Thursday, December 15, 2011

California law and Lanham Act converge to condemn false advertising

K & N Engineering, Inc. v. Spectre Performance, 2011 WL 6133258 (C.D. Cal.)

Previous coverage of the denial of summary judgment on Spectre's counterclaims. Hey look, sometimes a trial does what it's supposed to and reveals more facts!

The parties’ false advertising claims under state and federal law were tried simultaneously to the court and a jury. The jury returned a special verdict in favor of plaintiff K&N both on its affirmative claims and on the counterclaims raised by Spectre.

The parties compete in the market for automotive air intake products, including air filters and intake systems, which replace the entire factory-installed air path to the engine and include an air filter. These filters and systems “are designed to reduce the restriction on the amount of air flowing into a vehicle's engine caused by the stock air filter and intake, and thereby potentially increasing the vehicle's engine power.” Air intake systems aren’t highway-legal in California unless the the California Air Resources Board (“CARB”) has issued an Executive Order for a particular application (model, make, year, and engine size). Many systems fit more than one application. Sellers of systems for applications as to which there is no Executive Order are required to include a disclaimer with every California ad, making clear that the systems are not legal for highway use in California.

Without getting into the details, K&N challenged Spectre’s fuel economy claims; filtration claims; performance (horsepower and air flow) claims; and claims relating to the pollution control legality of Spectre intake systems.

Spectre claimed that using its filter “Saves Gas,” and some packaging stated “Government studies show that an efficient air filter can give you up to 10% better fuel economy, which translates to money in your pocket.” These statements, based on government websites, were both false. Since 2009, the Department of Energy has stated, “NEW INFORMATION: Replacing a Clogged Air Filter on Modern Cars Improves Performance but Not MPG. A new study shows that replacing a clogged air filter on cars with fuel-injected, computer-controlled gasoline engines does not improve fuel economy but it can improve acceleration time by around 6 to 11 percent. This kind of engine is prevalent on most gasoline cars manufactured from the early 1980s onward.” The website continued that replacing a clogged filter on an older care with a carburated engine might improve fuel economy 2-6% under normal conditions, or 14% if the car was so severely affected that it was almost undrivable.

The court noted that the “saves gas” claims didn’t compare its filters with clogged filters at the end of their useful lives. Instead, they stated that using an “efficient” filter such as Spectre’s would improve fuel economy, and that was false. Moreover, almost all of the filters with the “saves gas” claim were intended for use on cars manufactured from the early 1980s onward with fuel-injected, computer-controlled engines—“the cars for which the government study shows that replacing even clogged air filters will not increase fuel economy.”

Likewise, testing-based claims that “[a]ll Speed By Spectre hpR filters are tested at independent labs using ISO 5011 standards, and have been proven to filter 99.6% of particles” were false. This was based on a single test of a single filter, and it wasn’t a filter from a production run. It was extensively hand-oiled: “the tested filter contained approximately 41ml of oil, whereas Spectre's production filters indicated only 30ml of oil was required.” Practice tip: Don’t jigger your tests! Spectre didn’t commission any ISO 5011 tests on any production filters, and, since the filtration efficiency of a filter is affected by a large number of characteristics, there was no basis on which to conclude that any of the filters it sold would have the same efficiency as the sample filter that was tested. K&N’s own tests by the same independent lab, in which it told the lab to choose the parameters the lab believed appropriate, showed filtration efficiencies of 93.96%, 94.85%, and 97.44%; one filter couldn’t be tested because it stopped functioning.

Likewise, the packaging for Spectre’s PowerAdder line of products included a chart labeled “Filter Particle Retention” claiming that the Spectre PowerAdder filter trapped a higher percentage of particles of various sizes than “Brand K” air filters. Trial evidence proved that “Brand K” was a K&N filter, but Spectre had test results showing that Spectre filters performed materially worse.

Spectre’s performance claims to improve horsepower and air flow were also false. There was no evidence that replacing a stock air filter with a Spectre air filter would materially increase horsepower or torque, or show the substantial increases in peak horsepower and torque depicted on Spectre’s graphs on its packaging. The graphs were not supported by tests. Spectre’s horsepower ratings weren’t derived from tests corresponding to actual conditions; the airflow and pressure numbers it used in its extrapolations wouldn’t occur in a car, and even then it rounded up to obtain a “marketing” rating. Spectre had no data indicating that its filters would actually work in those conditions, and the court found that the air intake systems, as installed, were incapable of effectively allowing the claimed performance. Moreover, internal emails showed that Spectre understood that its ratings were marketing tools bearing no relationship to actual achievable horsepower.

Spectre’s catalog, now taken down from its website, even admitted the lack of real-world applicability of its ratings. It said: “The CFM and Horsepower ratings are what the filter will support in a naturally aspirated engine with no measurable loss due to restriction. This is important to know if the vehicle has been modified for increased performance as it tells you how much power the filter will support. These filters are rated at a much higher number than the requirements of the engine. Like speed ratings on a tire, it's always better to have more.”

This statement was insufficient as a disclaimer to correct the falsity. The court noted that “(1) the ratings are prominently featured on the packaging for Spectre products without such disclaimer; (2) the disclaimer appeared on a single page of Spectre's catalog separated by several pages from the portions of the catalogs that state the ‘ratings’ for specific air intake systems and air filters; and (3) the catalog was removed from Spectre's web site by October 26, 2009, while the ratings have remained on the packaging.”

As for the legality of Spectre systems, Spectre had three CARB Executive Orders allowing highway use in California of certain air intake systems for specific models of vehicles. However, Spectre sold systems in California that weren’t covered by an Executive Order without limiting them to non-highway use. The Executive Orders specifically provided that “No claim of any kind, such as ‘Approved by the Air Resources Board,’ may be made with respect to the action taken herein in any advertising or other oral or written communication.” Spectre nevertheless stated on its packaging, advertising and marketing in California that its systems covered by Executive Orders were “CARB–Approved.” It also advertised “C.A.R.B. Approval Pending” for a number of systems months before it applied for an Executive Order covering those air intake systems. But parts sold before the CARB issues an Executive Order covering them are not legal for highway use in California, either before or after the Executive Order issues.

The court concluded that Spectre made sales as a result of its false advertising, and the jury found that K&N suffered injury from the false advertising.

Legally, the case is notable because, as the court pointed out, though the California Section 17200 and 17500 claims were largely duplicative of the Lanham Act claim tried to the jury, there were two important differences. First, because Section 17200 covers unlawful business acts or practices even without false advertising, the court could deal with Spectre’s violation of CARB regulations by enjoining it from selling air intake systems not subject to an Executive Order without providing the required disclaimer or advertising its air intake systems as “CARB Approved,” regardless of whether such conduct is actionable under the Lanham Act. Second, Section 17500 allows an injunction against misleading conduct even without proof of actual deception or confusion, avoiding the Lanham Act’s explicit/implicit divide.

The court, like the jury, found in favor of K&N both on the claims and the counterclaims; Spectre challenged ads by, but the court found that California law doesn’t authorize claims for vicarious liability based upon the failure to control another party's advertisements.

Finally, based on the “overwhelming evidence” of Spectre’s “repeated, deliberate, and willful use of false statements and matter in its advertising,” the court found that this was an exceptional case. Time for a fee award! (It’s not clear from the published opinion what’s going on with damages.)

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