Wednesday, May 02, 2012

Identical materials sent to over 1200 recipients not "commercial advertising or promotion"

Generac Power Systems, Inc. v. Kohler Co., 2012 WL 1287713 (E.D. Wis.)
The parties compete in the market for standby home generators used to provide emergency power; both make 20 kilowatt generators.  Generac was also suing Kohler for infringement of a method patent, though that action was stayed.  In January, Kohler began distributing a marketing handbook and a CD to distributors and dealers containing statements that Generac alleged to constitute false and misleading advertising under the Lanham Act and state law.
The products at issue are fairly expensive (Kohler’s costs $5000 retail) and consumers buy only after researching and shopping around.  Kohler used to use distributors with their own dealer networks, but in 2011 it began selling its generators directly through a Kohler dealer network. The handbook was an educational tool for professional dealers, introducing the new dealer network and providing promotional support.  Copies went to over 1200 dealers and to two distributors for futher distribution to 60 more dealers.  The handbook was not directed to individual consumers.
The handbook contained a “Competitive Comparison” chart claiming that Kohler had a “Commercial-Grade Engine,” “Corrosion-Proof Enclosure,” and “Low-Speed Diagnostic Exercise,” and Generac didn’t.  While the handbook also contained various samples of promotional material (radio spots, print ads, sales presentations, direct mail), the comparison chart didn’t appear in any of that.  Generac, in fact, has a specific low-speed diagnostic test, as well as general diagnostic tests that run at any speed.  There is no industry standard for what constitutes a commercial grade engine.
Kohler argued that the challenged statements weren’t commercial advertising.  The Seventh Circuit defines advertising as “a form of promotion to anonymous recipients, as distinguished from face-to-face communication.” First Health Grp. Corp. v. BCE Emergis Corp., 269 F.3d 800, 803 (7th Cir. 2001).  It has also indicated that “[i]n normal usage, an advertisement read by millions (or even thousands in a trade magazine) is advertising, while a person-to-person pitch by an account executive is not, because they are not “disseminated sufficiently to the relevant purchasing public to constitute ‘advertising’ or ‘promotion.’”  (Note that “anonymous” seems superfluous to the distinction between ads and face-to-face communication, and also potentially misdescriptive of readers of a trade magazine, something that is about to become relevant.)  The Seventh Circuit does not follow the Gordon & Breach test, standard elsewhere.
So there wasn’t “advertising” here: “The recipients of Kohler's marketing handbook were not anonymous, rather they are identifiable entities or persons who distribute generators. The recipients number just under 1,300.”  Generac argued that distributors were unlikely to be single-employee businesses and the handbook would be read by others, but this generalization lacked factual support.  Thus, the marketing handbook was not a commercial advertisement, and Generac was unlikely to prevail on the merits.
Comment: This interpretation, though invited by the 7th Circuit, is ridiculous.  Under this reasoning, an email sent to 20 million people on the defendant’s marketing list would not be commercial advertising.  While there may be reason to distinguish individualized sales pitches from commercial advertising or promotion, any test is badly wrong if it concludes that identical materials delivered to nearly 1300 people wasn't advertising.  It’s not at all clear that the right test would help Generac, though, if the misrepresentations were unlikely to reach end consumers (though one wonders why it’s in the handbook if not to be conveyed to consumers).
On the merits, Generac established that Kohler’s statement about low-speed diagnostic exercises was literally false.  Even though Kohler claimed there were qualitative differences between the parties’ diagnostic exercises, the claim that Generac didn’t have them at all was literally false.  But Generac didn’t establish that the claim that Generac’s residential generator lacked a commercial engine was literally false.  Its own ads claimed a special residential design, and offered separate commercial generators.  The lack of an industry standard also made literal falsity hard to show. 
The court was inclined to dismiss the remaining state law claims for lack of subject matter jurisdiction (diversity being absent).

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