Wednesday, September 09, 2020

seller's private definition of "Made in USA" fails; disgorgement appropriate

Newborn Bros. Co. v. Albion Engineering Co., 2020 WL 5015571, No. 12-2999 (NLH/KMW)

After a bench trial, the court found Albion liable for falsely advertising its caulk dispensing guns as “Made in the USA” (a bit ironic given the name, no?).

There are different kinds of dispensing guns. Manual guns have two key components: a material containment unit (“MCU”) and a handle assembly. Some tasks require additional parts, including caulking knives or spatulas.

Newborn imports dispensing guns, parts, and accessories from China and Taiwan in finished condition. Its current president, Lee, testified that the industrial/professional market tends to purchase more “heavy duty caulking guns,” including bulk and sausage guns, while the paint and hardware market tends to focus on less durable products like “inexpensive cartridge guns.” Newborn introduced two new manual bulk dispensing guns, designed to compete with Albion’s bulk guns. Newborn was trying to create “something as similar to the Albion gun as possible,” but priced at $32, $6 less than Albion’s models. Despite this lower price, Newborn had limited success. Lee investigated the reasons, and “a salesperson told him that while the salesman believed Newborn created a superior and less expensive product, Newborn had trouble competing in the industrial/professional market because Albion, Newborn’s competitor, manufactured its products in America.” Lee testified that one of Newborn’s independent sales representatives “confirmed that many customers had inquired whether Newborn products were made in America like Albion products.” Upon investigation, Lee determined that at least some of Albion’s products were in fact made overseas. He visited distributors in a number of states; some Albion displays stated that the products were made in America.

A 2010 internet post says the author bought a $30 Albion caulking gun and found a hang tag that says, “Made in Taiwan.” The post says that, when the author called, Albion stated that “the page on their website is incorrect. They import most of their guns from Taiwan.” The post encouraged others to “be wary of anyone claiming to make products in the U.S.” and said “Albion refused to update their website and they are still actively deceiving customers into buying foreign made products with a Made in U.S.A. label.”

By the end of 2011, Lee sought help from Customs; a customs agent recommended a private lawsuit. In 2012, he used a SurveyMonkey survey that posed both multiple choice and open-ended questions to distributors about what Newborn products they buy; their reasons for not purchasing from Newborn; their thoughts about the quality of Newborn’s products; and their preferences on discounts. He received fifteen responses showing a variety of factors. “Seven out of fifteen respondents answered that the reason they do not buy all or more from Newborn is that Newborn’s products are not made in the USA.”

Another witness testified about attempts to sell to a specific purchaser, where there was “a kind of firewall” and that he “couldn’t get past the fact that we were not made in the U.S.A.” [More testimony of this type omitted.] A West Coast distributor similarly transitioned away from Newborn to Albion in 2010 because “Mark Schneider [of Albion] is always talking about how his products are made in the U.S.A. at the SEAL meeting, in his presentations, and in sales calls and I have to support that.”

Newborn sued in 2012 (yikes) and issued a press release, after which Albion made some changes.

Evidence of materiality/harm. Among other things, Newborn’s sales to Canada increased because Albion was no longer issuing NAFTA certificates that entitled customers to a 6.5% tariff savings for products made in America. Sales to one company increased from $6,600 in 2011 to $44,000 in 2015. An independent sales representative testified that following this suit, he was able to sell to distributors that had previously been exclusive to Albion, doubling his commissions between 2012 and 2017, despite only small adjustments to Newborn’s prices and sales force. He testified that the highest increase in sales was in accessories, but he also saw an uptick in sausage and cartridge guns. When he informed another company that Albion’s spatulas were not in fact made in America, it confirmed that fact and then began ordering spatulas from Newborn. Etc.

The actual country of origin situation. Albion is a New Jersey corporation established in 1929. In recognition of the founding Schneider family’s continued control over Albion, Albion described itself as a “third-generation American manufacturer.”  Until 2000, Albion manufactured all its guns and accessories in its Philadelphia plant. Its original guns were stamped with the phrase “ALBION ENG. CO. PHILA. PA U.S.A.” starting in the 1930s “and continued to be labeled this way into the twenty-first century.” But in the new millennium, the board pushed for low-cost overseas manufacturing alternatives, and in 2001, Albion begain using a Taiwanese company to make four models. Later, it began sending handle components made in Philadelphia for partial assembly in Taiwan, then final assembly back in Philadelphia, and it also began “supplementing” its barrels with barrels made in Taiwan. It expanded the handle export/re-import practice and began importing caulking knives from Taiwan. Then it began importing spatulas. By 2008, it was importing more “loosely assembled guns” that were complete other than adjustment and lubrication when imported. Some Albion guns still included handle assemblies that were made only in Albion’s U.S. plant without any imported components.

Labeling and marketing. “Schneider testified that it was his belief that it was appropriate to identify products as being ‘Made in America’ if over fifty percent of the cost of the tool were incurred within the United States.”  He didn’t explain where this formula came from or why it was justified. He used a formula (calculations not disclosed at trial) for calculating production costs including labor, overhead at the manufacturing plant, items made in the United States, and post-production packaging. Using this formula, Albion decided to stop applying the “Made in the U.S.A.” label to its guns with imported subassemblies in 2008. Given the absence of hard evidence of how the formula was applied to particular products or lines, the court characterized it as “either an ad hoc, or worse post-hoc, attempt to create the illusion that Albion’s imprecise and at times indiscriminate use of ‘Made in America’ was a good faith mistake.”

Ultimately, at least until the case was filed, and, for export certificates, up through trial, “Albion lacked any systematic or disciplined program designed to insure that its products met Department of Homeland Security marking requirements, that its export certificates were truthful, or that its website and product literature regarding foreign-made products sold domestically adequately and accurately revealed the country of origin.” Albion “deliberately kept its head in the sand content to free-ride on, and at times promote, the false illusion that it was a purely ‘Made in the USA’ company.” Concerns expressed within the company supported this conclusion.

Among other details, Albion produced a line (B-line) that was initially marked with a gold and black sticker reading “Made in Taiwan” on the recoil plate. Schneider testified that a distributor told him that the gold sticker was “loud” and Albion switched to using a no-contrast stamp which Schneider described as “out of the way, difficult to see” and speculated that he thought the distributor “would be pleased.”

In 2004, Albion instructed its Taiwanese manufacturer to print “75 Year History – USA Manufacturer and Designer” on one line of guns. This statement was updated in 2011 to read “80 Year History – USA Manufacturer and Designer.” It was removed in 2012.

Albion also switched for some guns to a hang tag with a Taiwan mark and asked its Taiwanese manufacturer to remove its information from the products. The hang tag would likely be removed before use; nothing left on the gun identified it as originating overseas. “Anyone examining the tool in such a condition post-sale and examining the banner sticker … would easily be misled into believing the product was domestically produced.” Now, Albion uses a metal stamp on the recoil plate of these tools to indicate Taiwanese origin.

In 2004, Albion’s website contained a page entitled “The Albion Difference,” which included the claim: “All our dispensing products and accessories are designed and manufactured in the USA, from our location in Philadelphia, Pennsylvania.” In 2007, it was updated to read: “all of our dispensing gun products and accessories are designed and manufactured in the USA, from our location in Philadelphia, Pennsylvania.” (US manufacturing was actually in New Jersey by then.) In 2010: “All of our dispensing gun products and accessories are designed in the USA, from our location near Philadelphia, Pennsylvania.” There were other publications, such as a catalog stating “All Albion Products are Made in America” in the bottom right-hand corner of its cover. A later catalog omitted that statement and said that the B-line was “USA engineered with the savings of an import” and that “Albion is a third generation American manufacturer.” Old catalogs continued to circulate widely.

The Albion’s Owner’s Guide includes the statement “All Albion products are made in America.” This guide provides instructions for users on how to use Albion’s cartridge and bulk guns. But because these instructions do not apply to B-line users, the Owner’s Guide was generally not distributed with B-line guns.

Interactions with customers. Albion’s customers requested a NAFTA certificate of origin from Albion between fifteen and twenty times per year. These certificates read “Meets FTC all or virtually all made in U.S.A. eligibility requirements.” The responsible employee testified that she did not know what the FTC is or what it requires in terms of product labeling. A certificate of origin introduced into evidence indicated that she had (falsely) certified to 3M that Albion’s product met the FTC’s “all or virtually all” made in U.S.A. standard.

Among the specific events: In 2004, an adhesives retailer in the roofing industry asked to return guns stamped with “Taiwan” on the body because they “need[ed] applicators that we can sell as being made in the U.S.A.” Albion replied that it would “replace quote, made in Taiwan recoil plates with a no-labeled recoil plate.” Albion did so, using unstamped recoil plates that were made in Taiwan. Albion did not seek legal counsel before it did this. For another adhesive manufacturer, Albion customized guns and acceded to its request that the “Made in Taiwan” mark be “move[d] to an obscure segment of the box.”

In 2009, Albion told ABC Supply, a distributor with around 900 retail locations, that it could place “Made in USA” labels on all Albion’s tools. Schneider told ABC that one model was the only tool with significant overseas costs, and that he would want an additional $3.96 if ABC elected to put “Made in USA” on it.

Post-suit actions. Albion contended that it stopped most if not all of this once Newborn sued, and that it prioritized asking distributors to take products labeled “Made in U.S.A.” down. Its witness testified that “some [distributors] comply, others do not.” In June 2012, the U.S. Customs and Border Protection Agency issued a “Notice to Mark” that the hang tag on the B-line was “not in close proximity to line stating USA Manufacturer and Designer.” Albion began putting a white with black lettering “Made in Taiwan” sticker on the handle of its B-line product.

Still, in September 2015, Albion’s Amazon listings for its imported accessories included the claim “Made in U.S.A.” There was testimony that a seller doesn’t always control what Amazon’s listing says.

Non-parties. Various non-party testimony came in about the structure of the market and why Albion and Newborn were more direct competitors than other market participants. Testimony also covered demand for American-made products: although durability and price are important to many, USA orgin is also often preferred, though there was also some testimony that origin wasn’t the overriding consumer concern. Other parties testified that they believed the products were made in the USA.

Experts. Newborn’s marketing expert, Wallace, prepared an expert report on the impact of the “Made in America” claim based on a number of third party surveys in which a significant number of respondents identified “Made in USA” as a factor in their purchasing decisions, if not one of the most important factors. Albion’s expert, Nowlis, rebutted this report but also didn’t conduct a survey. He criticized existing surveys’ aided questions, lack of control group and peer review, and reliance on a market different from the one at issue here. “Nowlis expressed skepticism about the FTC’s statements that consumers take into consider whether a product was ‘made in America,’ noting that ‘[t]he FTC does surveys sometimes and sometimes it doesn’t, so I don’t know where they’re getting this recommendation from.’” He further stated: “we could all agree that sometime ‘Made in the USA’ is material to some people, but sometimes it isn’t.” People say they care, but it isn’t clear that they follow through on this purported commitment.   

Albion commissioned a marketing consultant to help Albion decide whether to begin producing and selling an imported line of tools between 1989 and 1991. The relevant witness testified that he recalled that the expert reported that “all other things being equal, that at the point of purchase, if a buyer was comparing a USA versus a foreign product, that somewhere around ten or eleven percent premium price was about as much as the average end user of a caulking gun would pay.”

Housekeeping elements for liability: “actionable statements must be made by the defendant,” but a defendant can be liable for statements by third parties, for example, when the speech was “created, sponsored, and presented by the defendant” or when there is contributory false advertising. Also, some courts have held that “statements made inside the product’s packaging, available only to consumers after the purchase has been made, do not affect the choice to purchase” and therefore are not actionable under the Lanham Act.

Albion made several false statements, even though it didn’t have a duty to disclose country of origin under the Lanham Act. [Given the legal requirement to label foreign origin, this might be a case where nondisclosure necessarily implies US origin as well, but that’s not super important here.] Statements such as “All Albion products are Made In America,” and “All our dispensing products and accessories are designed and manufactured in the USA, from our location in Philadelphia, Pennsylvania” were false. Statements made (or disseminated, really) by the distributors were attributable to Albion, which “created, sponsored, and presented this information.”

These statements were factual and deceptive; third parties’ reliance on them to sell Albion’s products to end consumers were “evidence that the third parties themselves were deceived by Albion’s false origin claims and evidence that Albion has never corrected the false perception it created about the origin of its products.”

Even the statements available after purchase were actionable. Although statements in instruction manuals might not be made to influence consumers in product choice, the statement “All Albion Products are Made in America” “brands Albion falsely as a manufacturer of products made entirely in the United States” and Albion specifically lists other Albion products available for purchase in the catalog it includes in product boxes, “supporting a finding that these materials were meant to influence future purchasing decisions.” Also, these materials were available on Albion’s website before purchase.

In its introductory discussion, the court concluded that “Made in America” also wasn’t puffery. America is a specific location, and “Made in America” is “a specific standard defined by Government agencies.” [Notably, it doesn’t matter whether consumers know the details of the definition; they rely on there being such a definition. You can see the tension between cases like this one and the cases rejecting, say, the US government’s definition of “butter.”] Newborn’s own research confirmed that the claim was measurable and falsifiable: comparative research could establish its empirical truth or falsity.  The evidence also showed materiality.

Then, in its later discussion, the court noted that another decision found that a “Made in USA” claim was ambiguous, Honeywell Intern. Inc. v. ICM Controls Corp., 45 F. Supp.3d 969 (D. Minn. 2014), because of different definitions of “made” in FTC guidelines and policies, other federal regulations and dictionary definitions. The mere fact a statement does not conform with a federal agency’s guidelines is usually “insufficient evidence that a claim is literally false or misleading.” Yet “customs and FTC standards remain relevant for the Court to consider in its decision-making process, especially when the agency has developed an expertise in the area.”

Here, Albion made both literally false and ambiguous, misleading statements. Literally false: certificates of origin falsely stating that Albion’s products met the FTC’s standard. Albion argued that these weren’t “advertising or promotion,” but that argument failed. The court is somewhat confusing in its discussion here: the claim to meet the FTC’s standard could readily be treated as a separate claim from “made in the USA,” just as “X is clinically proven” is a separate “tests prove” claim from “X is true.” This would be particularly appropriate given customers’ apparent demand for the certificates of origin referencing the FTC standard over and above their demand for simple “made in the USA” labeling. But it’s not clear that’s how the court reasoned.

Some of the labeling was also literally false, when Albion allowed special orders to bear labels that claimed Albion products were made in the United States. However, “Albion’s practice of replacing recoil plates and relocating country of origin claims is not literally false because these messages are ambiguous and rely on the viewer to integrate information to interpret this message.”

Also literally false: Website claims that “All our dispensing products and accessories are designed and manufactured in the USA, from our location in Philadelphia, Pennsylvania” and catalog statements that “All Albion products are made in America.”

Misleadingness: Stamping products that were made at least partially abroad with “ALBION ENG. CO. PHILA. PA. U.S.A.” was not just merely an address or a “piece of legacy information.” Also misleading: Printing “75 [later 80] Year History – USA Manufacturer and Designer” on B-line guns; “third generation American manufacturer”; a new product announcement for the B-line identifying Albion’s products lines as “U.S. manufactured professional tools as well as commodity guns”; comparison of the B-line to Asian and European imports without acknowledging that the B-line is also imported; and advertising models as “Made in the USA” when significant portions of these guns were manufactured in Taiwan.

Some of the statements were even false by necessary implication. In context, statements such as “third generation American manufacturer” and “USA manufacturer” claims, “when considered in the context of Albion’s blanket statement, its other marketing, and its employees’ emphasis on country of origins, convey by necessary implication that Albion products are made in America. These statements do not rely on consumers to integrate separate components and draw a conclusion.”

However, the comparison to other imports did require inference, as did Albion’s statement that it manufactures “professional tools as well as commodity guns.” These ambiguous statements were shown to be likely to deceive.

Were the catalogs merely outdated? No. [It’s not clear this matters; most cases to reach the issue hold that falsity is falsity, even if the falsity is created by subsequent developments.] Albion began producing its B-line in Taiwan in 2001 but engaged in “continual distribution of outdated literature containing statements that had not been true for years as part of a pattern of deception in the marketplace.” Albion also said its “general statements” in small font were corrected by specific literature that acknowledges that the B-line was built overseas. But “these occasional acts of candor” were insufficient.

Albion argued that no reasonable consumer could be misled by these claims because Albion used a factually accurate, unambiguous statement of the geographic origin of the B-line guns, as in the Pernod Ricard case. But in that case, both the name “Havana Club” and “Made in Puerto Rico” appear on the same label, so consumers could see the true geographic origin when they saw the name. Here, “there is no guarantee that a customer reading a catalog or a section of Albion’s website would also encounter Albion’s blog post, press release, or a B-line gun itself.” In the “entire context,” the statements were literally false or misleading. The court pointed out that the statement “All Albion Products are Made in America” was not often coupled with the caveat that Albion’s B-line guns were manufactured in Taiwan, and Albion apparently never disclosed its self-administered lesser standard for Made in America.

Nor did the Honeywell case mean that “Made in America” could never be literally false:

Honeywell did not involve products made entirely abroad, nor did it involve end products that were required by law to be marked legibly, permanently, and conspicuously with their foreign country of origin pursuant to specific decisions thereon by U.S. Customs and Border protection. Honeywell also did not present a blanket statement regarding a country of origin. Under any of the thresholds discussed in Honeywell, Albion’s B-line guns do not meet the standard for being “Made in America” as they are wholly manufactured in Taiwan.

The customs rulings were relevant to falsity even if not binding: Customs held that certain Albion guns should not be labeled “Made in America.” Likewise, by Albion’s own admission, Albion’s products didn’t meet the FTC standard. Its claims were literally false.

As for proof of deception/harm to the plaintiff, “there is no quantitative measure of the degree to which an advertisement must mislead or deceive consumers to prevail.” A qualitative approach suffices.

However, since Newborn sought monetary damages and relied in part on misleading, not just literally false, statements, it had to show actual deception. It did so. Newborn didn’t need a survey given the evidence it did have, and the court refused to draw an adverse inference based on Newborn’s decision not to introduce a survey. The existing surveys about “Made in the USA” and related expert testimony were admissible, helpful, and at least “suggestive” of consumer deception. And even without the expert, Newborn showed several instances of actual consumer deception, including “a number of conversations with Albion customers.” One, for example, testified that he believed Albion products were made in America because it was “printed right on the side of the box.”

Because Newborn sought monetary damages, the court refused to presume materiality even from literal falsity, but again there was both direct and circumstantial evidence of materiality, along with evidence that Albion and Newborn products were “reasonable substitutes” for one another. “Newborn was not required to demonstrate that customers were purchasing Albion products only because they were made in America.” It sufficed that “many customers consider it a relevant factor.”

Injunctive relief: Newborn showed irreparable injury by showing that, “[d]espite Newborn’s best efforts to emphasize its added features and lower prices, Newborn has struggled to compete with Albion in the professional/industrial market. Newborn’s evidence demonstrates that its competitive advantages were undercut by Albion’s claims that its products were made in America.”

Monetary relief: Newborn showed that it was entitled to disgorgement. It showed prior diverted sales by showing that, once the truth about Albion began to penetrate the market, its own sales increased. Newborn saw the greatest growth in products that compete directly with Albion products, without any changes in pricing or sales force at Newborn. Albion argued that Newborn’s growth was attributable to Newborn’s innovations and the rebounding of the market following the global recession in 2008 and 2009 and that it also experienced growth in all business segments during this time period, but Newborn argued that it hadn’t suffered greatly in the downturn. This chronology alone might not have been enough, but Newborn also provided evidence of sales it never made because they were diverted to Albion based on false beliefs about Albion’s lack of foreign content.

Equity weighed in favor of disgorgement, since “Albion intended to distinguish itself from Newborn by stating that all of its products were made in the United States to the detriment of its customers understanding of where Albion products were made,” and made the statements for years. Albion argued that Newborn’s delay in filing suit weighed against disgorgement, but the court wouldn’t “penalize Lee and Newborn for conducting an investigation into the origin of Albion products, assessing its own market position, and consulting with the U.S. Customs and Border Patrol Agency before filing this suit.”

After considering Albion’s affirmative defenses not resolved here, the court would consider the amount of disgorgement if necessary.

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