The parties compete in the market for high-speed turbo blowers used in waste water treatment plants. Neuros was the first company to offer these in the North American market, while KTurbo began selling two years later, with little success. In 2008, Neuros won a bidding contest in Utah, while KTurbo came in third (last). KTurbo’s CEO Lee prepared PowerPoint slides and tables accusing Neuros of fraud in its claim to the Utah buyer that its blowers would achieve a “total efficiency” “that Lee claimed, probably correctly, was unattainable.” His slides, aimed at the consulting engineers who select and install blowers, alleged that Neuros engaged in “total efficiency cheating,” and that its numbers were “impossible,” “unrealistic,” and a “crime.”
Turbo blowers use a lot of expensive electricity. “Total efficiency” “is the ratio of input power (electrical current) to output power (a specified volume of air blown by the blower at a specified speed).” The figure that the slide accused Neuros of claiming, 82.5%, appears to be unattainable. But Neuros didn’t make total efficiency representations. Instead, it represented “wire power,” the ratio of an electrical current to work. Total efficiency requires considering other factors, like temperature and humidity, along with wire power. KTurbo’s slides challenged some of Neuros’s wire power claims, but the challenges were based on computational errors and incorrect assumptions; Lee eventually admitted that the wire power claims implied at most 76% total efficiency, which apparently was attainable. Though KTurbo’s expert argued that Neuros overclaimed its efficiency by 2-7%, that didn’t make its accusations substantially truthful, since KTurbo claimed overstatements from 15-26%.
This presentation, which was made to engineering firms, published on a KTurbo website, and sent to sales reps, nonetheless failed to move any business from Neuros, despite KTurbo’s vow to “break” and “terminate” Neuros. Neuros sued for violations of the Lanham Act, the Illinois UDTPA, and defamation. After a bench trial, Neuros won the defamation claim, with an award of $10,000 in general damages and $50,000 in punitive damages.
KTurbo argued that it had a qualified privilege to make the false statements, but the privilege doesn’t apply if a statement is made with knowledge of its falsity or with reckless disregard for the truth. “KTurbo was warned repeatedly, not only by Neuros but also by disinterested sources, that its accusations were false; it ignored the warnings and refused to investigate the truth of the accusations. Its conduct was not only disreputable but reprehensible.”
As for the punitive damages, there was no evidence of actual injury, but defamation per se is an exception to the general rule “no injury no tort.” And accusations of criminal fraud constitute defamation per se. “It's hard to imagine a more damaging accusation to make against a business.” Defamation per se entitles a plaintiff to general compensatory damages and, in cases of gross negligence or worse, punitive damages. Yet what is there to compensate here? Judge Posner explains:
[T]here can never be assurance that an accusation, however groundless, is not believed by someone, and doubtless employees or sales reps of Neuros had to answer questions put to them by consulting engineers, and perhaps even by shareholders of the parent companies, concerning Lee's inflammatory accusations. So a modest award of damages, though not based on evidence (what kind of “evidence” would enable an accurate estimate of the type of cost that we've suggested Neuros incurred from the defamation?), can reasonably be thought compensatory. The judge may have pulled the $10,000 figure out of his hat, but the figure is appropriately modest, considering that a single high-speed turbo blower costs more than $100,000 and that [Neuros] sold some 500 of them in the first few years of its existence.
He continued that $50,000 was too little in punitive damages. KTurbo’s conduct was outrageous, and it was a “substantial” company. The district judge may have been concerned that more than a slap on the wrist would have run afoul of the Supreme Court’s due process/punitive damages cases. But those cases merely find a presumption against big multiples, which can be rebutted when the compensatory damages award is very small. The gravity of the injury is only one consideration in determining punitive damages; deterrence also matters, and this award might not be a big deterrent, “considering the potential gains to KTurbo had it succeeded in expelling its foremost competitor from the North American market. It should consider itself fortunate that Neuros hasn't challenged the adequacy of the punitive-damages award.”
Judge Posner turned to the appeal of the dismissal of the Lanham Act claims. Without provable injury, general damages were unavailable under the Lanham Act, as was trebling of actual damages. But the Act permits injunctions along with fee awards in “exceptional cases,” including especially egregious violations of the law.
“Without meaning to prejudge the determination on remand, we point out that KTurbo persisted in its false representations to the engineering community concerning Neuros's blowers even after the suit was filed and compelling evidence was presented that the representations were false.” Though KTurbo’s argument that it wasn’t engaged in advertising or promotion was a “respectable” argument, the part of its defense that went to non-falsity was “objectively unreasonable.”
In First Health Group Corp. v. BCE Emergis Corp., 269 F.3d 800 (7th Cir. 2001), the court stated (note Judge Posner’s careful avoidance of the word “held”) that “commercial advertising or promotion” is limited to “promotional material disseminated to anonymous recipients.” This over-stringent language has been followed by a number of district courts, but Judge Posner said that the appellate cases “do not hold that ‘advertising or promotion’ is always limited to published or broadcast materials—an interpretation that would put us at odds with all seven other federal courts of appeals to have considered the issue.” First Health evinced no intention to create an intercircuit conflict (comment: other than the words it used, I guess?). The Seventh Circuit cases at the appellate level finding no advertising or promotion involved (1) three person-to-person communications at trade shows and (2) letters to the plaintiff’s customers threatening suit for patent infringement.
So, we now learn that a “classic advertising campaign” isn’t the only form of marketing covered by the Lanham Act. Rather, we need only “some medium or means” through which the defendant disseminated information “to a particular class of consumers.” The required amount of dissemination varies by industry. “If ‘advertising or promotion’ just meant ‘advertising,’ then ‘promotion’ would do no work in the statute.” But we’re used to redundant language in statutes, so more important is that “there are industries in which promotion—a systematic communicative endeavor to persuade possible customers to buy the seller's product—takes a form other than publishing or broadcasting.” So here, where KTurbo made presentations to most of the “de facto customers,” the engineers who act as the purchasers’ agents, in the market. Its negative ads reached fewer people than a conventional campaign would have, but that was because the market was smaller. Anyway, the type of “road show” KTurbo put on is “a common method of promotion.” And some of the false statements were also posted on a KTurbo website: “methods of advertising and promotion are changing with innovations in communications media; they are no longer, if they ever were, confined to newspaper and magazine ads, radio and television commercials, and billboards.”
The district court ruled against Neuros in part because “there is no evidence that the statements at issue were presented to any members of the general public.” But no one would expect that of ads for high-speed turbo blowers, or indeed of ads for almost anything, since rarely is the true market for a product “314 million individuals and millions of firms.” “There is no basis for limiting the Lanham Act to advertising or promotion directed to the general public, and the case law does not do that.” (Look, I could snark or ask whether this should have gone en banc, but the “anonymous” standard was poorly reasoned to begin with, and district courts largely felt bound by it; I’m just glad it’s gone.)
Thus, the Lanham Act and parallel UDTPA claims shouldn’t have been dismissed.