Tuesday, September 27, 2011

Presumption against finding literal falsity defeats summary judgment

K & N Engineering, Inc. v. Spectre Performance, 2011 WL 4387094 (C.D. Cal.)

There were a lot of evidentiary disputes in this case, which I will ignore. K&N sued Spectre and Spectre counterclaimed for false advertising/unfair competition under the Lanham Act and California state law. The parties compete to sell automotive air intake products, including air filters that replace OEM filters and air intake kits that replace the entire factory-installed air path to the engine.

The parties’ systems and filters are designed to reduce the air flow restriction caused by OEM air filters, thereby potentially increasing the engine's power. Air flow is generally measured in cubic feet per minute ("CFM"), while engine power is typically measured in horsepower ("HP"). The air flow restriction caused by an air filter creates a pressure differential in the system. To compare air filter products, therefore, one must compare the air flow at the same pressure drop point (and measure it in the same way).

Air flow. Since 2002, K&N’s air filter packaging has included two bar graphs, each comparing a "K & N Washable Reusable Air Filter" to an equivalent "Average Disposable Aftermarket Air Filter." The packaging says “Dust-free air flow test performed on laboratory equipment. These charts are examples of individual filters. Results will vary depending on part number and vehicle. Complete test protocol and results available at www.knfilters.com." The first chart is for a "Round Filter," No. E-1500, and reports an air flow of 881 CFM for K & N's filter, compared to 545 CFM for the average aftermarket filter. The second chart is for a "Panel Filter," No. 33-2042, and reports an air flow of 441 CFM for K & N's filter, compared to 319 CFM for the average aftermarket filter. The bar graph depicts the results of June 2001 (though the average filter got 548.4 CFM) and April 2002 tests, respectively.

K&N’s expert opined that K&N’s testing protocol, which K&N carried out itself, reliably and accurately tests air flow rate. K&N won summary judgment on Spectre’s contention that its “tests prove” air flow claims were false: the only evidence of testing reliability before the court was from K&N’s expert who supported the reliability and accuracy of K&N’s test protocol.

Horsepower. K&N and its competitors, including Spectre, use chassis dynomometer ("dyno") tests to evaluate product performance. This requires controlling variables that can affect test results, including air intake temperature, under-hood temperature, oil temperature, engine condition, use of shop fans, and vehicle tie-down tension. There’s no government mandated or industry standard dyno testing method, but K&N has standardized its own protocol.

K&N has performed thousands of dyno tests since 1997, including more than 700 comparisons on more than 500 vehicles showing increased horsepower from replacing an OEM air intake with a K&N air intake. K&N doesn’t have dyno test results for every intage and vehicle combination, but for most of its systems it publishes a comparison graph on its website. The advertised horsepower increases are non-specific and will necessarily vary in practice.

In 2005, K&N ran an ad promising "12 more horsepower to the wheels on a 2004 Subaru WRX Sti guaranteed," followed by the question "Can we guarantee this?--Legal," and the response "Dyno tests prove it!--D.V." Other ads used the template "[X] more horsepower on a [specific vehicle] guaranteed." Other K&N ads promised, "Whether you drive a Forester XT, Impreza WRX STi, or Legacy, [or other listed vehicles] K & N's website now allows you to get the exact guaranteed wheel horsepower numbers for your [vehicle]." There were other similar ads.

In 2007, another ad had the large-font claim "53 More Horsepower!;" in substantially smaller font under the picture, it continued, "The GT500 is unique and so is the 53HP gain our High-Flow Intake System achieved. We can't offer 53HP for every vehicle, but we do guarantee our intake systems will provide an increase in horsepower. Visit knfilters.com to see the horsepower increase for your vehicle." Other ads had similar layout and statements. Many ads had a chart showing a horsepower increase compared to an OEM intake, out to two decimal places. (In one instance, K&N ran an ad claiming results for a 2009 Dodge Challenger 6.1L that were actually from a 2005 Dodge Magnum RT 5.7L. However, K&N had tested a 2008 Dodge Challenger 6.1L, which was functionally identical to the 2009 version, and obtained greater horsepower gains than advertised.)

K&N admitted that horsepower gains would vary, but contended that replacing an OEM intake with a K&N intake in a properly tuned vehicle in good condition would result in at least the claimed gains. The court found that it was disputed whether the later “guaranteed horsepower” ads guaranteed the specific horsepower advertised or merely guaranteed that some horsepower would be added: the ads were reasonably susceptible to multiple interpretations. However, the earlier ads using claims of the form "[X] more horsepower on a [specific vehicle] guaranteed" did promise a specific horsepower increase. (This distinction doesn’t pass the smell test for me: I don’t see the difference in the message a reasonable consumer would take away from the later ads.)

Spectre argued that the ads were literally false because the horsepower increase in the ads couldn’t be achieved by all consumers. In U-Haul International, Inc. v. Jartran, Inc., 522 F.Supp. 1238 (D.Ariz. 1981), the court found that a guarantee of "10 [miles per gallon] or more" was "actually false" because it was "clear that not all [of the defendant's] trucks will obtain 10 miles per gallon of fuel, regardless of use or method of operation, and in no event would this mileage be realized when towing [the defendant's] trailer behind [one of the defendant's] truck[s]." However, the court found U-Haul inapposite because it was decided on a motion for a preliminary injunction, not a motion for summary judgment, which requires that there be only one reasonable conclusion in favor of the party making the motion. More importantly, the court believed that recent case law counseled in favor of giving advertisers leeway, “at least in the absence of a clear intent to deceive or substantial consumer confusion,” and thus avoiding findings of literal falsity.

In addition (and what the court should have relied on instead of giving advertisers a free pass in general), there was no evidence that the test results here were false or that a consumer would gain less horsepower than advertised; the only evidence was that K&N admitted that horsepower gains could “vary,” including being less than advertised. This wasn’t enough: a reasonable jury could conclude that K&N's earlier horsepower advertising was not literally false because it was based on sufficiently reliable tests. There was also no necessary implication that every purchaser would receive the “measured, verified, and guaranteed” horsepower increases, because that language appeared only in the 2007 ads and the court wouldn’t impute it to other ads. However, a reasonable jury could also find literal falsity for both the earlier and the later ads, and thus K&N’s cross-motion on these claims was also denied.

CARB. California mandates that air intake systems are not highway-legal unless the California Air Resources Board ("CARB") has issued an Executive Order for that particular application. As a result, sellers advertising air intake systems in California for which there is no Executive Order must include a disclaimer "to give reasonable notice of [the] limitation on the sale or use of" the air intake system. K&N obtained various Executive Orders exempting specific K&N intake applications; some intakes are exempt or non-exempt depending on particular applications. K&N’s website and catalogs identify each application in which a particular air intake system may be used and whether there is an Executive Order from CARB for each application. Before 2010, K&N didn’t use CARB disclaimers on the outside of its intake packaging, only installation instructions inside the packages.

Spectre’s UCL claim was that it was unlawful (and thus actionable under California Business & Professions code section 17200) for K&N to fail to include disclosures on its product packaging, since state law prohibits any entity from “advertis[ing] in California any device, apparatus, or mechanism which alters or modifies the original design or performance of any required motor vehicle pollution control device or system and not exempted from Vehicle Code section 27156 unless each advertisement contains a legally adequate disclaimer ….” The relevant section of law defines "advertise" and "advertisement" to include "any notice, announcement, information, publication, catalog, listing for sale, or other statement concerning a product or service communicated to the public for the purpose of furthering the sale of the product or service." So, was packaging a statement made "for the purpose of furthering the sale of the product”?

K&N argued that the systems weren’t sold in regular consumer packaging and contain minimal information—not the advertised horsepower increase and not even the vehicles for which the intake system is designed. However, Spectre pointed out that the packaging did include the phrases "Guaranteed Horsepower!" and "The World's Best Air Filter." The court found a factual dispute about whether the packages were designed for consumers to see or use as a basis for a purchasing decision, making summary judgment on that ground inappropriate.

However, injunctive relief—the only kind available under the UCL--was inappropriate because K&N changed the packaging in 2010 to include the disclaimers, so the UCL claim was dismissed. The court also held that simple omission couldn’t ground a Lanham Act claim in the absence of something else, such as a negative comparison omitting information that would weaken a superiority claim or a failure to designate a product as foreign-made, creating a false designation of origin. Thus, the Lanham Act claim against the CARB omissions was also dismissed.

Fuel economy. K&N sells its product through distributors and retail customers, including AutoAnything.com, which claims that K&N products will increase fuel economy. K&N’s research indicates that some consumers choose filters based on perceived fuel economy.

The parties also disputed whether K&N was responsible for AutoAnything’s fuel economy claims. Spectre argued that K&N exercised sufficient control because it would pre-approve select AutoAnything advertisements, and could prevent the advertisements' publication by ending its cooperative advertising policy of reimbursing AutoAnything for published advertisements. This was enough to create a disputed issue of material fact over whether K&N was at least contributorily liable, which can happen if there’s direct control and monitoring of the instrumentality used by a third party to violate the Lanham Act. (Note that given current standing doctrine, Spectre might not be able to make a direct claim against AutoAnything, though in the Ninth Circuit standing goes a bit differently than in other circuits. If Spectre lacked standing, then secondary liability reasoning might be inappropriate, though perhaps K&N is still in some sort of agency relationship with AutoAnything sufficient to make it responsible for the ads depending on the actual facts.)

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