Monday, January 23, 2017

Pipe dreams: expert spokesperson liable for false statements about competing product

Underground Solutions, Inc. v. Palermo, 188 F. Supp. 3d 717 (N.D. Ill. 2016)

This case is part of contentious relations between Eugene Palermo, a scientist/paid expert for one underground pipe maker, and UGSI, a maker of competing pipe.  Previous case about plaintiff’s website impersonating defendant Palermo.  Previous ruling finding jurisdiction over Palermo in this case.

UGSI sued Palermo for trade libel, intentional interference with prospective economic advantage (dismissed after discovery), and false advertising under California law and §43(a) for his statements as a paid spokesperson for a competitor.  In this opinion, UGSI won partial summary judgment on liability on the Lanham Act claim; Palermo won summary judgment on the trade libel claim; and summary judgment was otherwise denied.

Different kinds of pipe with varying properties are used for municipal and industrial water transmission, including ductile iron pipe, high-density polyethylene (HDPE) pipe, and polyvinyl chloride (PVC) pipe. “[E[ach type of pipe exhibits varying degrees of resistance to puncture, cracking, and other types of pipe failure.”  Rapid crack propagation (RCP) is exactly what it sounds like and can happen up to several hundred feet per second; it can happen in any type of pipe under varying conditions depending on the pipe’s diameter and wall thickness, the internal operating pressure of the pipe, and the pipe’s chemical makeup. Although RCP can’t occur in 100% water pressurized pipe, the inclusion of a small amount of air in a pipe could enable RCP failure.
This is RCP in plastic pipe

UGSI is the only producer of Fusible PVC pipe, which is thermally fused instead of jointed. Palermo is “a scientist who has been involved in the pipe industry for roughly forty years,” who now operates a consulting firm providing litigation consulting and failure analysis services. During the relevant period, Palermo had a consulting agreement with Performance Pipe, which made HDPÈ pipe. Along with two HDPE pipe interest groups, “Performance Pipe paid Palermo to attend trade shows and give presentations about Fusible PVC pipe.”

Palermo’s PowerPoint slideshow for these presentations, which was also uploaded to his website, was called “Plastic Pipe for Water Distribution—What You Need to Know About RCP and Butt Fusion Integrity.”  The presentation was “primarily focused on illustrating the high RCP risk associated with butt-fused PVC pipe.”  Palermo pointed out that PVC pipe was more prone 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.”
sample slide from presentation

The slide show began with a list of all known Fusible PVC RCP failures in the field: 20 across the US, ranging in length from 43 feet to 3,300 feet. He included “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.” Palermo then discussed laboratory test results.  Palermo showed a graph—which the court found to be unambiguous—indicating that when a PVC pipe has 10% air volume, its critical pressure (the pressure over which RCP is more likely) is 2.3 bar, and from about 10.8% to 100% air volume, its critical pressure is 1.6 bar. The next slide reported the pipe’s critical pressure as “1.6 bar for DR 19 PVC pipe with ≥10% air.” His HDPE graph from the study showed that the pipe’s critical pressure was over 7 bar at 10% air volume, and roughly 3 bar at 23% air volume. He also included data for modern HDPE pipes, whose critical pressure he placed at over 10 bar, which meant that “RCP is never an issue.”  Palermo then shared the results of a “Bent Strap Test” and a “Tensile Test” conducted on butt-fused polyethylene pipe and butt-fused PVC pipe: the former passed and the latter failed.

The result was that some people exposed to the slide show or presentation “expressed reticence to use or recommend Fusible PVC as a result.”  “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.” A project manager in Illinois received an e-mail from a contractor, with Palermo’s slide show attached, expressing grave concerns, and UGSI produced a slide show of its own to rebut Palermo’s report and retain the contractor’s business.

For the Lanham Act claim, UGSI argued: (1) Four of the crack lengths that Palermo disclosed in his presentation are grossly inaccurate and that he represented that cracks spread hundreds or thousands of feet farther than they actually did.  (The most extreme alleged misrepresentation was 300 feet for 3 feet; the least was 2200/1700.)  (2) PVC’s critical pressure at 10% air volume in the study was the more favorable figure of 2.3 bar, not 1.6 bar.  (3) He misleadingly used an old study without pointing out that Fusible PVC uses pipe that benefits from many years of scientific advancement in PVC pipe. (4) Even Palermo’s accurately reported crack lengths were misleading, because Palermo described them without disclosing the installation or maintenance errors that caused them to rupture in the first place. (5)  It was misleading to report results from the bent-strap test and the tensile test because these testing models are not designed to test PVC.

Palermo responded that his statements were not “commercial advertising or promotion” but noncommercial speech.  However, he was paid to deliver “presentations to anonymous purchasers and prospective consumers at trade shows throughout the country.”  That triggered the Lanham Act. 

The court found clear falsity in that the study reported that at 10% air volume, the critical pressure of PVC was 2.3 bar, but Palermo clearly said it was 1.6 bar in his slide based on the study.  Although he defended his value as an approximation, his slides didn’t say that, and their only basis was the S4 study that said otherwise.  This was literal falsity.  The court didn’t separately discuss materiality—a real blow for Palermo, it seems to me, given the real difference in critical pressures between PVC and HDPE, and the other uncontested crack lengths.

Palermo didn’t dispute that he was wrong about the amount of pipe that needed to be replaced in one place and the crack lengths in three instances. He argued that “his underestimating a 200-foot crack occurring in a Tampa, Florida project...[that] was substantially longer than 200 feet” is evidence “[t]hat [he] did not set out to exaggerate crack lengths.”  But, “for liability purposes it does not matter whether Palermo made one literally false claim whose inaccuracy was favorable to UGSI,” when there were other literally false statements unfavorable to it.  UGSI was entitled to summary judgment on liability for these statements.

UGSI further argued that the remaining challenged statements were deceptive. UGSI contended that its pipe had a different chemical makeup that made it substantially superior to the pipe used in the experiments fifteen years previous; that showing critical pressure with varying amounts of air was misleading because properly handled pipe will never contain more than 2% air; that accurately reporting crack lengths was misleading without disclosing the initiating event; and that PVC was not meant to be tested by the methodologies Palermo used.  There were factual disputes about each of these.  For example, Palermo and his expert both testified that water-pressurized pipe in the field commonly contains up to 10% air volume.  (I am especially sympathetic to Palermo’s argument that, notwithstanding that RCP might not have happened without mishandling/mis-installation or random error, it’s reasonable to assume that there will be some of that in the future.  The court, though, found that a jury could conclude that describing RCP without disclosing what caused it is misleading.)

Palermo argued that UGSI lacked a survey to show misleadingness, but surveys are not required as a matter of “an iron rule.”  (No pun intended?)  The evidence of concerns from two engineers caused by seeing the slide show supported “a reasonable inference that the slide show’s false or misleading statements confused these consumers, for their worries were apparently assuaged only after UGSI presented information to rebut Palermo’s claims.”

Palermo finally argued that UGSI didn’t show harm, as required by Lexmark, because one of the concerned engineers had no decision-making authority, while the others ended up using Fusible PVC anyway.  “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.” The evidence that UGSI needed to produce its own rebuttal presentation “permits a reasonable inference that Palermo’s presentation directly led to a diminution in goodwill and reputation for Fusible PVC.”

Trade libel under California law: This requires that the defendant made a false statement of fact, the statement was made with actual malice, and the false statement diverted business away from the plaintiff or diminished the value of the disparaged product.  UGSI argued that, when a person disparages a plaintiff’s only product, he necessarily defames the plaintiff personally, triggering the lower negligence standard for a defamation claim by a private party. The court disagreed.  Also, UGSI failed to adduce evidence that shows that “particular purchasers...refrained from dealing with [it],” and that it was deprived of any particular transactions. “Unlike claims under the Lanham Act, trade libel claims under California law must be centered on particular losses emanating from lost business opportunities.”  Thus, Palermo was entitled to summary judgment on this claim.

California FAL: Proposition 64 restricted standing under the FAL to “any person who has suffered injury in fact and has lost money or property as a result of a violation” of the law. The resources expended to create UGSI’s corrective presentation and meet with clients qualified as lost money or property.  (I wonder about that—if these were salaried employees doing the work, wouldn’t they have been paid anyway?)  Nor did UGSI need to show its own reliance on the false statements to prevail; Proposition 64 wasn’t designed to preclude competitors from bringing false advertising claims.  Summary judgment denied.

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