Monday, July 18, 2011

Third-party subpoena allowed to seek substantiation after the ad

Precision IBC, Inc. v. PCM Capital, LLC., 2011 WL 2728467 (S.D. Ala.)

The parties compete to sell and lease intermediate bulk containers (IBCs) for hazardous, sensitive, and degradable materials. Some of Precision’s inventory was manufactured in China. PCM allegedly advertised that tanks from China are “lower quality” and have "serious quality issues" and advised customers that they should "stay away from" and not "take the chance" with Chinese IBCs and that the "risks borne of using such units far outweigh the apparent savings." Precision sued for violation of the Lanham Act.

The magistrate judge found that portions of PCM’s subpoenas should be quashed because they sought information that wasn’t relied on by PCM when it made the ad claims in question. PCM argued that the material sought was relevant because the majority rule was that a plaintiff is required to prove falsity, not just a lack of preexisting substantiation. (By contrast, the FTC requires substantiation in hand, though its enforcement discretion may take post-ad substantiation into account.)

Precision argued that PCM couldn’t “salvage wholly unsubstantiated statements with arguments cobbled together after the statements were made,” citing Novartis Consumer Health, Inc. v. Johnson & Johnson-Merck Consumer Pharm. Co., 290 F.3d 578 (3d Cir. 2002). But this isn’t the majority rule. Precision argued that this case went beyond mere superiority claims to attacking the safety of its products, but the court didn’t find that a relevant distinction. It’s true that safety claims are more than statements of opinion and are likely to be material, and that statements inviting comparison suggest that comparative performance has been tested and verified. Also, PCM was unable to provide any support for its claim that Chinese tanks had serious quality issues or that using them was risky. The Chinese tanks were compliant to the relevant standards, and PCM had no evidence they were unfit for indended purposes.

However, the court noted that Novartis involved a situation in which the defendant didn’t present any evidence to show that its claim was true. The court didn’t refuse to entertain after-acquired evidence of truthfulness, but merely found that lack of substantiation was sufficient to find falsity when the defendant had absolutely nothing. If PCM could present evidence of truthfulness, Precision can’t win merely by showing that PCM didn’t have that evidence in hand at the time it made its statements. Thus, PCM was entitled to seek evidence from third parties about the truth of the statements.

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