Thursday, November 11, 2010

The line between product disparagement and defamation is easily crossed

Dorman Products, Inc. v. Dayco Products, LLC, 2010 WL 4342014 (E.D. Mich.)

Previous opinion discussed here. Dorman countersued Dayco for defamation, trade disparagement, tortious interference with prospective contractual relationships, and unfair competition/false advertising under state and federal law.

In 2009, Dorman launched a line of automatic belt tensioners for the automotive aftermarket. It alleged that all of its automatic belt tensioners comply with applicable Society of Automotive Engineers (SAE) standards, which are important to consumers. Dorman alleged that its tensioners “garnered immediate attention” in the market because they provided significant value at significantly lower prices than those of Dayco and other dominant suppliers. As a result, Dorman alleged, Dayco distributed a PowerPoint presentation claiming that Dayco’s tensioners conformed to exacting standards and that, tested under the same standards, eight of twenty Dorman tensioners failed to meet them.

Dorman alleged that Dayco’s testing was in-house and didn’t rely on SAE standards, but used its own specifications, which did not employ reliable scientific testing methodology or statistical analysis. However, the presentation was allegedly intentionally designed to mislead customers into believing that Dayco used applicable industry standards, including relevant SAE standards, which in turn was likely to influence customers’ purchase decisions.

Dayco also sued Dorman for trade dress infringement, false advertising, and unfair competition, alleging that Dorman’s tensioners are inferior to Dayco’s. Dayco sent out an email about the lawsuit to customers and industry publications, stating that Dayco believed Dorman imported its tensioners from China and that Dayco was concerned that Dorman’s designs would mislead consumers and affect Dayco’s reputation. Aftermarket News and Automotive Week/The Greensheet published stories repeating Dayco’s allegations.

In addition, Dorman alleged that an interview published on Dayco's homepage with Dayco President and SAE member Dennis Walveart, entitled "Differentiate Between Quality and Sub-Standard Parts", was part of an intentional pattern by Dayco to falsely convey that "lower cost, private label aftermarket parts" are of inferior quality to Dayco's "simply because they are less costly" than the original equipment manufacturers' name brands. (Sample statement: “[I]f a technician goes to a name brand, whether it's Dayco, which is ours, or Federal Mogul, or Gates, our competition, they can assure themselves that they're going to get a good quality product. They go to a private brand, not necessarily 100% guarantee that's going to be a good quality product.”) Dorman alleged that consumer research showed that this campaign had worked: “a market research firm focused on the automotive aftermarket industry, recently reported that consumers of aftermarket products perceive a quality difference between private label and name brands.”

Dayco moved to dismiss the defamation claim, arguing that the facts only supported a claim for trade disparagement under Pennsylvania law (a separate claim which Dayco did not move to dismiss), because the statements were directed at Dorman’s products, not at Dorman itself. In business defamation cases, courts look at whether the defendant made a statement that "clearly imputes, to the person to whom it refers, characteristics and conduct which are incompatible with the proper and lawful exercise of a business,” and "any language which unequivocally, maliciously, and falsely imputes to an individual or corporation want of integrity in the conduct of his or its business is actionable." Under Pennsylvania law, a statement about the quality of a company’s goods can cross the line from disparagement to defamation when the statement “imputes to the corporation fraud, deceit, dishonesty, or reprehensible conduct in its business in relation to said goods or products."

Statements about the inferiority of Dorman’s products couldn’t make out a defamation claim. Allegations of inferiority are “par for the course” and "the most innocuous kind of puffing," generally not capable of misleading the public. The email and the website interview, among others, were therefore not defamatory. This includes the China importation statement, even though Dorman alleged that this was "an accusation synonymous with inferior products and designed to scare consumers with visions of lead-tainted products, Chinese drywall, and cadmium-laced children's toys," as well as Dayco’s expressed concern that confusion over Dorman products would harm Dayco’s reputation as a provider of superior products.

However, statements that could be construed as suggesting that Dorman misrepresented product quality are actionable. Some of Dayco’s statements could be read to impute dishonesty or improper business practices to Dorman. The Powerpoint comparing Dayco’s “exacting standards” to Dorman’s allegedly defective products could suggest that Dorman “misled the public into believing that their products are in conformance with SAE standards when they are not. The statement further suggests that Dorman misrepresented the quality of its products because, according to Dayco, the products are defective.”

Moreover, some statements imputed an intent to mislead the public to Dorman, such as asserting that the resemblance between Dayco and Dorman products wasn’t a coincidence. Dayco argued that it only claimed that the products were misleading, not that Dorman intentionally misled customers, but the court was unconvinced. Asserting infringement of trade dress, noncoincidental similarity, and misleadingness to consumers “has the potential” to impute an intent to mislead to Dorman, which is enough to survive a motion to dismiss. This conclusion was bolstered by the Automotive Week story stating that Dayco accused Dorman of “intentionally deceiving purchasers by selling products with Dayco look-alike housing but that contain inferior quality and largely different types of internal parts.”

Thus, statements that went beyond puffing/inferiority claims survived the motion to dismiss, including statements in Dayco’s complaint in the other lawsuit. (I guess Dayco didn’t argue litigation privilege?)

Tortious interference: this requires that: 1) plaintiff had prospective contractual relationships; 2) defendant's purpose or intent was to harm the plaintiff by preventing the relation from occurring; 3) there was an absence of any privilege or justification on the part of the defendant; and 4) actual damage resulted from defendant's conduct. How do you plead (2), intent, after Iqbal and Twombly? Here, Dorman did little more than plead the elements and various conclusory statements, which was insufficient to survive a motion to dismiss. “The assertions by Dorman that Dayco's statements were ‘defamatory’, that Dayco engaged in unfair competition and that Dayco ‘maliciously interfer[ed] with Dorman's prospective contractual relationships’ are legal conclusions, which the Court is not required to accept.” Other than that, Dorman only had a subjective belief that Dayco intended to harm Dorman. “The statements made by Dayco, do not, on their face, establish, or even give rise to the inference, that Dayco intended to harm any prospective contractual relationship Dorman may have had. The statements could just as plausibly be seen as statements intended to gain an economic advantage over a competitor in the market.” Pleading facts consistent with liability was insufficient.

The court also found that Dorman failed to properly allege (1), a prospective business relationship, which required more than a mere hope—a reasonable likelihood or probability. Dorman might have alleged sufficient harm by alleging that “customers and prospective customers” had informed it that Dayco’s allegations had deterred them from purchases, but that wasn’t enough to allege a reasonable likelihood or probability that a contractual relationship would be formed.

Unfair competition under Pennsylvania state law through false statements, tortious interference, and intent to illegally restrain competition: Dayco argued that unfair competition in Pennsylvania is generally limited to passing off. There was no passing off allegation here. Dorman contended that Pennsylvania courts have extended unfair competition to include tortious interference and to track the Lanham Act, but it only cited (and the court could only find) federal court cases. “Although the Third Circuit has seemingly extended the grounds for a Pennsylvania unfair competition claim, the Pennsylvania state courts have not.” In any event, federal courts equating Pennsylvania unfair competition with the Lanham Act seemed to be talking about §43(a)(1)(A)/passing off. A court in the Sixth Circuit was not in a position to extend Pennsylvania law, so the unfair competition claim was dismissed.

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