Monday, November 14, 2011

Tank wars

Precision IBC, Inc. v. PCM Capital, LLC, 2011 WL 5444114 (S.D. Ala.) (magistrate’s report and recommendation)

IBC sued defendants, competitors in the market to sell and lease intermediate bulk containers (IBCs or tanks) designed to store and transport hazardous, degradable, and sensitive materials. Some of Precision’s 350-gallon stainless steel tanks, which comprise 25% of its tank rentals, are imported from China. Precision alleged that its products were made of high quality materials and properly labeled with the country of manufacture. Defendants, allegedly knowing that Precision used Chinese-made tanks, made statements that such tanks are "lower quality" and have "serious quality issues," advising customers that they should "stay away from," "beware" of, and "say no to Chinese IBCs." They allegedly further falsely claimed that Chinese tanks are not UN/DOT compliant and may expose the consumer to "costly legal liability." Precision claimed that this constituted a violation of the Lanham Act and also defamation per se.

Defendants challenged constitutional and prudential standing, because why not these days? This created a question of what kind of motion to dismiss this was; the magistrate found that the jurisdictional and merits inquiries overlapped. Defendants’ arguments over lack of injury were inextricably intertwined with the Phoenix of Broward inquiry into the directness or indirectness of the asserted injury and the speculativeness of the damages. The proper course of action was thus to find that jurisdiction existed and deal with the attack on the merits.

Article III standing requires an injury fairly traceable to the defendant that would likely be redressed by a favorable decision. Defendants argued that Precision only made generalized assertions of harm without identifying any customers allegedly affected by the challenged statements or any causal connection between the statements and harm to Precision. This didn’t work. Precision alleged that defendants, “with whom it is in direct competition, made false and misleading statements regarding its Chinese-made tanks, that the statements have the capacity to deceive existing and potential customers, that as a result of Defendants' false advertising, it has suffered loss of reputation, goodwill, and market position, and that the purpose of the false advertising was to drive business away from Precision in favor of Defendant Tote Systems.” This was enough to plead constitutional standing.

Prudential standing: (1) This was the type of injury to a direct competitor’s market position, goodwill, and reputation that Congress targeted with the Lanham Act. (2) Directness of harm: defendants argued that Precision’s name was never mentioned. That didn’t matter, because the parties were direct competitors: Precision alleged a direct causal relationship between the false advertising and the injury. (3) Precision’s proximity to the alleged injurious conduct: “The most appropriate party to bring a false advertising claim under Lanham Act are competitors who suffered a loss in customers and consequently suffered a loss in profits.” That’s Precision. Defendants argued that since they said nasty things about Chinese manufacturers, such manufacturers and distributors would be better plaintiffs. But Precision alleged that defendants attacked Chinese-made tanks in an effort to harm Precision.

(4) Speculativeness of alleged damages: The degree of evidence required depends on the stage of the litigation. Precision was seeking injunctive relief, disgorgement, expenses for corrective advertising, and attorneys’ fees. Defendants argued that damages would be speculative because Precision has no way of knowing how many potential customers saw the allegedly false advertising and made purchasing decisions based on it. Moreover, they argued that potential customers visiting Precision’s website wouldn’t know that Precision sells or leases Chinese-made tanks, and that because Precision also sells US-made tanks, it wasn’t harmed. The magistrate, demonstrating that Phoenix of Broward is a machine for hurting plaintiffs before they get to put in any evidence, found that this factor counseled against standing. “Because the actual economic loss depends on consumers' reaction in a particular way to Defendants' advertisements [ed. note: when will this not be true of any ad?] regarding Chinese-made tanks, the amount of any resulting loss will necessarily be speculative and difficult to quantify.” Something that will always be true is not a factor; it is serving some other function. If we want to put a thumb on the scale against all plaintiffs, we should at least say so, not pretend otherwise. (Note also the illegitimate sub rosa incorporation of materiality; whatever speculativeness means, this version is bad.)

(5) Risk of duplicative damages. Defendants argued that every Chinese manufacturer, seller, lessor, distributor, and owner of Chinese tanks would have prudential standing. This factor is related to factor (3), proximity. Precision is the most proximately injured because it’s at the same place in the distribution chain. Also, the market here is smaller than that in Phoenix of Broward, since it’s restricted to retailers who sell or lease Chinese-made tanks in the US.

Given that Phoenix of Broward was a close call with more factors weighing against standing, the magistrate here found that Precision had prudential standing.

Substance: Precision challenged an article, “A Pioneering Pedigree,” originally published in the Hazardous Cargo Bulletin (gotta love niche publication) and reposted on defendant Tote Systems’ website; the FAQ section of that website; and defendants’ print and electronic ads.

As to falsity, on a motion to dismiss, the court must accept as true the facts as pled and Precision was not required to submit proof of actual falsity. Precision properly alleged that the statements at issue were literally false and misleading because they suggested to the IBC-buying public that Plaintiff's Chinese-made tanks are unsafe and inferior to American-made tanks and that they do not comply with UN/DOT standards.

Defendants argued that the statements weren’t about Precision and didn’t refer to it or its products by name, and thus weren’t actionable. The magistrate rightly rejected this argument, determining that the claim that the statements were directed at Precision was plausible. (Even if there were a bunch of sellers of Chinese-made tanks on the market, Precision should still have a claim; the Lanham Act, after all, does not require disparagement, only falsity—even if the defendant is making false claims about its own products.)

Defendants argued that the trade journal article wasn’t commercial speech. Using the Gordon & Breach test, the magistrate determined that it was, apparently reaching this result both for the original article and for Tote Systems’ republication of the article. In the “Pioneering Pedigree” article, defendant Palmer Finger stated that consumers should know about pitting, which could affect the wall thickness of IBCs and have "the potential to throw you out of UN and DOT compliance," which could subject the consumer to legal liability. The article mentioned “problems” and “serious quality issues” with imported Chinese tanks, then suggested that Tote Systems had eliminated those problems. The purpose of those statements was clearly to get consumers to choose Tote Systems IBCs over competing Chinese-made IBCs. Moreover, posting the article on the publicly accessible Tote Systems website, and in Hazardous Cargo Bulletin, was sufficient dissemination.

Defendants also argued that their statements were opinion or nonactionable puffery. Representations about safety hazards, however, can be interpreted as claims founded in fact. In context, the reference to “problems” suggested a proven and known fact. Likewise, ads urging customers not to "take the CHANCE!!" and suggesting that Chinese tanks are "dangerous ... [and] environmentally taboo" “could undoubtedly bring safety concerns to a customer's mind.” These safety concerns weren’t easily verifiable by customers, and they went beyond mere opinion. Likewise, claims that Chinese-made tanks are "lower quality" and "have serious quality issues"; that customers should "stay away from," "say no to," and not "take the chance" with Chinese IBCs; that the "risks borne of using such units far outweigh apparent savings"; and that these tanks are "dangerous, expensive, and environmentally taboo" include specific and measurable claims capable of being proven false or interpreted as statements of objective fact.

Because the Lanham Act claims survived, so did the related conspiracy claim.

Turning to the libel claims, the magistrate engaged in a necessarily different analysis. Defamation requires 1) a false/defamatory statement concerning the plaintiff; 2) an unprivileged communication of that statement to a third party; 3) fault amounting at least to negligence on the part of defendant; and 4) either an exception to the special harm requirement or the existence of special harm. The magistrate rejected Precision’s claim because Precision didn’t allege defamation personal to it: the statements were about Chinese-made tanks and not Precision. Alabama law precludes recovery for defamatory statements about someone else.

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