United States District Court, C.D. California
February 4, 2015
CALTEX PLASTICS, INC., Plaintiff,
ELKAY PLASTICS COMPANY, INC., Defendant.
RULING & ORDER re: BENCH TRIAL
RONALD S.W. LEW, Senior District Judge.
On November 18, 2014, the above matter commenced in a bench trial before this Court. Plaintiff Caltex Plastics, Inc. ("Plaintiff" or "Caltex") brings this Action against Defendant Elkay Plastics Co. ("Defendant" or "Elkay") for false advertising in violation of the Lanham Act, 15 U.S.C. § 1125(a), and California's Business & Professions Code §§ 17200 and 17500. Compl. ¶ 1. Plaintiff alleges that Defendant has falsely represented that Defendant's StratoGrey product line "meet[s]" a certain military specification. Id. Plaintiff seeks actual damages in the amount of $3, 030, 911.33. Pl.'s Closing Trial Br. ¶¶ 7-8. Plaintiff also seeks treble damages, Id. at 32:17-25, and attorneys' fees, id. at 34:24-35:2. Defendant seeks judgment in its favor and attorneys' fees. Def.'s Closing Trial Br. 27:1-19.
Having received, reviewed, and considered the evidence presented, as well as the Parties' arguments at trial, the Court makes the following ruling:
IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Judgment be entered in favor of Defendant Elkay Plastics Company, Inc., and the parties shall bear their own costs and fees.
FINDINGS OF FACT
1. Plaintiff Caltex is a California corporation that manufactures, markets, and distributes polyethylene bags and laminated products for military and electronics. Compl. ¶¶ 2-3; Trial Tr. 150:14-15.
2. Plaintiff's packaging products include "flexible military packaging material" that is qualified by the Department of the Navy as meeting the Department of Defense's ("DOD") MIL 81705 Type III specification for "flexible barrier materials, often supplied as bags." Pretrial Conference Order 3:4-22 (undisputed fact).
3. The term "MIL-PRF-81705" (formerly "MIL-B-81705") is a military specification defined by the DOD that establishes qualification requirements for certain types of military packaging for electronic components. Pretrial Conference Order 3:4-22 (undisputed fact); Magnifico Dep. 12:6-21, ECF No. 56.
4. The DOD maintains a Qualified Products List (QPL) for products that have been submitted to the DOD for qualification and have met the military specification's qualification requirements after government testing. Magnifico Dep. 12:6-14:11; 20:12-16.
5. If an entity wants to submit a product for qualification, the entity must contact the DOD to begin the process of qualification. Magnifico Dep. 20:12-22:21.
6. The only way an entity can be placed on the QPL is if the entity's product has been tested by the government and approved by the government for qualification. Magnifico Dep. 28:7-19. No entity can self-qualify; for qualification and placement on the QPL, the product must be qualified by the government. Id. at 47:4-20.
7. Prior to submitting a product to the DOD for qualification, an entity can find the specific testing requirements in the military specification, and the entity must test its product to ensure that the product passes the tests before the DOD will begin testing the product for qualification. Magnifico Dep. 22:4-23:1, 27:15-28:6.
8. When a military specification has a qualification requirement, products with that military specification may be purchased by the military from only "qualified" manufacturers listed on the QPL. Magnifico Dep. 15:10-16:18.
9. Anyone can access the QPL on the Internet. Magnifico Dep. 50:8-51:3.
10. The Department of the Navy (DON) is the only entity that can qualify products under the MIL-PRF-81705 specification. Pretrial Conference Order 3:4-22 (undisputed facts).
11. Plaintiff's MIL-PRF-81705 Type III products have been approved by the DON and were placed on the DOD's QPL in February 2010. Pretrial Conference Order 3:4-22 (undisputed facts); Magnifico Dep. Ex. 1.
12. At present, Plaintiff Caltex is the only manufacturer that has been qualified by the DON and placed on the QPL for MIL-PRF-81705 Type III product. Pretrial Conference Order 3:4-22 (undisputed facts).
13. There had not been a qualified manufacturer for MIL 81705 Type III product for approximately ten years prior to Caltex's qualification in February 2010. Trial Tr. 154:7-155:2, 223:4-8, 225:3-15; Magnifico Dep. 41:4-48:24, 54:12-57:5, 77:9-21, Exs. 2-3.
14. Mr. Magnifico of the DON sent out a problem advisory, dated May 8, 2012, to the Government Industry Data Exchange Program (GIDEP) to alert GIDEP members that if defense contracts required qualified product for MIL-PRF-81705 Type III product, such products needed to be purchased only from qualified manufacturers on the QPL and not from non-qualified manufacturers who were claiming their product met the MIL 81705 Type III requirements. Magnifico Dep. 41:4-47:20, Ex. 2. Mr. Magnifico sent a similar letter, dated July 23, 2012, to the DOD. Magnifico Dep. 59:3-66:15, Ex. 3.
15. Defendant Elkay, a California corporation, Def.'s Ans. ¶ 4, is a "master distributor of polyethylene products" that sells its products solely through distributors and has no direct sales. Trial Tr. 15:18-23, 16:2-3.
16. Elkay advertises its products to its customer-distributors via Elkay's catalogs and brochures, web site, specification sheets, and Elkay-employed consultants. Trial Tr. 16:1-20. Elkay has approximately 4300 distributors. Id. at 36:16-37:4.
17. Elkay does not manufacture the StratoGrey static shielding bags it sells. 5:19-20 (Trial Tr. 18:19-25, 21:13-16, 254:17-20). Elkay's suppliers for its StratoGrey static shielding bags are Shannon Packaging and Techflex. Trial Tr. 21:13-16, 48:4-9.
18. At least since February 2010 when Caltex was placed on the QPL for MIL 81705 Type III product and until October 2012 when Elkay removed any reference to 81705 from its marketing materials, Elkay has advertised via the Elkay website, Elkay catalogs and brochures, and Elkay specification sheets that Elkay's StratoGrey static shielding product line "meets the electrostatic requirements for MIL 81705 Type III." Trial Tr. 18:5-11; Trial Ex. 4.
19. Elkay has no independent evidence that its StratoGrey static shielding product line "meets the electrostatic requirements for MIL 81705 Type III, " and Elkay has not tested its StratoGrey bags to see if the bags pass the qualification requirements for MIL 81705 Type III. Trial Tr. 20:12-17, 24:20-27:14.
20. Elkay did not request its suppliers to prove to Elkay that the StratoGrey bags met the MIL 81705 Type III requirements. Id. at 73:10-74:4, 77:2-9.
21. Plaintiff tested the Elkay bags via Senawang to see if the Elkay bags met the MIL 81705 Type III requirements. Trial Tr. 238:16-24.
22. Elkay's StratoGrey static shielding bags have not been qualified by the Department of Defense, including the Department of the Navy, and are not listed on the QPL. Trial Tr. 18:14-15, 75:8-11.
23. There is no evidence that Elkay ever advertised that its StratoGrey products were "qualified" by the military or on the QPL list. Cf. Pl.'s Reply Br. 7:13-16.
24. Caltex sent Elkay a letter dated October 12, 2012, in which Caltex demanded that Elkay withdraw its representations regarding the MIL-PRF-81705 specifications and give written notice to its customers that the Elkay products were not approved by the Department of Defense. Trial Tr. 48:10-50:22; Trial Ex. 220.
25. In response to Caltex's letter to Elkay, Elkay stated in a letter dated October 31, 2012, that Elkay's statements "concerning the standards met by its moisture barrier bags were accurate, " but Elkay nevertheless agreed to remove all references to "specification number 81705 from its website and printed materials pertaining to the barrier bags in question, " and Elkay has since then refrained from making any such references. Trial Tr. 50:6-54:12; Trial Ex. 221; see Trial Ex. 298.
CONCLUSIONS OF LAW
Plaintiff's claims are for (1) False Advertising in violation of 15 U.S.C. § 1125(a); (2) False Advertising in violation of Cal. Bus. & Prof. Code § 17500; and (3) Unfair, Unlawful, or Fraudulent Trade Practices in violation of Cal. Bus. & Prof. Code § 17200.
A. False Advertising, 15 U.S.C. § 1125(a)
To prove a prima facie case for false advertising in violation of 15 U.S.C. § 1125(a), a plaintiff must show:
(1) the defendant made a false statement either about the plaintiff's or its own product;
(2) the statement was made in a commercial advertisement or promotion;
(3) the statement actually deceived or has the tendency to deceive a substantial segment of its audience;
(4) the deception is material, in that it is likely to influence the purchasing decision;
(5) the defendant caused its false statement to enter interstate commerce; and
(6) the plaintiff has been or is likely to be injured as a result of the false statement, either by direct diversion of sales from itself to the defendant, or by a lessening of goodwill associated with the plaintiff's product.
Jarrow Formulas, Inc. v. Nutrition Now, Inc., 304 F.3d 829, 835 n.4 (9th Cir. 2002) (citing Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1139 (9th Cir. 1997)).
Plaintiff Caltex must first prove that Defendant Elkay's advertisements that Elkay's StratoGrey product "meets the electrostatic properties of MIL-B-81705, Type III" are "false." Jarrow, 304 F.3d at 835 n.4. "Falsity" can be proved by showing either that the advertisement is "literally false" or, if not literally false, that the representation is "likely to mislead or confuse consumers, " which requires proof, "by extrinsic evidence, " that the advertisements "tend to mislead or confuse consumers." In re Century 21-RE/MAX Real Estate Adver. Claims Litig., 882 F.Supp. 915, 922-23 (C.D. Cal. 1994); see Southland Sod Farms, 108 F.3d at 1139.
1. Literal Falsity
Plaintiff states that "[t]he false advertising that is the subject matter of this litigation" "involves the representation by Elkay that its StratoGrey line of static shielding products meets the electrostatic requirements of MIL B-81705 Type III.'" Pl.'s Reply Br. 7:13-16. Plaintiff asserts that such advertisements by Elkay are "literally false." Pl.'s Closing Trial Br. 27:20-25. To prove that Elkay's advertisements are literally false, Plaintiff bears the burden of proving, by affirmative evidence,  that Elkay's StratoGrey products do not meet the requirements for MIL 81705 Type III specification.
Plaintiff proffers the following evidence to support its claim of "literal falsity": (1) only the Government can qualify a product as being a MIL SPEC 81705 Type III product approved for defense contracts, and (2) Elkay has no independent evidence that its StratoGrey bags meet the MIL 81705 Type III requirements. Pl.'s Closing Trial Br. 27:20-31:19; Pl.'s Reply 2:8-4:19.
a. No Self-Qualification Argument
Plaintiff first argues that Defendant's advertisements that its StratoGrey product "meets" the requirements of MIL 81705 Type III are "literally false" "since only the Department of the Navy can make that determination and Elkay's products were never qualified thereby." Pl.'s Closing Trial Br. 27:20-25.
Plaintiff's argument is conflated and flawed: the fact that Elkay's products were not qualified by the DON does not prove that Elkay's StratoGrey products do not meet the testing requirements for MIL 81705 Type III specification. Plaintiff's claim that "only the Department of the Navy" can determine whether a product meets the requirements for a military specification is unfounded and unsupported by any law, regulation, or evidence.
Plaintiff is essentially arguing that only "qualified" products (products tested by the government and placed on the DOD's QPL) can, in fact, "meet" MIL 81705 Type III qualification requirements. See Pl.'s Closing Trial Br. 27:20-25. But the evidence at trial proved otherwise: a product can "meet" the qualification requirements of a military specification without ever having been tested by the military. See Magnifico Dep. 12:6-14:11, 21:2-14, Ex. 2; Trial Tr. 153:19-154:6. The only time the military must be involved is to qualify a product.
To "meet" the MIL-PRF-81705 Type III qualification requirements, a product must merely successfully perform the required tests for the qualification, and non-military entities can and do test products to see if they pass the qualification tests. Trial Tr. 238:16-24, 154:4-6; Magnifico Dep. 22:4-23:1, 27:5-28:15. Thus, a product that has not been tested or qualified by the military could very well still "meet" the qualification requirements for a military specification such as MIL-PRF-81705 Type III.
For example, a company must choose to submit its product to the DOD for testing in order for its product to be "qualified." Magnifico Dep. 12:6-14:11, 21:2-14. A company that chooses not to submit its product to the DOD for testing may still manufacture or sell a product that does, in fact, "meet" the qualification requirements for a military specification, even if that product has not been tested by the military. Plaintiff itself has proved that this can be so: Plaintiff admitted that it had the Elkay bags tested by Senawang to see if the Elkay bags, and other competitors' products, "met" the MIL 81705 Type III requirements. Trial Tr. 238:16-24; see also id. at 154:4-6; Magnifico Dep. 22:4-23:1, 27:5-28:15. Thus, the Court rejects Plaintiff's argument that Elkay's advertisements are "literally false" because "only the Department of the Navy" can say when a product "meets" the testing requirements for MIL 81705 Type III specification.
b. No Independent Evidence Argument
Plaintiff argues that Elkay's advertisements are "literally false" because Elkay has "no independent evidence" that its StratoGrey bags meet the MIL 81705 Type III requirements. Pl.'s Reply 3:15-18. Plaintiff's argument cannot prevail because it is a "lack of substantiation" argument, and a false advertising claim cannot be proved on "lack of substantiation" grounds. Fraker v. Bayer Corp., No. 08-1564, 2009 WL 5865687, at *7-*9 (E.D. Cal. Oct. 6, 2009) (noting that, in a case for false advertising under the Lanham Act, the burden of proof does not shift to the defendant to prove substantiation of advertising claims; otherwise, a plaintiff could use a false advertising claim to "shoehorn an allegation of violation of the Federal Trade Commission Act, " which does not allow private causes of action).
Defendant has maintained that its advertisements were true. Def.'s Closing Trial Br. 5:21-6:12, 8:2-8. It is irrelevant that Defendant failed to test its own bags; Defendant does not have the burden of proof and is thus not required to show that its advertisements are substantiated by testing. Id. As Fraker points out, "the government, representing the Federal Trade Commission, can sue an advertiser for making unsubstantiated advertising claims; a private plaintiff cannot." Fraker, 2009 WL 5865687, at *8. A private litigant asserting false or misleading advertising "has the burden to plead and prove facts that show" that the defendant's advertising claims "are false or misleading, " not merely unsubstantiated. Id.; see Sandoz Pharm. Corp. v. Richardson-Vicks, Inc., 902 F.2d 222 (3d Cir. 1990) ("[A] Lanham Act plaintiff bears the burden of showing that a challenged advertisement is false or misleading, not merely that it is unsubstantiated by acceptable tests or other proof.'").
In sum, because Plaintiff has not provided affirmative evidence that Defendant's StratoGrey bags do not meet the testing requirements of MIL 81705 Type III, Plaintiff's allegation of "literal falsity" fails. Thus, to prevail on its false advertising claim, Plaintiff must show that Defendant's advertisements were "misleading."
Falsity "can be established... by showing that although the statement was literally true[, ]' it was nonetheless likely to mislead or confuse consumers' as evidenced by consumer surveys." Mutual Pharm. Co. v. Ivax Pharm., Inc., 459 F.Supp.2d 925, 932 (C.D. Cal. 2006); Southland Sod Farms, 108 F.3d at 1139; see CytoSport, 894 F.Supp.2d at 1295 (E.D. Cal. 2012). Extrinsic proof of consumer deception is required for a "true but misleading" false advertising claim because "whether a representation is impliedly misleading is not something that is readily susceptible to being evaluated absent evidence [showing] actual consumer deception.'" Mutual Pharm., 459 F.Supp.2d at 932; see William H. Morris Co. v. Grp. W, Inc., 66 F.3d 255, 258 (9th Cir. 1995) ("Where a statement is not literally false and is only misleading in context, ... proof that the advertising actually conveyed the implied message and thereby deceived a significant portion of the recipients becomes critical."); Zeltiq Aesthetics, Inc. v. BTL Indus., Inc., No. 13-cv-05473-JCS, 2014 WL 1245222, at *8 (N.D. Cal. Mar. 25, 2014).
Here, Defendant's representations that its StratoGrey bags met the MIL 81705 requirements could mislead consumers to believe that the Elkay StratoGrey bags were actually qualified by the military; but it is Plaintiff's burden to show proof of customer deception. Mutual Pharm., 459 F.Supp.2d at 932. The only arguable evidence of consumer deception provided by Plaintiff is the testimony of Caltex's witness, Mr. Jim Higgs, that Caltex "was told numerous times that [customers] already were getting material that meets the requirements and, you know, Why am I going to pay you 40 percent or more for a product that we're already being told that already meets the requirement?'" Trial Tr. 156:24-157:9. However, this testimony does not prove consumer deception because the statement does not show that customers believed that Elkay's products were "qualified" by the military or were on the QPL list, but only that there were other, cheaper products on the market that "met" the MIL 81705 testing requirements, and Plaintiff has not shown such a belief to be false.
Plaintiff does provide evidence of confusion among the defense community regarding the DOD's qualification requirements for MIL 81705 Type III product once Caltex was qualified in February 2010. Trial Tr. 223:4-8. However, the evidence clearly shows that this consumer confusion was not caused by Elkay's advertising, but by the DOD's failure to inform the defense-related community of the qualification requirements for MIL 81705 Type III product. Plaintiff's evidence does not show that consumers thought Elkay's products were qualified or on the QPL, or that consumers were led to believe any other falsity due to Elkay's advertisements.
Not necessary but further convincing, the following evidence lessens the likelihood of consumer deception: (1) anyone can access the QPL online to check if a product is qualified, Magnifico Dep. 30:11-14, 50:8-51:3; and (2) consumers purchasing static shielding products are arguably sophisticated and thus less likely to be deceived, especially in light of the publicly accessible QPL, see Trial Tr. 219:3-9; Magnifico Dep. 13:12-14:11. See, e.g., Bober v. Glaxo Wellcome PLC, 246 F.3d 934, 939 (7th Cir. 2001) (when considering a similar lack-of-substantiation claim, noting that not only was there no evidence of falsity, but "there was significant information available to consumers... providing accurate information..., " thereby dispelling "any tendency to deceive that the statements at issue might otherwise have had").
The Court finds that Plaintiff has failed to prove falsity, the first element of a false advertising claim under 15 U.S.C. § 1125(a), and therefore cannot prevail on its federal false advertising claim.
B. False Advertising, Cal. Bus. & Prof. Code § 17500
Section 17500 of the California Business & Professions Code is California's false advertising law and prohibits any advertising that is "untrue or misleading" to the "reasonable consumer." People v. Forest E. Olson, Inc., 186 Cal.Rptr. 804, 806 (Cal.Ct.App. 1982); Cal. Bus. & Prof. Code § 17500; see Consumer Advocates v. Echostar Satellite Corp., 8 Cal.Rptr.3d 22, 29 (Cal.Ct.App. 2003). Under the "reasonable consumer" standard, a plaintiff must "show that members of the public are likely to be deceived." Williams v. Gerber Prods. Co., 552 F.3d 934, 938 (9th Cir. 2008) (internal quotation marks omitted); Bank of West v. Sup.Ct., 833 P.2d 545 (Cal. 1992); In re Tobacco II Cases, 207 P.3d 20 (Cal. 2009).
"In an action for false advertising under [California law], the plaintiff bears the burden of proving the defendant's advertising claim is false or misleading.'" Stanley, 2012 WL 1132920, at *3 (citing Nat'l Council Against Health Fraud, Inc. v. King Bio Pharm., Inc., 133 Cal.Rptr.2d 207 (Cal.Ct.App. 2003)). California courts have held that "lack-of-substantiation arguments" are "insufficient, on their own, to support a false or misleading advertising claim." Hughes v. Ester C Co., 930 F.Supp.2d 439 (E.D.N.Y. 2013); see In re Clorox Consumer Litig., 894 F.Supp.2d 1224, 1231-32 (N.D. Cal. 2012); Stanley v. Bayer Healthcare LLC, No. 11-cv-862-IEG, 2012 WL 1132920, at *3 (S.D. Cal. Apr. 3, 2012); King, 133 Cal.Rptr.2d 207, 214-16 (Cal.Ct.App. 2003).
In Fraker, the district court dismissed the plaintiff's claims for false or misleading advertising under Cal. Bus. & Prof. Code §§ 17500 and 17200 because the plaintiff had failed to "prove facts that show that the claims that Defendant made in connection with product are false or misleading, " as the plaintiff's lack of substantiation claim was not sufficient to prove falsity or deception. Fraker, 2009 WL 5865687, at *8-*9. Similarly, in Stanley, the district court rejected the plaintiff's false advertising-related claims under Cal. Bus. & Prof. Code §§ 17200 and 17500 even though it was "undisputed that [the] Defendant did not independently conduct clinical studies" of its product. 2012 WL 1132920, at *5 n.4. The plaintiff in Stanley failed to provide evidence showing that the defendant's advertisements were "actually false" or would "mislead a reasonable consumer." Id. at *5.
As in Stanley, and as discussed above, Plaintiff has not proved that Defendant's advertisements of its StratoGrey bags were false or were likely to "mislead a reasonable consumer" into believing that the StratoGrey bags were qualified by the military or any other false belief. Thus, Plaintiff cannot prevail on its state-law false advertising claim under Cal. Bus. & Prof. Code § 17500.
C. Unfair Trade Practices, Cal. Bus. & Prof. Code § 17200.
"California's Unfair Competition Law ("UCL") prohibits any unlawful, unfair or fraudulent business act or practice.'" Williams v. Gerber Prods. Co., 552 F.3d 934, 938 (9th Cir. 2008); Cal. Bus. & Prof. Code § 17200. To state a cause of action under the UCL, the plaintiff must allege either an unlawful act, an "unfair" act, or a fraudulent act. See Williams, 552 F.3d 934, 938; VP Racing Fuels, Inc. v. Gen. Petroleum Corp., 673 F.Supp.2d 1073, 1086-88 (E.D. Cal. 2009).
To claim a violation of the UCL based on an "unlawful" act, a plaintiff must prove the defendant violated some underlying law. VP Racing, 673 F.Supp.2d at 1086-88. Plaintiff's false advertising claims under the Lanham Act and Cal. Bus. & Prof. Code § 17500 fail, and Plaintiff asserts no other legal violation to support its UCL claim under the "unlawful" prong.
There is at least a three-way split among California appellate courts as to the proper standard for an "unfair" act under the UCL. Graham v. Bank of Am., N.A., 172 Cal.Rptr.3d 218, 233 (Cal.Ct.App. 2014). Upon review of the various tests, the Court finds that Plaintiff has not proved an "unfair" business act. See id.
A "fraudulent act" under the UCL "may include a false statement, or one which, though strictly accurate, nonetheless has the likely effect of misleading or deceiving the public." Zeltiq Aesthetics, Inc. v. BTL Indus., Inc., No. 13-cv-05473-JCS, 2014 WL 1245222, at *9 (N.D. Cal. Mar. 25, 2014) (citing Garcia v. Sony Computer Entm't Am., LLC, 859 F.Supp.2d 1056, 1062 (N.D. Cal. 2012)). Because Plaintiff has not provided sufficient evidence to show that customers were actually deceived by Elkay's advertisements, Plaintiff cannot prevail under the fraudulent prong of the UCL.
D. Attorney Fees & Costs
Section 1117(a) of the Lanham Act states that the "court in exceptional cases may award reasonable attorney fees to the prevailing party." 15 U.S.C. § 1117(a). An "exceptional" case warranting an award of attorney fees is one in which the non-prevailing party's actions were "groundless, unreasonable, vexatious, or pursued in bad faith.'" Gracie v. Gracie, 217 F.3d 1060, 1071 (9th Cir. 2000).
Defendant requests an award of attorney fees and costs pursuant to 15 U.S.C. § 1117(a), arguing that this case is "exceptional" in that "Caltex acted in bad faith by filing suit against Elkay even though Elkay ceased the alleged wrongful conduct" and "attempt[ed] to hold Elkay liable for claims that Caltex knew were true and which were released pursuant to Caltex's previous settlement with 3M Company." Def.'s Closing Trial Br. 27:1-14. The Court does not find that Plaintiff's claims against Defendant were "groundless, unreasonable, vexatious, or pursued in bad faith." Thus, Defendant's request for attorney fees and costs under 15 U.S.C. § 1117(a) is DENIED.
Because Plaintiff has failed to prove its three claims against Defendant, Judgment is entered in favor of Defendant. The parties shall bear their own costs and fees.
IT IS SO ORDERED.