Rebecca Tushnet

Underground
Solutions, Inc. v. Palermo, 188 F. Supp. 3d 717 (N.D. Ill. 2016)

This case is part of
contentious relations between Eugene Palermo, a scientist/paid expert for one
underground pipe maker, and UGSI, a maker of competing pipe.  Previous case about plaintiff’s website
impersonating defendant Palermo.  Previous ruling finding jurisdiction over
Palermo in this case.

UGSI sued Palermo
for trade libel, intentional interference with prospective economic advantage
(dismissed after discovery), and false advertising under California law and
§43(a) for his statements as a paid spokesperson for a competitor.  In this opinion, UGSI won partial summary
judgment on liability on the Lanham Act claim; Palermo won summary judgment on
the trade libel claim; and summary judgment was otherwise denied.

Different kinds of
pipe with varying properties are used for municipal and industrial water
transmission, including ductile iron pipe, high-density polyethylene (HDPE)
pipe, and polyvinyl chloride (PVC) pipe. “[E[ach type of pipe exhibits varying
degrees of resistance to puncture, cracking, and other types of pipe failure.”  Rapid crack propagation (RCP) is exactly what
it sounds like and can happen up to several hundred feet per second; it can
happen in any type of pipe under varying conditions depending on the pipe’s diameter
and wall thickness, the internal operating pressure of the pipe, and the pipe’s
chemical makeup. Although RCP can’t occur in 100% water pressurized pipe, the
inclusion of a small amount of air in a pipe could enable RCP failure.

This is RCP in plastic pipe

Palermo’s PowerPoint
slideshow for these presentations, which was also uploaded to his website, was
called “Plastic Pipe for Water Distribution—What You Need to Know About RCP and
Butt Fusion Integrity.”  The presentation
was “primarily focused on illustrating the high RCP risk associated with
butt-fused PVC pipe.”  Palermo pointed
out that PVC pipe was more prone 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.”

sample slide from presentation

The slide show began
with a list of all known Fusible PVC RCP failures in the field: 20 across the
US, ranging in length from 43 feet to 3,300 feet. He included “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.” Palermo then
discussed laboratory test results.  Palermo
showed a graph—which the court found to be unambiguous—indicating that when a
PVC pipe has 10% air volume, its critical pressure (the pressure over which RCP
is more likely) is 2.3 bar, and from about 10.8% to 100% air volume, its
critical pressure is 1.6 bar. The next slide reported the pipe’s critical
pressure as “1.6 bar for DR 19 PVC pipe with ≥10% air.” His HDPE graph from the
study showed that the pipe’s critical pressure was over 7 bar at 10% air
volume, and roughly 3 bar at 23% air volume. He also included data for modern
HDPE pipes, whose critical pressure he placed at over 10 bar, which meant that
“RCP is never an issue.”  Palermo then shared
the results of a “Bent Strap Test” and a “Tensile Test” conducted on butt-fused
polyethylene pipe and butt-fused PVC pipe: the former passed and the latter
failed.

The result was that
some people exposed to the slide show or presentation “expressed reticence to
use or recommend Fusible PVC as a result.”  “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.” A project manager in Illinois
received an e-mail from a contractor, with Palermo’s slide show attached,
expressing grave concerns, and UGSI produced a slide show of its own to rebut
Palermo’s report and retain the contractor’s business.

For the Lanham Act
claim, UGSI argued: (1) Four of the crack lengths that Palermo disclosed in his
presentation are grossly inaccurate and that he represented that cracks spread
hundreds or thousands of feet farther than they actually did.  (The most extreme alleged misrepresentation
was 300 feet for 3 feet; the least was 2200/1700.)  (2) PVC’s critical pressure at 10% air volume
in the study was the more favorable figure of 2.3 bar, not 1.6 bar.  (3) He misleadingly used an old study without
pointing out that Fusible PVC uses pipe that benefits from many years of
scientific advancement in PVC pipe. (4) Even Palermo’s accurately reported
crack lengths were misleading, because Palermo described them without
disclosing the installation or maintenance errors that caused them to rupture
in the first place. (5)  It was
misleading to report results from the bent-strap test and the tensile test
because these testing models are not designed to test PVC.

Palermo responded
that his statements were not “commercial advertising or promotion” but
noncommercial speech.  However, he was
paid to deliver “presentations to anonymous purchasers and prospective
consumers at trade shows throughout the country.”  That triggered the Lanham Act. 

The court found
clear falsity in that the study reported that at 10% air volume, the critical
pressure of PVC was 2.3 bar, but Palermo clearly said it was 1.6 bar in his
slide based on the study.  Although he
defended his value as an approximation, his slides didn’t say that, and their
only basis was the S4 study that said otherwise.  This was literal falsity.  The court didn’t separately discuss
materiality—a real blow for Palermo, it seems to me, given the real difference
in critical pressures between PVC and HDPE, and the other uncontested crack
lengths.

Palermo didn’t
dispute that he was wrong about the amount of pipe that needed to be replaced
in one place and the crack lengths in three instances. He argued that “his
underestimating a 200-foot crack occurring in a Tampa, Florida project…[that]
was substantially longer than 200 feet” is evidence “[t]hat [he] did not set
out to exaggerate crack lengths.”  But, “for
liability purposes it does not matter whether Palermo made one literally false
claim whose inaccuracy was favorable to UGSI,” when there were other literally
false statements unfavorable to it.  UGSI
was entitled to summary judgment on liability for these statements.

UGSI further argued
that the remaining challenged statements were deceptive. UGSI contended that
its pipe had a different chemical makeup that made it substantially superior to
the pipe used in the experiments fifteen years previous; that showing critical
pressure with varying amounts of air was misleading because properly handled
pipe will never contain more than 2% air; that accurately reporting crack
lengths was misleading without disclosing the initiating event; and that PVC was
not meant to be tested by the methodologies Palermo used.  There were factual disputes about each of
these.  For example, Palermo and his
expert both testified that water-pressurized pipe in the field commonly
contains up to 10% air volume.  (I am
especially sympathetic to Palermo’s argument that, notwithstanding that RCP
might not have happened without mishandling/mis-installation or random error, it’s
reasonable to assume that there will be some of that in the future.  The court, though, found that a jury could
conclude that describing RCP without disclosing what caused it is misleading.)

Palermo argued that
UGSI lacked a survey to show misleadingness, but surveys are not required as a
matter of “an iron rule.”  (No pun
intended?)  The evidence of concerns from
two engineers caused by seeing the slide show supported “a reasonable inference
that the slide show’s false or misleading statements confused these consumers,
for their worries were apparently assuaged only after UGSI presented
information to rebut Palermo’s claims.”

Palermo finally
argued that UGSI didn’t show harm, as required by Lexmark, because one of the concerned engineers had no
decision-making authority, while the others ended up using Fusible PVC anyway.  “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.” The evidence that UGSI needed to produce its own
rebuttal presentation “permits a reasonable inference that Palermo’s
presentation directly led to a diminution in goodwill and reputation for
Fusible PVC.”

Trade libel under
California law: This requires that the defendant made a false statement of
fact, the statement was made with actual malice, and the false statement
diverted business away from the plaintiff or diminished the value of the
disparaged product.  UGSI argued that,
when a person disparages a plaintiff’s only product, he necessarily defames the
plaintiff personally, triggering the lower negligence standard for a defamation
claim by a private party. The court disagreed. 
Also, UGSI failed to adduce evidence that shows that “particular
purchasers…refrained from dealing with [it],” and that it was deprived of any
particular transactions. “Unlike claims under the Lanham Act, trade libel
claims under California law must be centered on particular losses emanating
from lost business opportunities.”  Thus,
Palermo was entitled to summary judgment on this claim.

California FAL: Proposition
64 restricted standing under the FAL to “any person who has suffered injury in
fact and has lost money or property as a result of a violation” of the law. The
resources expended to create UGSI’s corrective presentation and meet with
clients qualified as lost money or property. 
(I wonder about that—if these were salaried employees doing the work,
wouldn’t they have been paid anyway?) 
Nor did UGSI need to show its own
reliance on the false statements to prevail; Proposition 64 wasn’t designed to
preclude competitors from bringing false advertising claims.  Summary judgment denied.