Fake demos/altered tests v. customer's testimony they didn't matter: a jury will decide

Eco Electrical Sys., LLC v. Reliaguard, Inc., 2022 WL 1157481, No. C 20-00444 WHA (N.D. Cal. Apr. 19, 2022)

The parties compete to supply Pacific Gas & Electric Company with specialized guards that protect birds and other animals from electrocution. PG&E asked Eco to design a “cutout cover” to prevent animals from coming into contact with “cutouts,” a type of electrical device that rests atop utility poles. The resulting ECC-3, which is designed for cutouts made out of porcelain, is Eco’s most successful product and is also sold to other utility companies. PG&E also purchases, in much smaller quantities, the ECC-10 cutout cover, which is made from the same material but is designed for particularly large porcelain cutouts. And Eco sells— but not to PG&E — the ECC-2 cutout cover, which is designed for smaller cutouts made from polymer.

PG&E developed concerns about the fire risk associated with the -3 and -10 covers, fearing that if electrical equipment caught fire, the covers could cause a wildfire by melting and dripping on the ground below. (Fun fact: Judge Alsup, who wrote this opinion, is overseeing PG&E’s probation for its role in wildfires! That might make for some awkward moments in this case.) Eco thus developed what it contends is flame-resistant material and told PG&E it had the ability to sell cutout covers composed of this new material. But PG&E never followed up and continued to buy the ECC-3 product without modifications.

Meanwhile, PG&E was discussing the fire issue with other potential vendors, including what eventually became defendant Reliaguard. Eco alleged a campaign of disruption: (1) wining and dining key decisionmakers at PG&E via a consulting firm, one of whose managers had a longstanding personal relationship with the PG&E employee spearheading PG&E’s effort to replace the ECC-3 with a fire-resistant cutout cover. That PG&E employee asserted his Fifth Amendment rights in this litigation and refused to be deposed, which does raise some eyebrows. He wasn’t the only PG&E employee cultivated by this campaign; another one provided Reliaguard with photographs and measurements of Eco’s cutout covers, and another relevant person obtained samples of Eco’s products and Eco pricing information, which he then supplied to Reliaguard.

(2) Reliaguard created and shared with PG&E allegedly defamatory videos that allegedly misrepresented Eco’s products, claiming that they failed a test assessing whether they present a risk of electrocution. Eco alleged that the videos misleadingly depicted an ECC-10 cover, which is designed for large porcelain cutouts, placed on a smaller polymer cutout and not installed properly, resulting in an inaccurate depiction of how loosely Eco’s cutout covers fit over PG&E’s cutouts. “Because the purpose of the covers is to prevent animals from coming into contact with energized cutouts, Eco asserts that portraying Eco’s cutout covers as having a loose fit falsely suggested to PG&E that Eco’s products were not effective.”

(3) Reliaguard allegedly provided PG&E a doctored test report falsely suggesting that Eco’s ECC-2 cutout cover was not flame resistant. PG&E required that any new cutout cover it approved must receive a “V-0 rating” under the UL 94 standard, which essentially meant the cover must withstand high heat for a certain length of time without catching on fire, melting, or dripping. The test report that Reliaguard gave to PG&E stated that the tested sample, supposedly Eco’s “ECC-2 Cutout Cover,” failed to achieve a V-0 rating. Eco alleged that a Reliaguard employee sent a piece of Eco’s ECC-2 cutout cover to a third-party laboratory to test the flame resiliency of the piece under the UL 94 standard. The lab then sent the results of the test to Reliaguard on a document that included the lab’s letterhead. Reliaguard allegedly modified the document to change the letterhead and omit language clarifying that the tested sample had been previously burned and that the tested sample was merely a piece (a pin) as opposed to the entire cover. The Fifth Amendment-invoking PG&E employee passed this on to the team at PG&E conducting the approval process for the new cutout cover. PG&E later announced it had placed Eco’s ECC-3 cutout cover on its “Do Not Purchase” list and had approved Reliaguard’s cutout cover for purchase. “The ECC-3 has been Eco’s best seller but has gone unsold to PG&E since 2019.”

Reliaguard argued that PG&E’s decision was driven by concerns that had nothing to do with the videos or test report, in particular Eco’s failure, after an initial meeting, to provide third-party test reports showing that Eco’s product was flame resilient. “Multiple PG&E employees testified that, when they were assessing Eco’s products in 2018, they felt the 2014 test reports were ‘outdated,’” and PG&E had also received reports suggesting that Eco’s products “electrically tracked,” which presented a fire risk. PG&E employees attributed this to the “loose fit” of ECC-3 covers over PG&E’s cutouts, which, among other problems, allowed squirrels to store acorns inside the cutout cover, which PG&E believed facilitated “tracking” and thus was a fire risk. In addition, PG&E employees testified that they chose Reliaguard’s product because Eco failed to follow PG&E’s formal requirements for product approval and Reliaguard was generally more responsive to PG&E’s feedback. Several PG&E decisionmakers stating that they did not rely on the videos and even found them unprofessional/absurd.

Eco sued for trade libel, intentional interference with prospective economic advantage, false advertising/unfair business practices under California law, and Lanham Act false advertising.

A note on interstate commerce: It does not matter whether any actionable meetings or statements took place outside of California, or whether Eco’s products are made or shipped outside California. Relevant communications were published online and shared in emails. “Communications made online generally implicate interstate commerce.”

A jury could reasonably find that Reliaguard’s alterations of the test report were false or misleading.   Reliaguard modified the original test report to omit a segment explaining that the tested sample “was received with some burning on the ends.” “This omission was critical because the flammability test could not have produced reliable results if the tested sample had been previously burned and tampered with, or so a reasonable jury could find.” And Reliaguard employees changed language in the original report from “Objective: Evaluate part for FR performance” to “Objective: Evaluate Eco Cutout Cover (ECC-2) for FR performance.” Reliaguard’s own expert offered testimony suggesting this change could also be misleading. A reasonable jury could also find that this caused Eco injury, given that Fifth Amendment guy emailed the report to other PG&E employees, saying “We have been looking at this for the past three years.... We need to move forward with the products that we believe work well.... Please make this a high priority for your team.” Etc. “Two weeks later, PG&E began the process of approving Reliaguard’s cutout cover for purchase. This evidence supports a reasonable inference that the modified test report influenced PG&E’s decision to purchase the Reliaguard’s cover instead of the ECC-2 cover.”

There was also a triable issue on whether the videos constituted false advertising. It was undisputed that the videos depicted an ECC-10 cutout cover placed on a polymer cutout and that ECC-10 covers are designed for larger porcelain cutouts. “Those facts alone would allow a reasonable jury to infer, taking all inferences in Eco’s favor, that the videos were literally false or misleading,” and there was also evidence that the ECC-10 was not installed properly. What about the PG&E testimony that the videos didn’t influence their decision? “We will see if the jury believes this self-serving testimony in light of all the circumstances to the contrary.” The Ninth Circuit “has repeatedly suggested that Section 43(a)’s injury requirement is lenient and ‘express[ed] a distinct preference for those opinions permitting relief based on the totality of the circumstances,’” and, for false comparative advertising claims, “has held that publication of deliberately false comparative claims gives rise to a presumption of actual deception and reliance.” It has explained:

The expenditure by a competitor of substantial funds in an effort to deceive consumers and influence their purchasing decisions justifies the existence of a presumption that consumers are, in fact, being deceived. He who has attempted to deceive should not complain when required to bear the burden of rebutting a presumption that he succeeded.

That fit the facts:

Here, Reliaguard decided to procure samples of Eco’s products, construct an elaborate set piece incorporating two energized cutouts, craft a fake crow, film multiple videos, and upload those videos to the company YouTube channel. A jury could reasonably conclude that Reliaguard’s comparative advertising efforts were deliberately false within the meaning of the Lanham Act and caused actual consumer deception and reliance.

A jury could find injury: the record showed that

Reliaguard employees broadcast the videos to PG&E decisionmakers at a meeting and then repeatedly emailed PG&E decisionmakers — including PG&E’s Senior Vice President — links to the videos. Shortly after the videos were shared, PG&E chose to substantially end its fifteen-year business relationship with Eco in part because of concerns with the loose fit of Eco’s cutout covers. … This evidence is sufficient to establish a genuine dispute over whether the videos that Reliaguard thought were worth the significant effort of producing had some impact on PG&E’s decision or at least caused a “lessening of the goodwill associated with” Eco’s products.

Nor need Eco show that the videos were the sole cause of its injury. Circuit precedent establishes that “an inability to show actual damages does not alone preclude a recovery” under the Lanham Act.

However, the consulting firm excaped liability for failure to show that it was involved in the falsity.

Trade libel: Essentially the same results. As to knowledge,

the record shows that Reliaguard was familiar with Eco’s products, spent years and significant resources developing a competing cutout cover, and engaged in a deliberate effort to create comparative videos. Reliaguard acknowledges, for example, that its own “early prototypes were focused on the porcelain cutouts that PG&E was using at the time” and it had to engage in “numerous redesigns” to adapt to PG&E’s new polymer cutouts. A reasonable jury could infer that Reliaguard knew that an ECC-10 cutout cover was not designed to fit over PG&E’s polymer cutouts. Alternatively, a reasonable jury could infer that Reliaguard made its videos with reckless disregard as to whether Eco’s product was installed properly.

Similarly with the videos.

Intentional interference with prospective economic advantage: although Eco argued that the consulting firm’s “wining and dining” of PG&E employees was “improper,” Eco has not identified any “constitutional, statutory, regulatory, common law, or other determinable legal standard” that this conduct would violate, though that didn’t mean that evidence of “wining and dining” will be excluded at trial. There was a triable issue on the other parts of the claim.

California false advertising/unfair competition: The UCL is equitable and generally limits remedies to injunctive relief and restitution. “Lost profits are damages, not restitution, and are unavailable in a private action under the UCL.” Eco had no damages theory providing for restitutionary relief, and the asserted communications took place several years ago, making injunctive relief inappropriate, so the UCL claims were kicked out.