Monday, September 17, 2012

Being an expert witness as commercial speech under the Lanham Act

LidoChem, Inc. v. Stoller Enterprises, Inc., 2012 WL 4009709 (6th Cir.)

The parties compete in the market for farm chemicals in Michigan.  LidoChem and individual plaintiff/chemist Frank Dean sued Stoller Enterprises, McKenzie Wright Laboratories, and various individuals: Jerry Stoller (Stoller’s owner), David Alexander (sales rep), and Michael Wright (president of McKenzie Wright).  The district court rejected plaintiffs’ Lanham Act, tortious interference, injurious falsehood, defamation, and civil conspiracy claims. The court of appeals affirmed in part and reversed in part.

Frank Dean and sales rep Gerry Gelder worked for Stoller Enterprises before they joined LidoChem.  LidoChem’s products were blended by The Andersons, a large midwestern chemical manufacturer, then sold to Michigan distributors, including Zeeland Farm Services and Green Valley Agriculture.

LidoChem’s owners joined a business venture in 2000 to form a new corporation, Nutrecology, which employed Dean to develop a liquid fertilizer, Nutrefol, to compete with Stoller Enterprises' similar product, FoliZyme. They utilized LidoChem's distribution network in Michigan to market the product.  Gelder and a Zeeland salesman met with the owners of Boersen Farms, one of Zeeland’s largest customers.  Gelder asked them to try LidoChem/Neutrecology’s products instead of the Stoller products they’d been using. Dennis Boersen alleged that Gelder told him that Nutrefol would work like FoliZyme to enhance the growth of soybeans, but Gelder denied this. Boersen agreed to try Nutrefol and did so.  But when Boersen sprayed Nutrefol and Roundup on soybeans, the plants “turned yellow and became stressed.”  A Stoller distributor “recommended the use of Stoller products to encourage plant recovery.”  Stoller then assured Boersen that Nutrefol contained a substance that was harmful to soybeans.

LidoChem and Dean alleged that Stoller “orchestrated a plan to ruin their reputations within the farm chemicals industry by making misrepresentations that Nutrefol contained ‘poison.’”  They provided evidence that Stoller advanced a scheme to represent falsely that Dean added a particular chemical to Nutrefol; Stoller claimed that this chemical was toxic and caused the reduced soybean harvest.  As a result, Nutrecology pulled Nutrefol from the market.  LidoChem and Dean also showed that Stoller repeatedly encouraged Boersen Farms and its attorneys to file a lawsuit against LidoChem, Dean, etc. LidoChem alleged that, once the lawsuit became public, LidoChem lost business relationships and goodwill.

Stoller sent several communications alleging Nutrefol was toxic.  After one test he commissioned didn’t find any toxic chemicals, he ordered that a different lab re-test the sample, allegedly because he knew that the lab would provide the results he wanted because it had provided favorable results for him in the past when other labs had failed to satisfy.  Stoller also allegedly directed Wright to issue a false report finding that the Nutrefol sample taken from Boersen contained the toxic chemical, which Wright did; Stoller then told several people, including Boerson, about the results.  Stoller’s sales rep Alexander met with Boerson’s attorneys three times and agreed to serve as an expert witness in the case against LidoChem etc. “It was common knowledge in the very small industry for farm chemicals that Stoller pushed the lawsuit against LidoChem and the other defendants.”  Stoller sent several letters to the attorneys claiming that Nutrefol had falsified key safety documents, that Gelder falsely represented to Boersen that Nutrefol was the same as Foli–Zyme, that Dean had a history of using “customers as an experimental laboratory,” that Stoller had worked for months, employing “numerous lab analyses and specialized equipment,” to isolate the damaging, “cleverly disguised” ingredient in Nutrefol, agreed to serve as an expert witness, etc. (and requested compensation based on results, leading him later to concede that he had a proprietary interest in the lawsuit).

When a distributor, Gerst, started distributing LidoChem products, Stoller denied him the right to access research samples of Stoller products because Gerst was doing business with Dean, telling Gerst that Dean had stolen “private information” from Stoller and calling Dean “a dishonest person and a thief” and “a known crook who stole from me.”

Stoller ultimately withdrew as an expert witness for Boerson, and the state trial court barred Wright from testifying as an expert because he got rid of the Nutrefol samples Stoller gave him to test and then claimed that his computer “crashed” so that he no longer possessed the underlying data and testing procedure that formed the basis for his opinion. Boersen and LidoChem ultimately settled the lawsuit.

Lidochem produced evidence indicating that Stoller’s statements were false.  Side-by-side tests by Green Valley produced virtually no difference in crop production between Nutrefol and Foli–Zyme.  LidoChem's insurer had an independent lab test Nutrefol; though the sample contained two substances not listed on its material safety data sheet, neither was a threat to soybeans, and additional expert testing failed to detect the allegedly toxic chemical at the part-per-trillion level.

LidoChem also produced evidence of economic harm, including the end of its relationship with The Andersons (which had blended its products), and trouble making sales.

LidoChem alleged that Stoller, Alexander, Stoller Enterprises, Michael Wright, and McKenzie Wright Laboratories violated the Lanham Act.  But were the statements “commercial advertising or promotion”?  The phrase goes beyond the classic advertising campaign; most courts follow Gordon & Breach.  At a minimum, covered speech has to target a class or category of customers, not merely particular individuals, though the required level of dissemination varies according to the industry at issue.  In a small enough market, even a single promotional presentation to an individual purchaser can be enough.

Applying Gordon & Breach, the court of appeals concluded that Wright and McKenzie Wright Laboratories didn’t engage in commercial advertising or promotion by providing Stoller with a false laboratory report “because Wright was not engaged in promotion to influence consumers to purchase goods or services from McKenzie Wright Laboratories.” The same was true when Wright participated as an expert witness in Boersen’s lawsuit.  But Stoller Enterprises was in commercial competition with LidoChem, and could be vicariously liable for the conduct of its owner Stoller and employee Alexander.  A reasonable factfinder could conclude that Stoller was engaged in “commercial speech for the purpose of influencing consumers—not just the end-use farmer, but also the farm-chemical distributor—to buy Stoller Enterprises products and that Stoller's statements were disseminated widely enough to the relevant purchasing public to constitute promotion within the relatively small western-Michigan farm-chemical industry,” based in particular on the statements to Boersen and Gerst.

Because the claim that Nutrefol contained a toxin was false, actual deception could be presumed.  “Further, Stoller disparaged LidoChem in another way by casting doubt on Dean's honesty and on the validity of his patents.”  LidoChem produced evidence of materiality in its subsequent difficulty making sales.  Whether the causation analysis with respect to the amount of damages was affected by Nutrefol’s removal from the market was a factual question for the jury.

Defendants argued that many of Stoller’s statements went to Boerson’s attorney and therefore weren’t commercial speech, but here the attorney was Boerson’s agent for dealing with Stoller, “and the evidence suggests that Stoller fully expected his statements to the attorney to reach farmer Dennis Boersen and the farm-chemical industry in western Michigan.”  A reasonable jury could believe what Stoller said: “that he intended to instigate litigation to inflict severe competitive injury on LidoChem and disrupt its business relationships,” especially given his admission that he had a financial interest in the litigation’s success.  “The district court's belief that Stoller made the false statements to the attorney simply to promote himself as a consultant and expert may be one reasonable interpretation of the evidence, but it is not the only one.”

Plus, there was evidence that Alexander directly gave false information to Boerson and other Michigan growers. Alexander “admitted that he discussed the facts underlying the Boersens' lawsuit with Michigan growers to whom he sold Stoller products.”  Thus, summary judgment against Stoller, Alexander, and Stoller Enterprises was improperly granted.  (The partial dissent thought that Alexander should be out of the case because counsel didn’t mention some of these facts to the district court, but the majority said that it was legitimate to consider the entire summary judgment record given the de novo standard that applied.)

On tortious interference, the court of appeals also reversed; a reasonable jury could find that any/all of the defendants tortiously interfered with LidoChem’s business relationships with Boersen Farms, Zeeland Farm Services, Gerst, and The Andersons by falsely stating that Nutrefol contained a toxic chemical. However, there wasn’t enough evidence to warrant trial on any separate claim by Dean.  Likewise, while the district court ruled that LidoChem’s injurious-falsehood claim failed for want of proof of causation—inducing others not to deal with LidoChem—the court of appeals thought that there was enough evidence to go to trial, except on the argument that Stoller and Wright committed perjury during their depositions, because of immunity for testimony given during a legal proceeding.  

Defamation: Dean alleged that Alexander defamed him during a meeting with Gelder by telling Gelder that, if he would work for Alexander, then Alexander would reveal to him what “really” happened in the Boersen litigation and Gelder would be shocked. Gelder didn’t accept the invitation.  This wasn’t enough to show a false and defamatory statement concerning Dean, nor did Dean show damages.

As noted above, there was a partial dissent on the procedural issue.  The majority, the dissent thought, had improperly searched the record for contrary evidence against Alexander, even though it wasn’t mentioned in the briefs or argument to either court.  The legal question is an important one for procedure-loving types and the dissent is impassioned; I commend it to interested readers.


Max Kennerly said...

Claims for "instigating litigation" and for giving a false opinion as an expert strike me as unsupportable, at least when brought by a third party. Initially, I can see there being big issues of privilege: for the moment, it seems like the client duped into the litigation is supportive of the third-party claims against the instigator, but what if they're not? More to the point, I think this just hits way too close to a third-party fraud claim, and those claims are routinely dismissed because the plaintiff is unable to prove reliance.

Coupled with the procedural issue, I'm really inclined to see this as an example of court straining to manufacture liability against a party that engaged in a lot of dishonest conduct. Part of me agrees with that, but that sort of rough justice isn’t available to all plaintiffs, so why do it here?

Rebecca Tushnet said...

I'm not sure I'd read the opinion as one allowing false advertising claims to be based on instigation--the court seems to be saying that a jury could accept that Stoller was just trying to get hired as an expert (which wouldn't satisfy Gordon & Breach), but they could also find that he was using the opportunity to disseminate misinformation to the relevant industry players, which would make his communications advertising or promotion.

It's interesting that all the dissent is about is the evidence against one of the employees--clearly the majority thought that there was evidence that the alleged rot at the top had spread.