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,
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
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
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.

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