Antitrust Law Daily Wrap Up, ADVERTISING—C.D. Cal.: False advertising claims against packaging product manufacturer dismissed, (May 29, 2015)

By Michael Menzhuber, J.D., LL.M.

In an action by a manufacturer of packaging for military and electronics products a competitor, the federal district court in Los Angeles dismissed claims of Lanham Act false advertising and California Unfair Competition Law (UCL) violations. The court found that the manufacturer failed to establish the falsity of the competitor’s representations to support a Lanham Act claim and did not offer sufficient evidence that the claims were unlawful, fraudulent, or unfair to support a UCL claim (Caltex Plastics v. Shannon Packaging, May 27, 2015, Lew, R.).

Background. Caltex Plastics, Inc. (Caltex) manufactures packaging products that include flexible military packaging material that is qualified by the Department of the Navy (DON) as meeting the Department of Defenses’ (DOD) MIL-PRF-81705 Type III specification for flexible barrier materials, often supplied as bags. These products appear on the DOD’s “Qualified Products List” (QPL) and, at present, Caltex is the only entity qualified by DON to provide materials designated MIL-PRF-81705 Type III to U.S. defense contracts that require “qualified” product for MIL-PRF-81705 Type III material.

Shannon Packaging Co. (Shannon) manufactures packaging products for a variety of industries. Prior to the action taken by Caltex against Shannon, data sheets for some of Shannon’s products, including its SS013 product, stated that they were designed to meet the performance of MIL PRF 81705 TI3. This statement was based on the results of testing conducted by Shannon or a third-party on its behalf. Shannon clearly communicated to its customers that: (1) it was not on the QPL for MIL-PRF 81705 Type III; (2) its products were not on the QPL; and (3) its products were not qualified by the DOD. Also, at the time an order was accepted for SS103 bags, Shannon advised the customer that these bags were not on the QPL.

Caltrex filed a complaint alleging that Shannon’s statement on its data sheets, with respect to the MIL-PRF 81705 Type III standard, was false advertising. Caltrex also alleged that Shannon’s actions violated the UCL. Shannon responded by filing a motion to dismiss.

After the court overruled the evidentiary objection by Caltrex and granted Shannon’s evidentiary objection, it considered Caltrex’s false advertising and UCL claims.

False Advertising Claims. The court noted that “falsity,” for purposes of establishing a prima facie case for false advertising, in violation of U.S.C. § 1125(a), can be proved by showing that an advertisement is either: (1) “literally false”, either on its face or by necessary implication; or (2) “likely to mislead or confuse” consumers, which requires extrinsic evidence that the advertisements “tend to mislead or confuse customers.”

In support of its claim of “literal falsity,” Caltrex alleged that Shannon’s products: (1) were not tested by the DON and did not successfully pass the DOD qualifying procedure; (2) were not listed on the QPL; and (3) were not “military grade” products. Caltrex further alleged that: (1) Shannon’s representations were without the substantiation required by law; and (2) Shannon’s discovery material did not establish that its products were subjected to the MIL B 81705 C test method or to the performance requirements of MIL PRF-81705 Type III.

The court rejected Caltrex’s allegations related to the testing or qualifying or qualification of Shannon’s products by the DOD or DON. The court noted that, even if the allegations were true, they did not establish “literal falsity” because Shannon did not claim that its products were tested or were listed on the QPL. The court also found that Caltrex did not prove that Shannon’s assertion, that regardless of the DOD’s or DON’s involvement, a product can be subjected to the MIL B 81705 C test method and can meet the performance requirements of MIL PRF 81705 Type III, was false.

The court determined that Caltrex’s argument, that Shannon’s products were not “military grade,” did not establish that Shannon’s representations were false for the same reasons as Caltrex’s testing and qualification” allegations, and lacked proof. The court noted that Caltrex did not define the term, “military grade products” but, if the term included non-qualified products, there was no admissible evidence showing that Shannon’s products failed to meet the military specification requirement.

Caltrex’s complaint also asserted that Shannon’s representations were “literally false” because they were without the substantiation required under “applicable law.” The court noted, however, that not only did Caltrex not identify any “applicable law,” it misstated the law because, in an action for false advertising, the burden of proof does not shift to the defendant to prove substantiation of the advertising claim.

Caltrex also tried to assert that Shannon’s representations were “literally false” because they were “establishment claims.” An “establishment claim” theory is a subspecies of the “false by necessary implication doctrine” and requires that a defendant’s advertising claims be based on product testing. The court, however, noted that Caltex had the burden of producing evidence that either attacked the validity of Shannon’s product tests, or showing that the tests were contradicted or unsupported by other scientific test, and it failed to do so.

The court noted that, in the absence of “literal falsity”, “falsity” can be established if the challenged advertisements tend to “mislead or confuse” customers. However, Caltrex did not provide any extrinsic evidence that Shannon’s representations tended to “mislead or confuse” customers.

California Unfair Competition Law (UCL). The court determined that Caltrex failed to meet its burden of proof for establishing a claim of unfair competition under any of the three prongs of California’s UCL. A violation of the “unlawful” prong was not established because Caltrex’s federal and state false advertising claims failed and it did not offer any other legal violation to support its claim. A claim under the “fraudulent” prong could not be established because there was no evidence that Shannon made a false statement or that its representations were likely to “mislead or deceive.” Finally, Caltrex did not offer sufficient evidence to establish an “unfair” business act for purposes of the “unfair” prong of the UCL.

The case is No. 2:13-cv-06611 RSWL (JEM)

Attorneys: Fred A. Fenster (Greenberg Glusker Fields Claman and Machtinger LLP) for Caltex Plastics Inc. Gary M. Anderson (Fulwider Patton LLP) for Shannon Packaging Co.

Companies: Caltex Plastics Inc.; Shannon Packaging Co.

Cases: Advertising CaliforniaNews