Friday, July 05, 2013

Statements about FTC regulations not covered by Lanham Act

CMH Mfg., Inc. v. U.S. GreenFiber, LLC, 2013 WL 3324292 (E.D. Tenn.)

CMH makes manufactured homes. GreenFiber sells home insulation, whose insulating power is represented by an R-value: the higher the R-value, the greater the insulating power.  Federal regulations require loose-fill insulation sellers to put a chart on product labels showing how thick the insulation has to be installed to achieve specified R-values.  Homesellers are required by federal regulations to install insulation according to the insulation manufacturer’s instructions. CMH alleged that GreenFiber’s product label and instruction manual misrepresented the necessary thickness to comply with federal regulations, incorrectly stating that the insulation did not have to be installed over the entire installation area to the minimum thickness required for the stated R-value, but rather that the regulations only required that the average thickness of the area meet the minimum thickness.  The manual stated that “an interpretation [of the FTC rule] might be that the depth can never be lower than 8.1 inches in an attic [to reach R-30]. That is not what is being asked of an applicator. Both the insulation industry and FTC recognize that loose fill materials will never be installed to a perfectly even depth. Requiring that no area is less than 8.1 inches actually results in an R-value higher than R-30 and a higher installed cost for the applicator.” 

However, in 2000, the FTC clearly stated that no area covered with insulation could be less than the minimum.  In 2008, a group of CMH's home buyers began a class-action arbitration against CMH, arguing that their insulation didn’t meet the R-value claimed by CMH because the thickness of the insulation in some areas was less than the minimum thickness necessary.  CMH settled the arbitration action with a payment and sought to recover those amounts from GreenFiber.  The court rejected CMH’s breach of contract, warranty, and indemnity claims; I will discuss only the Lanham Act false advertising and state law fraud claims.

While much precedent suggests that customers lack standing under the Lanham Act, the court focused on two other problems: first, the alleged misrepresentation was about the federal installation regulations, not about “the nature, characteristics, qualities, or geographic origin of [a person's] or another person's goods, services, or commercial activities.”  (I’m dubious—how much of a product you need to use to achieve a certain result seems like a characteristic or quality of the product, regardless of the reason why you need to use that amount—but there is also plenty of precedent that a claim about the meaning of a law, at least if the law is unsettled, is not a factual representation at all. The problem here seems to be that the FTC was unambiguous about what it meant.)

Also, the claim was barred by laches, measured by borrowing the analogous state statute of limitations and presuming laches after that time has run.  Tennessee’s Consumer Protection Act has a 1-year statute of limitations.  Under federal law, the period begins to run when a plaintiff knows or has reason to know of the injury.  The latest date there was when the class plaintiffs filed their action, in 2008.  CMH didn’t sue until 2012.  CMH argued that the limitations period should be tolled because GreenFiber kept insisting that its instruction manual was accurate.  Fraudulent concealment of facts tolls the statute of limitations if the plaintiff couldn’t have discovered the cause of action despite exercising reasonable diligence, but CMH could have discovered its cause of action given the explicit statements in the class action complaint, which referenced the 2000 FTC public letter stating that averaging insulation depths violated the regulations.  “With reasonable care and diligence, CMH should have been able to determine what the applicable federal regulations required regardless of what GreenFiber executives were saying.”  Thus, there was a strong presumption of laches, which was not overcome.

The state-law fraud claim, with its three year statute of limitations, was also time-barred.

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