued an injunction that, among other things, allowed Viance to publish the results of its studies/tests, but barred it from claiming or implying that those studies demonstrate that structures using MCQ-treated wood are unsafe, pose a threat to consumers, or are structurally unsound, or that micronized copper preservatives are defective or less effective than solubalized copper preservatives. Viance was not allowed to draw its own conclusions about what the studies indicate and attribute those conclusions to the studies unless the data clearly supported those conclusions: any conclusions attributed to the studies had to be stated by the studies themselves or readily apparent from the data. Viance could not indicate or imply that conclusions or opinions were verified or endorsed by Timber Products.

The court of appeals reviewed the literal falsity ruling for clear error and upheld it. These were “tests prove” or establishment claims, as indicated by Viance’s repeated use of the term “findings.” The burden of proof on Osmose was to demonstrate that the tests didn’t support the conclusions Viance drew from them.

Viance argued that its statements were truthful fact (the findings show premature decay) combined with non-actionable opinion (this raises safety concerns). The court of appeals disagreed. Even in isolation, these purported opinions might be reasonably interpreted as more than opinion. “Representations that the use of a particular product ‘poses a considerable safety hazard’ because of a risk of failure or that structures built with micronized copper-treated wood might be at risk ‘because the wood may be subject to early failure and possible collapse’ arguably are reasonably interpreted as more than subjective statements regarding the efficacy or superiority of a product. Instead, they can be viewed as expressing an objective risk of serious consequences that fairly implies a basis for that statement.” These claims arguably could be judged true or false based on empirical testing, as Viance in fact attempted.

The court of appeals didn’t decide the issue, though, because the context in which the statements appeared made it clear that these were unambiguous establishment claims, not mere opinion. They were generally made in the same sentence as a reference to Viance’s “findings,” which referred to the Timber Products reports. And some statements weren’t even fairly subject to Viance’s parsing, such as “the severity of the decay on these micronized copper-treated posts raises alarming consumer safety concerns about structures built using micronized copper treated wood” and “[o]ur findings show that micronized copper-treated wood will lead to problems with structural integrity.” These were straight-up establishment claims.

Likewise, the court of appeals upheld the finding that these claims were literally false because Viance’s broad conclusions weren’t adequately supported by the tests. First, Viance never inspected structures built with MCQ-treated wood, only fence posts, lot markers, and stakes. Second, “Viance had to go to considerable trouble to find any posts showing decay in its in-service survey, and ultimately only found that thirteen of the 530 MCQ-treated posts it inspected were rated a 9.0 or lower.” Such a low percentage did not support broad generalizations about the integrity or safety of structures built with MCQ-treated wood. Third, the reports were specifically qualified as not supporting any conclusion about physical quality and performance.

Viance argued that field stake testing is a standard industry measure used to test wood preservatives and that the posts tested were the same type used to build structures. Because the key issue in testing wood is contact with the ground, it argued, conclusions about structures were justified. The court of appeals was uncertain of the district court’s first rationale. If the district court meant that the particular tests performed didn’t purport to indicate that the level of decay revealed indicated structural weakness or safety concerns, that was not clearly erroneous. Viance’s tests didn’t assess the affect of the decay on the structural integrity of the wood, though such a test was available.

Turning next to the percentage of posts affected, Viance argued that the district court erred in calculating the percentage, because it didn’t have all 530 MCQ-treated posts analyzed. It calculated that of 56 posts analyzed, 30 rated 9.5 or lower, or 54% showed some decay, which was large enough to support serious safety concerns. There were four parts to the district court’s reasoning: the threshold rating at which a post should be counted as having significant decay, the number of posts decayed under that standard, the number of posts comprising the total sample, and whether the resulting percentage of decayed posts supports a conclusion of serious safety concerns. Viance didn’t support its contention that anything less than a perfect ten meant decay indicative of serious safety concerns. Using 9.0 as the threshold rating wasn’t clearly erroneous, given that the rating system is subjective and that there was testimony that a rating under 10 was not necessarily less than sound.

Despite a potentially incorrect calculation of the number of posts with a 9.0 rating or lower, the counting error was not significant. The district court didn’t clearly err in taking 530 as the sample size, given that Viance spent substantial time and resources to find decaying MCQ-treated posts without much luck. On the record, “the district court was certainly not obligated to use the fifty-six posts that Viance specifically identified as showing sufficient signs of decay to warrant further testing as the total sample size for the survey.” Viance argued that some of the 530 posts it examined were encased in concrete or otherwise not amenable to further testing, but produced no evidence about the percentage of inaccessible posts. Thus, even using a higher number of decayed posts, the percentage decayed was only 18/530 or 3.4%.

The key link in the causal chain is whether this percentage (or 2.45% as the district court calculated) supports the conclusions in Viance’s ads. A professor of wood science and technology at Michigan State testified that his study of MCQ showed that 2.9% of posts had “issues,” which made him conclude that MCQ was a “robust, very good wood preservative.” As a result, the district court didn’t clearly err in concluding that the percentage was too low to support the safety concerns in the ads.

Finally, Viance argued that the district court shouldn’t have relied on qualifying language in the Timber Products reports and its own employee’s report on field tests, especially since the VP of Timber Products testified that he had no problem with Viance drawing conclusions about micronized copper based on the reports. The court of appeals disagreed. The qualifications “undermine[d] the breadth of the conclusions that Viance seeks to draw.”

The district court also found that Viance’s statements asserted that Timber Products shared Viance’s concerns: "The decay, verified by Timber Products Inspection (TP), is considered unacceptable for providing long-term structural integrity for residential and commercial uses." Viance argued that this was literally true: Timber Products verified the decay, and Viance then drew the conclusion. The court of appeals noted that the literal falsity/implicit falsity line is not always clear, and a district court’s findings will be upheld if not clearly erroneous. There was no clear error here. The ads relied “heavily and repeatedly” on the independence and reputation of Timber Products, and several times unambigously stated that Timber Product’s findings raised serious concerns. Nor did the district court clearly err in finding literal falsity: Timber Products stated that its reports shouldn’t be considered as acceptance or rejection of the physical quality of the wood. According to a witness from Timber Products, “[it] cannot conclude and has not concluded that micronized copper treated wood treating systems, including MCQ, are not as effective and reliable as any other major wood preservative treating system." Moreover, had Timber Products been aware of Viance’s intended use of its reports, it wouldn’t have performed the tests for Viance.

Viance challenged the materiality of the Timber Products statements. The court of appeals found materiality “self-evident,” because the statements served as verification and endorsement of the concededly material safety and efficacy claims. “[T]he heavy reliance on Timber Product's independence and reputation enhances the likelihood that misrepresentation would influence purchasing decisions.”

Viance also argued that the district court erred on the other preliminary injunction factors. The district court found a likelihood of irreparable harm without applying any presumption, even though literally false comparative statements have often been presumed irreparably harmful, because of uncertainty over the effect of eBay. On their face, the statements would likely cause irreparable harm because they represented serious indictments of the safety of Osmose’s products that would likely be remembered by consumers. Also, Viance’s stated goal was to put Osmose out of business. The court of appeals declined to decide whether eBay ended the presumption of irreparable injury, because the district court didn’t abuse its discretion in any event. The inference of harm to Osmose’s goodwill and market position was reasonable, given the seriousness of the claims.

Viance argued that harm was unlikely because the intended audience of the advertisements was industry professionals. Given that one release was titled "Hidden Danger in Your Backyard," the court of appeals concluded that the target audience for the advertisements was not solely industry professionals. Moreover, the ads could also reasonably affect the decisions of companies that supply lumber to consumers. Although pressure treated wood producers issued a letter and press release urging Viance to drop its campaign, that did not, as Viance contended, demonstrate that the target audience wasn’t confused or influenced by the ads. “The fact that certain industry members saw through these ads does not indicate that the purchasing decisions of sellers of pressure treated lumber or ultimate purchasers of pressure treated lumber would not be negatively influenced by these ads.”

The district court found the balance of harms weighed in favor of the injunction. The court of appeals found no abuse of discretion. Given the scope of the injunction, any harm to Viance is limited. Viance can participate in the scientific debate, because it can still publish the results of its testing and conclusions stated in the studies or readily apparent from the data. The injunction was not likely to shift market perception against Viance, as Viance argued; stopping the ads wouldn’t disparage Viance’s product or inappropriately bolster Osmose’s.

The district court further found that the public interest favored an injunction because consumer confusion or deception harms the public. Viance argued that “the free flow of commercial and non-commercial speech on topics of consumer safety” favors the public interest, but enjoining only unsupported statements doesn’t hinder that free flow.

The court of appeals agreed, however, that the district court abused its discretion by enjoining certain statements about Osmose’s certification, because it neither identified nor analyzed any Viance ads to that effect. Viance had sought a preliminary injunction about Osmose’s own statements about certification, claiming a false implication that the technology was EPA-certified. The district court held that Viance failed to demonstrate literal falsity or misleadingness. However, it never linked this finding to its decision to enjoin Viance from claiming that Osmose was not properly certified (I’m leaving out some details of what counts as “properly”). This portion of the injunction was vacated, though the court of appeals specifically noted that, if Viance had made such statements (presumably in commercial advertising or promotion) the district court could revisit the issue.

Finally, Viance argued that the injunction was an unconstitutional prior restraint because by its terms it could apply to protected noncommercial speech: petitioning the government, publishing scientific papers, arguing before certification organizations, or even giving testimony in this litigation. The court agreed and remanded for the injunction to be limited to statements made in commercial advertising and promotion. Osmose disavowed any intent to apply the injunction to protected noncommercial speech, and it hasn’t been enforced outside of advertising and promotional statements, but the literal terms bar such claims in any setting. A narrower injunction would protect Osmose’s goodwill and market position.

Comment: It's interesting that this is a case about press releases, given the court's First Amendment solicitude; the court takes as a given that press releases are commercial advertising or promotion--which I think is right, but might give at least some of the Justices who wrote in Nike v. Kasky fits.

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