Consultant's speech to potential customers wasn't pure scientific speech protected by First Amendment

Underground Solutions, Inc. v. Palermo, 2016 WL 2866099, No. 13 C 8407 (N.D. Ill. May 17, 2016)

 

Related decisions discussed from 2012, 2014, and 2015.  Plaintiff UGSI sued Palermo for trade libel and false advertising under California and federal law (having previously dismissed a tortious interference claim).  UGSI alleged that Palermo, as a paid spokesperson for one of UGSI’s competitors, made false or misleading statements about UGSI’s products, subterranean pipes used for water transmission.  Here, the court granted partial summary judgment in favor of UGSI on the Lanham Act claim and dismissed the trade libel claim.

 

This is what I love about Lanham Act cases: you learn about details of how the world works.  Underground water pipes include ductile iron pipe, high-density polyethylene (HDPE) pipe, and polyvinyl chloride (PVC) pipe.  Rapid crack propagation (RCP) is pretty much what it sounds and can occur up to several hundred feet per second; it can happen in any type of pipe when the right (wrong) event occurs, such as someone bending or pressurizing a pipe too far or an external object hitting the pipe.  Whether RCP happens after a break depends on many factors, including the pipe’s diameter and wall thickness, the internal operating pressure, and the pipe’s chemical makeup. Although RCP can’t occur in 100% water pressurized pipe, a small amount of air in a pipe could enable RCP.

 

Municipalities typically use more than one pipe to create a network.  HDPE pipe sections are often ‘butt fused,’ connected end-to-end by thermal fusion techniques. Ductile iron or PVC pipe traditionally uses ‘bell-and-spigot’ joints to latch each pipe to the next. UGSI is the only producer of Fusible PVC pipe, where thermal fusion eliminates the need for bell-and-spigot junctures. “Some Fusible PVC pipes stretch seamlessly for miles, which simplifies and speeds up installation, avoids the potential for corrosion and seepage intrinsic to bell-and-spigot joints, and eliminates associated maintenance requirements and costs.”

 

Palermo operates a consulting firm that provides litigation consulting and failure analysis services. During the relevant period, Palermo had a consulting agreement with Performance Pipe, which makes HDPE pipe. “Along with two HDPE pipe interest groups (the Plastics Pipe Institute and the Alliance for PE Pipe), Performance Pipe paid Palermo to attend trade shows and give presentations about Fusible PVC pipe.”  Palermo designed a PowerPoint slideshow for these presentations, and put it on his website.  The slideshow ‘Plastic Pipe for Water Distribution – What You Need to Know About RCP and Butt Fusion Integrity,’ was primarily focused on illustrating the high RCP risk associated with butt-fused PVC pipe, rather than butt-fused pipe of all types.  The presentation stated that PVC pipe is more vulnerable to RCP than HDPE and that butt-fused PVC pipe’s RCP risk is even higher, because “without bell-and-spigot joints to relieve pressure, cracks can spread farther and faster without meeting resistance.” 

 

Palermo began with twenty Fusible PVC RCP failures in the field, from 43 feet to 3,300 feet long.  “He showed pictures of massive cracks in the butt-fused PVC pipe at some failure sites, and he provided details of the damage done and replacement requirements for some of the RCP events described.”  He then discussed test results from lab experiments on PVC and HDPE pipe, showing test results that indicated that HDPE’s resistance to RCP was higher than that of PVC for given water/air mixes.  It’s possible for pressurized pipes to contain up to 10% air, and he showed graphs indicating that when a PVC pipe has 10% air volume, it is vulnerable to RCP at much lower pressures than HDPE pipe with 10% air.  Palermo claimed that modern HDPE pipes had even higher critical pressures (the point at which the vulnerability emerges) “which meant that ‘RCP is never an issue.’”  Further, Palermo reported that HDPE butt-fused joints passed tests that PVC butt-fused joints didn’t.

 

As a result, some people exposed to the slide show were reluctant to use or recommend Fusible PVC pipe.  For example, “Julie Morrison, a consulting engineer in Illinois, testified that she had been open to the possibility of recommending Fusible PVC for a project in Illinois but had changed her mind after finding and reading Palermo’s presentation online.”  UGSI produced a slide show of its own which it used to reassure a contractor that expressed grave concerns based on Palermo’s slide show.  UGSI sent Palermo a C&D in March 2012, and in July 2013, Palermo said that he would “no longer provide negative information about butt fusion of PVC Pipe” because he felt “UGSI [had] conducted significant testing to develop the proper butt fusion procedure for PVC Pipe.” Nonetheless, Palermo continued to deliver his message at trade shows and on the Internet.

 

Palermo argued that the Lanham Act claim had to fail because he was engaged in private, noncommercial speech, trying to advance scientific inquiry on a matter of public concern rather than advertising or promoting HDPE.  But “an activity is promotional if it involves dissemination to anonymous members of the purchasing public.”  Members of the polyethelene pipe industry paid Palermo to deliver presentations to anonymous purchasers and prospective consumers at trade shows throughout the country, converting his speech into commercial speech for Lanham Act purposes.  Since he was paid to make his statements in a commercial setting to potential purchasers, his statements weren’t made purely to advance scientific discourse.  Cf. Eastman Chem. Co. v. Plastipure, Inc., 775 F.3d 230 (5th Cir. 2014) (statements made in a commercial setting and directed at customers “do not become immune from Lanham Act scrutiny simply because their claims are open to scientific or public debate. Otherwise, the Lanham Act would hardly ever be enforceable—many, if not most, products may be tied to public concerns with the environment, energy, economic policy, or individual health and safety.”) (internal quotation marks omitted). Moreover, commercial speech need not directly propose a commercial transaction.  Jordan v. Jewel Food Stores, Inc., 743 F.3d 509 (7th Cir. 2014). 

 

UGSI argued that there were five false or misleading statements in Palermo’s slide show: (1) Four of the crack lengths were grossly inaccurate, overstating crack lengths by hundreds or thousands of feet (specifically, reporting a crack as 300 feet long when it was only 3 feet long; 2200 versus 1700, 800 versus 430, and 2000 versus 200, plus stating that 13 miles of pipe needed to be replaced after one incident, where there were only 7 miles of pipe to begin with). (2) Palermo described PVC’s critical pressure at 10% air volume, as shown by the key study, as much lower than it was.  (3) Palermo used the study even though Fusible PVC used far more advanced pipe than that tested in the study.  (4) Palermo described cracks without disclosing the installation or maintenance errors that caused them to rupture in the first place. (5) The joint tests Palermo used weren’t designed to test PVC.

 

The study on which Palermo relied to report PVC’s critical pressure at 10% air volume unambiguously said it was 2.3 bar, whereas Palermo said it was 1.6 bar.  He argued that this simply reflected scientific disagreement, and that he used the study’s regression line and data generated by another lab (the one that conducted the joint tests Palermo used):

 

Because scientific truth is elusive, Palermo says, settling the dispute between methodologies should be left to the scientific community. But Palermo’s slides do not indicate that he was approximating, nor do they make reference to any other tests than those conducted by Greenshield and Leevers. Instead, they unequivocally state that Greenshield and Leevers found that the critical pressure at 10% air volume was 1.6 bar. In fact, they did not. Assigning a lower critical pressure than the test actually indicated is a classic example of literal falsity.

 

The evidence would permit a jury to determine that Palermo did not materially misrepresent the length of one crack, where the damage had to be approximated. However, it was undisputed that Palermo falsely reported the amount of pipe that needed to be replaced in one incident and the crack lengths in three.  Palermo argued that he substantially underestimated another crack length, favoring UGSI.  But for liability purposes it didn’t matter that one of his literal falsities favored UGSI; the others didn’t.  Thus, the literally false statements about critical pressure at 10% air volume, the three crack lengths, and the amount of pipe that needed to be replaced in one city violated the Lanham Act, without further need to show consumer confusion; UGSI was entitled to summary judgment on liability for these statements.

 

UGSI asked for an injunction against these statements.  Palermo argued that Winter and eBay prevented the court from presuming irreparable harm.  The circuits have an inconsistent treatment: the Fourt Circuit continues to state that false advertising is typically irreparable “because diminished goodwill is difficult to quantify,” while the Third Circuit expressly disavowed a presumption of irreparable harm from false advertising.  Because there were still outstanding falsity issues on liability, the court decided to wait until after the jury trial, which would result in further findings about the remaining statements.  This would allow the court to make a better finding on whether a permanent injunction was appropriate.

 

As for misleadingness, UGSI argued that it showed substantial differences between the chemical makeup of the pipes tested in the fifteen-year-old study on which Palermo relied and its own PVC pipe.  UGSI also made other criticisms of whether the studies on which Palermo relied reflected real conditions. The court found that genuine factual disputes remained on these and the other remaining falsity/misleadingness claims.  One of the older study’s authors, for example, testified that product improvements likely didn’t change the fundamental qualities of the pipe for the purpose of his test results, while UGSI’s experts testified that its pipe had a substantially different molecular weight, which the study’s author conceded was the most relevant factor in determining fracture resistance.

 

Palermo argued that there couldn’t be any misleadingness because UGSI didn’t provide a survey showing confusion.  But surveys aren’t always required; Mead Johnson & Co. v. Abbott Labs., 201 F.3d 883 (7th Cir. 2000), on which Palermo relied, actually rejected the district court’s improper reliance on a survey. UGSI showed evidence that one consulting engineer developed concerns after seeing a slide show, and that another feared that UGSI’s product was dangerous. This evidence supported a reasonable inference that they were confused.

 

Palermo then argued that UGSI wasn’t harmed by any misleadingness, because the confused consumers testified that they didn’t end up making decisions based on his presentation, after reassurance from UGSI.  “It cannot be the law that where a plaintiff succeeds in retaining its customers by spending an abundance of time, energy, and money to combat false advertising, the defendant who produced and disseminated the false advertisement or commercial promotion escapes liability for violating the Lanham Act.”  Because of UGSI’s need to reassure at least one consumer, a reasonable jury could find that Palermo’s slide show diminished UGSI’s goodwill and reputation.

 

As for the trade libel claims, they required actual trade diversion, and UGSI didn’t provide evidence that particular purchasers refrained from dealing with it because of Palermo.  Thus, Palermo won summary judgment.

 

Palermo argued that the same harm problems justified summary judgment on the California false advertising claim, because of Proposition 64’s lost money or property requirement.  UGSI’s “significant resources” spent rebutting Palermo’s statements, however, qualified.  Nor did the First Amendment preclude liability, for the reasons given above.