False advertising of flanges leads to rare recall and some disgorgement


Followup on the multimillion-dollar verdict in this false advertising case. A jury found that defendants
falsely advertised their carbon steel flanges as being normalized and/or in compliance with ASTM A105, A961, and A941. “Normalizing a carbon steel flange improves the physical properties of the flange. … [This] is important, as flanges can be used in extreme high-temperature, high-pressure, corrosive environments.” Customers expect flanges marked “A105N” to be normalized in accordance with ASTM standards, but “have no easy, non-destructive, means of verifying whether or not the flange was actually heat treated.”
Still, “[n]ot all ASTM A105N flanges or flange manufacturers are created equally.” A hotly disputed issue at trial was whether the parties actually compete: plaintiffs are domestic manufacturers, and Ulma sells only foreign-made flanges.  “[D]omestic flanges are considered by some to be superior to foreign flanges and command a price premium. Indeed, testimony suggested that certain companies would not accept foreign flanges and that distributors would therefore stock foreign and domestic flanges separately so as not to commingle the flanges—in order to comply with the domestic-only orders. Other consumers do not care about a flange’s origin and still others prefer foreign made.” Thus, Ulma argued that its false advertising hadn’t harmed Boltex.  Boltex contended that “many buyers—including pipeline companies—would accept both foreign and domestic flanges interchangeably for many jobs,” though it conceded that they weren’t head to head competitors in all markets.
Plaintiffs’ damages expert calculated Boltex’s damages by determining the hypothetical share of the market that they would have occupied if Ulma wasn’t a market participant. Defendants’ damages expert argued that there was no overlap between the two markets and showed that Boltex made virtually no sales to Ulma’s five customers (almost 85% of their sales), though the numbers changed once one considered Ulma’s top ten customers. The overlap was thus both “evident” and “somewhat small.”
The jury chose a middle ground, awarding $650,000 in damages to Boltex for the six years covered by the lawsuit, and $300,000 in damages to co-plaintiff Weldbend, much lower than the millions sought by plaintiffs. The court agreed that this was appropriate.
Although at least 95% of Ulma’s “A105” flanges weren’t normalized in compliance with ASTM A105, as they explicitly represented, Ulma argued that they were normalized according to Ulma’s “in-line normalization process.” The court declined to rule on “the chemical soundness of this process.” Ulma falsely advertised ASTM A105 normalization, and that’s that. 
This false advertising included a 2017 letter to customers sent the month that suit was filed, accusing Boltex of lying about the mislabeling and falsely reiterating that they did normalize their flanges in compliance with ASTM standards. Only in late 2018/early 2019 did Ulma admit to customers that it used two processes, and at trial Ulma just said it should have been more accurate. “These facts clearly influenced the jury with regard to their award of punitive damages and finding that disgorgement was appropriate.” The court agreed on its relevance.
The jury found that Boltex had lost profits of $250,000 from May 5, 2013 to May 4, 2015 and $400,000 from May 5, 2015 to May 31, 2019 [the dates are important because of a dispute about the limitations period for Lanham Act claims; the court chose four years] and that Weldbend had lost profits of $100,000 from May 5, 2013 to May 4, 2015 and $200,000 from May 5, 2015 to May 31, 2019. Under Texas law, they awarded punitive damages of $2 million to each plaintiff. The jury found that Ulma should disgorge $26 million from May 5, 2013 to May 31, 2019. This result was supported by the evidence, except that the amount of disgorgement was too high.
Disgorgement requires a court to consider: (1) whether the defendant had the intent to confuse or deceive, (2) whether sales have been diverted, (3) the adequacy of other remedies, (4) any unreasonable delay by the plaintiff in asserting his rights, (5) the public interest in making the misconduct unprofitable, and (6) whether it is a case of palming off. These are nonexclusive factors where equity would consider others. The jury was instructed on these factors, and made a reasonable finding, especially given that factors (1) and (5) soundly weighed in plaintiffs’ favor. The public interest was also significantly served by disgorgement because determining whether normalization had occurred can’t be checked without a test that destroys the product, making false advertising difficult to detect and requiring buyers to rely on the labeling (which includes purported test results). In addition, the false advertising here “relates to the integrity of pipelines carrying oil and gas,” and a crack “could result in leaks that severely harm the environment or cause damage to life or property.”  There was also some evidence of sales diversion, and other remedies were inadquate— “even the pursuit of this action did not dissuade the Defendants, considering they sent out the 2017 letter again falsely advertising that their products were ASTM compliant.” As to delay, “while this conduct had been ongoing for some time, the Plaintiffs moved promptly once they could confirm the misconduct by testing Defendants’ products.”
In assessing the appropriate amount, the court wanted to avoid over-compensation by awarding both damages for plaintiffs’ lost profits on diverted sales and the profits made by the infringer. Instead of the entire amount awarded by the jury, the court used plaintiffs’ expert’s numbers and awarded each plaintiff a percentage of Ulma’s profit commensurate with their respective market shares. For Boltex, who held a 11.6% market share, the Court added $3,016,000 in disgorgement. For Weldbend, who held a 10.4% market share, the Court added $2,704,000.
Plaintiffs sought reconsideration, citing a “plethora of cases holding that a court may award disgorgement even where a diversion of sales is not shown,” though those were TM cases. They also argued that it would be inequitable to allow any windfall to go to Ulma, which engaged in false advertising.  Comment: really the money should go to the absent market participants, but they aren’t in the case and, while they can probably use offensive collateral estoppel against Ulma on liability, they may face a very different limitations period. Deceived consumers who used non-normalized flanges and now may face a variety of consequences, regulatory and otherwise, may also have their own claims.
Anyway, the court declined to change its mind:
In trademark infringement cases, there is only one party that has been injured—the owner of the trademark. Where a trademark infringer enters into a market within the penumbra of a trademark holder’s business, but that the holder has not yet entered, there may be an injury without any actual lost sales. In those situations, disgorgement is necessary to remedy the harm that will not be covered by an award of lost profits. Further, awarding all of the disgorged profits to the trademark owner is not a windfall as the owner is the only one damaged (setting aside the theoretical damages to consumers).
In this false advertising case, “the harm the Lanham Act addresses is one shared by all competitors in the market—the encroachment on the ability to compete in a fair market.” Only a disgorgement award shared between all competitors in the market would serve the Lanham Act’s purpose of “achiev[ing] equity between or among the parties.” Here, the two companies weren’t even major Ulna competitors. The jury’s estimate of Ulma’s profits from its false advertising was reasonable, but that profit was gained at all competitors’ expense. A proportional share award was equitable as between defendants and these plaintiffs.
This wasn’t an exceptional case, given the hotly contested question of whether plaintiffs were even injured, and, “in a sister case filed against a different defendant, another court (obviously with a different record) actually granted summary judgment for the defendants due to a failure by Plaintiffs to show that they had been injured as a result of the alleged false advertisements.” See Boltex Manuf. Co., LP v. Galperti, Inc., H-17-1439, 2019 WL 2568338 (S.D. Tex. June 21, 2019). The intentionally false advertising, continued after the filing of suit, did not change this conclusion. Those actions justified punitive damages [which the court required plaintiffs to disclaim to get federal remedies] and disgorgement [which the court shrank], but not fees; the court noted that the jury cut the requested actual damages by 95%.
Plaintiffs argued that they should be allowed to recover state punitive damages in addition to Lanham Act damages, because that wasn’t double counting of, e.g., actual damages. Fifth Circuit precedent says that “picking and choosing from damage elements arising under different theories … is impermissible under Texas law.” [This necessarily implies that Texas common law doesn’t allow recovery of lost profits, disgorgement, and costs, though I haven’t followed all the arguments in the case.]  Given plaintiffs’ preference for the largest possible award, the court awarded over $3.7 million to Boltex and a bit over $3 million to Weldbend under the Lanham Act (including costs).  The court noted that Texas’s cap on punitive damages to twice actual damages meant that Boltex could only have gotten $800,000 and Weldbend $400,000 given the jury’s awards of actual damages.
Boltex Manufacturing Co. v. Ulma Piping USA Corp., 2020 WL 605321, No. 4:17-CV-01400 (S.D. Tex. Feb. 7, 2020)
Also, the court granted a permanent injunction. Ulma persisted in false advertising even after suit was filed, and that false advertising caused pecuniary harm, but if it continues those damages may be impossible to quantify, and potentially lost customers qualify as irreparable harm. (Interestingly, at least if market participation is pretty stable, this might be a rare case where the market is capable of penalizing Ulma. I know I wouldn’t want to take any risks on whether Ulma was really normalizing its “normalized” flanges, and I would also wonder what other private definitions of industry standard terms it had been using.)  The court calls lost market share “non-monetary damages” for purposes of finding irreparable injury, which seems weird, but that’s because we have no coherent concept of goodwill in Lanham Act law. It’s not non-monetary, but it can be hard to measure.

The court also granted a rare recall order, given the potential consequences of using a non-normalized flange: However, Ulma could avoid recalling those flanges if they “relabel/rebrand or otherwise redesignate (by some means that is either actually on the flange or accompanies the flange in question) those flanges so that they accurately reflect that they have not been normalized and are not compliant with the standards set out in ASTM A105.” The one untaken safety measure is informing the customers who actually bought the non-ASTM normalized flanges that the flanges weren’t in fact ASTM normalized.

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