Wednesday, July 03, 2019

Flange wars: material misrepresentations aren't enough without causation

Boltex Manufacturing Co. v. Ulma Piping USA Corp., No. 17-CV-1400, 2019 WL 2723253 (S.D. Tex. Jun. 28, 2019)

More flanges! Boltex alleged that defendants misrepresented that they “normalized” their flanges. Normalization is a heat treatment process that makes steel more durable; it’s more expensive than not normalizing the flanges, and Boltex charges more for normalized than non-normalized flanges. ASTM has a published set of standards and specifications applicable to carbon steel flanges to ensure uniformity in the industry; some consumers only buy industry standard-normalized flanges. “[C]ustomers cannot simply look at a flange to determine whether it has been normalized,” but must rely on sellers.

Defendants allegedly misrepresent the normalization-status of their flanges “in the catalogs, brochures, price lists and websites of third-party distributors of Ulma flanges,” “in the MTRs [mill test reports, described as a “birth certificate” for a flange] that accompany each flange,” and by stamping A105N on each flange where N stands for normalized and A105 represents the relevant ASTM standard.

Ignoring Justice Scalia’s instruction not to call the issue in Lexmark “prudential standing,” the court found that plaintiffs did have standing for purposes of avoiding summary judgment. Article III: There was deposition testimony that “Ulma’s purported misrepresentations directly affect the market in which the Plaintiffs participate and that customers compare Ulma and Boltex prices,” and that had Ulma not advertised their flanges as normalized, “a portion of [the market] definitely would have come to Boltex.” They also provided a damages model as evidence of their purported losses.

Lanham Act “prudential” standing: Defendants argued that because Boltex is a domestic manufacturer and Ulma is a foreign manufacturer, the two companies weren’t competitors because customers usually choose either a foreign or domestic brand of flange and stick to it. Plaintiffs’ evidence was otherwise, creating a genuine fact issue. As competitors, they’d be within the Lanham Act zone of interests. There was also evidence supporting proximate cause; losing sales to a product of supposedly equivalent quality sold at a lower price is a classic Lanham Act harm story.

For similar reasons, there was a genuine issue of material fact on falsity. Defendants argued that their flanges were “normalized” via either the ASTM approved method or their own “proprietary method,” but whether that method counted as normalization was disputed, including by testimony from defendants’ own representatives. Defendants also argued that representations that appear on third-party websites or in third-party catalogs constitute commercial speech that couldn’t be attributed to them. However, there was evidence, including the inscriptions on flanges, that at a minimum supported a claim of contributory false advertising.

Defendants argued that the inscriptions on flanges and statements in MTRs weren’t commercial advertising or promotion because they were only provided to a customer after purchase. However, “the stamping and inclusion of MTRs confirm the assumption that consumers make when purchasing the flanges, namely that the flanges are of the quality and specifications that they purport to be.” There was evidence that “customers depend on the MTRs as an accurate reflection of what they purchased,” and that an MTR is a “birth certificate for a flange.”

As for deceptiveness, this is presumed for literal falsity. In addition, plaintiffs provided evidence that customers sought reassurance from Ulma that their flanges were in fact normalized in accordance with ASTM after the filing of this suit. A reasonable juror could use this to conclude that customers associated the “A105N” stamp with the ASTM normalization process specifically, rather than including Ulma’s proprietary method.

Materiality: similarly, there was evidence that ASTM-compliant normalization is an important standard upon which customers rely, and that consumers might have decided differently had they known the truth.

There was also “very thin” evidence of injury. Plaintiffs emphasized that Ulma specifically lists Boltex’s prices when responding to Requests for Quotes (RFQs). There was evidence that at least one of defendants’ customers actually compared the parties’ prices.

Prior proceedings before the ITC didn’t matter because the ITC had dealt with a claim that defendants were selling their flanges at an unacceptably low price; the Lanham Act claim wasn’t actually litigated nor were plaintiffs’ positions contradictory in a way calling for the application of judicial estoppel.

Boltex Manufacturing Co. v. Ulma Piping USA Corp., No. 17-CV-1400, 2019 WL 2723272 (S.D. Tex. Jun. 28, 2019)

Flanges, it turns out, are formed from rough steel forgings. Plaintiff “Weldbend buys forgings from domestic and foreign suppliers and manufactures the forgings into flanges in its Illinois facility. Boltex makes most of its own forgings domestically and performs its heat treating in one of its two plants located in Houston. In its second Houston plant, Boltex machines, finishes, and warehouses its flanges. Defendants produce their flanges in Spain.” Defendants allege that plaintiffs falsely advertise/falsely designate the origin of their flanges by falsely stamping/advertising flanges as “Made in the USA” or “American Made” when at least some of the steel in the flanges is internationally sourced. Weldbend’s packaging allegedly contains pictures of Uncle Sam and the American flag and that its social media accounts display representations such as, “This product [sic] Made in the USA with USA Steel.” In addition, Weldbend allegedly falsely advertises that its goods are made with “unquestionable traceablility.” Here, the court kicked out the false advertising claims except for “traceability,” on which it sought more briefing.

Initially, the court declined to rely on the FTC’s Enforcement Policy Statement on U.S. Origin Claims to define made in the USA. FTC standards don’t control in Lanham Act cases, which require showing falsity or misleadingness, not just a violation of the guidelines (although the guidelines indicate what the FTC considers false or misleading). The falsity had two aspects: (1) misrepresentation that flanges are “Made in the USA” when they are in fact made with imported steel and (2) implying that all of their flanges are “Made in the USA,” when in fact some are made using imported steel. The court found no evidence of literal falsity on (2); instead, while Boltex uses some internationally sourced steel, it didn’t mark those as “Made in the USA” and there was no evidence of an overall Boltex advertising scheme to the contrary. However, there was a genuine issue of material fact on falsity for Weldbend, which claimed that its “American Made line uses only top-quality steel from US mills, forged into fittings and flanges at Weldbend’s own plant in Argo, Illinois.” In this context, Weldbend defined “American Made,” removing potential ambiguity. There was testimony from a Weldbend executive that “American Made” flanges may use steel from either a US or an offshore mill, creating a fact issue on falsity. In addition, Weldbend admitted that it didn’t do any of its own forging.

Misleadingness: Defendants argued that there was a fact issue “as to whether [Plaintiffs’] use of unqualified and express U.S. origin claims, American iconography, and other statements leave a false and misleading impression that all of their products are manufactured in the U.S. with U.S.-sourced steel.” They provided deposition testimony from distributors who ordered plaintiffs’ flanges, one of whom who interpreted “Made in the USA” and similar statements as meaning “steel coming from the US” and two who didn’t. This wasn’t enough for misleadingness; “the Court must look for signs that consumers assume something incorrect about the product based on the language or imagery in the advertisement.” Anyway, the deponents were asked different questions and provided similar answers when they were asked similar questions.

The court also rejected screenshots of third-party social media posts that “juxtapose Weldbend and Boltex’s names with American imagery” and slogans such as “Buy American not dumped from China!” or “American Made Matters” as evidence of misleadingness; defendants didn’t explain who the poster was in relation to plaintiffs.

Finally, there was additional evidence about Weldbend individually that did demonstrate a fact issue as to whether consumers were confused by Weldbend’s use of the terms “Domestic” and “USA.” A distributor requested a quote for flanges and specified that “[r]aw material is required to be domestic.” A Weldbend customer service representative responded that “[e]verything [ ] quoted is U.S.A.” The distributor then sought to clarify whether “USA mean[t] the raw material as well,” to which Purpura responded “U.S.A. means it is melted and manufactured in the U.S.A.—Domestic means material from another country, manufactured here.” In a different email exchange, Weldbend informed a customer that he could not “guarantee that all material will be Melted and Manufactured in the USA” but that “[a]ll items which are not Domestic are noted as Import.” These representations seemed to conflict—both appear to define “Domestic” in different terms. Combined with evidence that Weldbend internally defined “American Made” as including flanges made in the US with imported steel but advertised the opposite, a reasonable fact-finder could find it misleading to call products made from non-U.S. sourced steel “American Made,” “Made in America,” or “Domestic” without clearly defining or qualifying those terms for consumers.

Materiality as to Weldbend: literal falsity would mean materiality, and at least one buyer insisted that the flanges sold to him be made in America with U.S. sourced steel.

Nonetheless, there was no direct evidence of injury. A damages model wasn’t enough. There was no evidence that plaintiffs’ profits resulted from the allegedly false advertising. And on this record, the customers misled by Weldbend’s “American Made” designation wouldn’t have accepted flanges produced by Ulma—a foreign flange manufacturer—as substitutes. One series of emails, for example, involved a bid that included a line stating that the “starting material [was] non-China.” The other party responded to the quote, stating: “I am concerned about the comment [regarding “non-China” material]. The starting material for these fittings and flanges MUST [sic] be from the USA not just non-China,” per her customer’s request; she did not “want to lose a customer over something like this.” There was no evidence in the record that this subset of customers would buy Ulma’s flanges as a substitute, even if the parties generally compete in the market for normalized flanges. Summary judgment granted (with the exception of “traceability”: plaintiffs didn’t adequately move for sj on this issue, which required more briefing).

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