Neuros Company, Ltd v. KTurbo, Inc. ( 2012 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 11-2260, 11-2375
N EUROS C O ., L TD. and A VIATION AND
P OWER G ROUP INC.,
Plaintiffs-Appellees/
Cross-Appellants,
v.
KT URBO, INC.,
Defendant-Appellant/
Cross-Appellee.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 08 C 5939—John W. Darrah, Judge.
A RGUED S EPTEMBER 5, 2012—D ECIDED O CTOBER 15, 2012
Before P OSNER, K ANNE, and SYKES, Circuit Judges.
P OSNER, Circuit Judge. This litigation, now in its fourth
year, is between competing manufacturers of high-speed
turbo blowers used by waste water treatment plants.
The blowers maintain the oxygen dissolved in the
water at a level needed by the aerobic (that is, oxygen-
2 Nos. 11-2260, 11-2375
dependent) bacteria that play a critical role in the treat-
ment process by breaking down organic waste into
carbon dioxide, nitrogen, and water. The plaintiffs oper-
ate in the United States as a joint venture under the
name APG-Neuros, and to simplify exposition we’ll
pretend that APG-Neuros is the plaintiff and (for further
simplification) call it Neuros.
Neuros was the first company to offer such blowers to
waste water treatment facilities in North America. That
was in 2006 and two years later the defendant, KTurbo,
began offering its own blowers to those facilities, though
with little success.
In 2008 Neuros won a bidding contest to supply high-
speed turbo blowers to a waste water treatment plant
in Utah. KTurbo came in third in the bidding—last,
because there were only three bidders. Disappointed
with the outcome of the bidding contest, the chief execu-
tive officer of KTurbo, HeonSeok Lee, prepared a series
of PowerPoint slides and related tables that accused
Neuros of fraud by representing to the Utah purchaser
that its blowers would achieve a “total efficiency” that
Lee claimed, probably correctly, was unattainable.
Waste water treatment plants hire consulting engineers
to select, test, and install the turbo blowers. Lee’s slides
were aimed at those engineers. Here is a typical slide:
Nos. 11‐2260, 11‐2375                                                                         3
4 Nos. 11-2260, 11-2375
Turbo blowers are fans driven by electricity, and they
use a lot of it—and it’s expensive; the cost of electricity
is the second largest cost (after labor) of operating a
waste water treatment plant, and the blowers account
for a substantial fraction of the electricity cost. M/J Indus-
trial Solutions, “Municipal Wastewater Treatment Plant
Energy Baseline Study,” PG&E New Construction Energy
Management Program, pp. 5-6 (June 2003), www.cee1.org/
ind/mot-sys/ww/pge1.pdf (visited Oct. 9, 2012). “Total
efficiency,” the key term in Lee’s slides, is the ratio of
input power (electrical current) to output power (a speci-
fied volume of air blown by the blower at a specified
speed). Were there no power loss, making the ratio 1,
total efficiency would be 100 percent. Even 82.5 percent
of total efficiency, the figure that the slide accused
Neuros of claiming to have attained, appears to be unat-
tainable. But Neuros did not make representations of
total efficiency. It made representations of “wire power,”
which is the ratio of an electrical current to work (such
as turning the blades of a fan); but to estimate total effi-
ciency from wire power requires consideration of other
factors as well, such as temperature and humidity.
KTurbo’s PowerPoint presentation states that some
of Neuros’s claims of wire power imply that its efficiency
claims are exaggerated, but these accusations turned out
to be false too. They were based on computational
errors and incorrect assumptions. KTurbo’s expert
argued that the claimed wire power in one Neuros docu-
ment implied a 2 to 7 percent overstatement of the effi-
ciency of its blowers, but such overstatements do not,
as KTurbo argues, make its defamatory accusations
Nos. 11-2260, 11-2375 5
“substantially truthful.” For KTurbo claimed that the
overstatement was not 2 to 7 percent but at least 15-20
or even 26 percent. There was no evidence of such over-
statement; KTurbo’s expert would not support it.
It was from Neuros’s claims of wire power that KTurbo
deduced that Neuros was implicitly claiming a total
efficiency of 82.5 percent. Lee admits that the wire
power claims imply at most a total efficiency of
76 percent, apparently an attainable percentage.
Had KTurbo merely accused Neuros of “guaranteeing”
unattainable performance, in the sense of warranting it,
this would not necessarily have been an accusation of
fraud. One can warrant a level of performance that one
may not be confident of attaining, for by accepting a
warranty a customer grants the seller an option to pay
rather than perform. Cf. Zapata Hermanos Sucesores, S.A. v.
Hearthside Baking Co., 313 F.3d 385, 389 (7th Cir. 2002);
Oliver Wendell Holmes, Jr., The Common Law 300-02
(1881). The slide we reproduced earlier did describe the
alleged representation that Neuros’s blowers achieve
82.5 percent of total efficiency as a “guarantee.” But
Neuros had never warranted that performance, and so
if it had represented that its blowers were that efficient,
knowing they were not, the representation would
have been fraudulent; and that is what KTurbo claimed.
Lee made his PowerPoint presentation to a number of
the engineering firms that advise waste water treatment
plants on which turbo blowers to buy. Judging from
the fact that KTurbo failed, so far as appears, to wrest
any business from Neuros, the consulting engineers
6 Nos. 11-2260, 11-2375
were not impressed by the slide show. Lee also pub-
lished his accusations on one of KTurbo’s websites
and sent them to the sales representatives that the com-
pany uses to help market its blowers, doubtless hoping
the representatives would convey the accusations to
the engineers whom they visited on KTurbo’s behalf.
KTurbo vowed in correspondence to “break” and “termi-
nate” Neuros. All to no avail. KTurbo was like a gnat
that buzzes annoyingly around a person’s head but
never manages to land and bite.
The suit charges KTurbo with violations of the
Lanham Act and the Illinois Uniform Deceptive Trade
Practices Act, and with defamation, also under Illinois
law. KTurbo filed parallel counterclaims. A bench trial
resulted in a judgment in favor of Neuros on its claim
of defamation and an award of $10,000 in general
damages and $50,000 in punitive damages. The judge
rejected all other claims, including the counterclaims.
KTurbo’s appeal challenges only the judgment for defama-
tion; Neuros’s cross-appeal challenges the dismissal of
its Lanham Act and Deceptive Trade Practices Act claims.
KTurbo argues that even if it defamed Neuros by
false statements (as clearly it did), it had a “qualified
privilege” to do so. This privilege is available in cases in
which the public had an “interest” in the making of the
statements that turned out to be false. Kuwik v. Starmark
Star Marketing & Administration, Inc., 619 N.E.2d 129, 134-
35 (Ill. 1993); Parker v. House O’Lite Corp., 756 N.E.2d 286,
298 (Ill. App. 2001); Haywood v. Lucent Technologies, Inc., 323
F.3d 524, 533 (7th Cir. 2003) (Illinois law); Restatement
Nos. 11-2260, 11-2375 7
(Second) of Torts §§ 593-98A, 598 comments d-f (1977). This
is pretty vague, but we needn’t worry about that in this
case, since the privilege, whatever its precise boundaries,
is forfeited if the statement is made with knowledge of
its falsity or with reckless disregard for the truth
(which courts in defamation cases like to call “actual
malice”—why we don’t know, since “malice” implies
deliberate rather than merely reckless wrongdoing). Kuwik
v. Starmark Star Marketing & Administration, Inc., supra, 619
N.E.2d at 135-36; Naleway v. Agnich, 897 N.E.2d 902, 913 (Ill.
App. 2008); Giant Screen Sports v. Canadian Imperial Bank of
Commerce, 553 F.3d 527, 536 (7th Cir. 2009) (Illinois law);
Restatement, supra, § 600. 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.
KTurbo complains perfunctorily about the award of
punitive damages. The general rule is no injury no tort,
McCann v. Hy-Vee, Inc., 663 F.3d 926, 930-31 (7th Cir. 2011),
and there is no evidence that Neuros was injured by
the false claims that KTurbo made. But there are excep-
tions (which is why we call it the “general” rule). One is
for trespass, because a continuing trespass may ripen
into a prescriptive right and thus deprive a property
owner of title to his land. Another is for defamation
per se, which means, so far as relates to a business
victim, defamation that impugns the defendant’s compe-
tence or honesty. Tuite v. Corbitt, 866 N.E.2d 114,
121 (Ill. 2006). And that was the character of KTurbo’s
defamation of Neuros. KTurbo accused it of committing
8 Nos. 11-2260, 11-2375
criminal fraud against its customers. It’s hard to
imagine a more damaging accusation to make against
a business.
When defamation per se is proved, the plaintiff is
entitled both to general damages—which means “compen-
satory” damages without proof of injury, id.; Van Horne
v. Muller, 705 N.E.2d 898, 903 (Ill. 1998); Restatement,
supra, § 621 comment a—and, if the defendant in commit-
ting the defamation was grossly negligent or worse,
to punitive damages as well. Slovinski v. Elliot, 927
N.E.2d 1221, 1224-25, 1228-29 (Ill. 2010). Compensatory
damages without proof of injury sounds like an
oxymoron, though: for what is there to compensate? But
there 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 per-
haps 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 the APG-Neuros joint venture sold some 500
of them in the first few years of its existence.
The punitive damages award of $50,000 was too
small, and though Neuros is not seeking more, we
Nos. 11-2260, 11-2375 9
cannot forbear to note that the conduct of KTurbo was
outrageous. It is a substantial company and should have
been ordered to pay substantial punitive damages. In
ordering the slap-on-the-wrist award that he did the
district judge may have been concerned that any
multiple of general damages greater than five would
run afoul of the Supreme Court’s decisions placing tight
limitations, in the name of due process, on the ratio of
punitive to compensatory damages. In State Farm Mutual
Automobile Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003),
the Court said that “few awards [of punitive damages]
exceeding a single-digit ratio between punitive and
compensatory damages, to a significant degree, will
satisfy due process . . . . [F]our times the amount of com-
pensatory damages might be close to the line of constitu-
tional impropriety.” But the Court quickly added that
there was merely “a presumption against an award that
has a 145-to-1 ratio,” id. at 426 (emphasis added)—the
award the lower court had upheld—and as we explained
in Mathias v. Accor Economy Lodging, Inc., 347 F.3d 672(7th Cir. 2003), the presumption can be rebutted in
cases in which the award of compensatory damages
is very small, as indeed the Supreme Court had
indicated in the State Farm case, 538 U.S. at 425; see also
BMW of North America, Inc. v. Gore, 517 U.S. 559, 582-83
(1996); Kunz v. DeFelice, 538 F.3d 667, 679 (7th Cir. 2008);
Alexander v. City of Milwaukee, 474 F.3d 437, 454 (7th Cir.
2007). “The proper focus of analysis of the ratio itself is
the adequacy of the combined award of compensatory
and punitive damages to motivate the prosecution of
a meritorious claim. If compensatory damages are slight,
10 Nos. 11-2260, 11-2375
a single-digit ratio is likely to be insufficient.” Gavin v.
AT&T Corp., 464 F.3d 634, 641 (7th Cir. 2006).
The gravity of the injury to the victim of a wrongful
act is only one consideration in determining a proper
penalty, as is obvious if one thinks of punishments,
often severe, for criminal attempts that inflict no injury
at all. Or if one considers the factors that enter into the
determination of fines for crimes committed by firms
and other organizations. See, e.g., U.S.S.G. § 8C2.4(a). A
principal goal of punishment is deterrence, and in the
Mathias case an award of punitive damages capped at
$20,000 ($40,000 for the two plaintiffs), as urged by
the defendant because that would be four times the
compensatory award, would have had a negligible deter-
rent effect. That may be true of the award of $50,000 in
this case, 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.
So much for defamation; let us turn to Neuros’s
challenge to the dismissal of its Lanham Act claim. The
dismissal may seem academic given the absence of prov-
able injury, for there is no contention that general
damages may be awarded for violating the Lanham Act,
and the Act limits punitive damages to threefold the
actual damages, 15 U.S.C. § 1117(a)—an even lower ratio
than the punitive-damages award made by the district
judge to punish KTurbo for defamation. But the Act
permits the award of attorneys’ fees to the prevailing
Nos. 11-2260, 11-2375 11
party in “exceptional cases,” id., a term the meaning of
which we struggled with in Nightingale Home Healthcare,
Inc. v. Anodyne Therapy, LLC, 626 F.3d 958 (7th Cir. 2010),
concluding that an award is appropriate if the opposing
party’s “claim or defense was objectively unreasonable—
was a claim or defense that a rational litigant would
pursue only because it would impose disproportionate
costs on his opponent.” Id. at 965. It is also appropriate
when a party’s violation of the Act is especially egre-
gious. See, e.g., BASF Corp. v. Old World Trading Co., 41
F.3d 1081, 1099 (7th Cir. 1994). The determination of
unreasonableness or egregiousness is to be made in
the first instance by the district court, which wasn’t
done in this case because the judge ruled the Lanham
Act inapplicable. If that ruling was error, which we
have now to consider, the case must be remanded for
consideration of whether to award attorneys’ fees—plus
injunctive relief, authorized in the same section of the
Act and also sought by Neuros and denied by the
district court.
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. This weighs in favor of an
award of attorneys’ fees by indicating that this part of
KTurbo’s defense (as opposed to its argument that the
Lanham Act was inapplicable because KTurbo was
not engaged in advertising or promotion, a respectable
argument, as we’re about to see) was objectively unrea-
12 Nos. 11-2260, 11-2375
sonable: KTurbo persisted in denying that the slide
show and related marketing activities were deceptive
long after it was evident that the denial was frivolous.
But is the Lanham Act applicable? It’s limited to misrep-
resentations “in commercial advertising or promotion,”
15 U.S.C. § 1125(a)(1)(B), and in Sanderson v. Culligan
Int’l Co., 415 F.3d 620, 624 (7th Cir. 2005), we held that
three person-to-person communications at trade shows
did not constitute commercial advertising or promotion,
while in First Health Group Corp. v. BCE Emergis Corp.,
269 F.3d 800, 803-04 (7th Cir. 2001), we said that the
statutory term is limited to “promotional material dis-
seminated to anonymous recipients” and that “an adver-
tisement read by millions (or even thousands in a
trade magazine) is advertising, while a person-to-
person pitch by an account executive is not,” before
holding that in any event the defendant’s promotional
materials did not make false or misleading representa-
tions. In between those two decisions came ISI Int’l, Inc.
v. Borden Ladner Gervais, LLP, 316 F.3d 731, 733 (7th
Cir. 2003), which held that sending letters to the
plaintiff’s business partners, warning them (falsely) that
if they continued dealing with the plaintiff they would
be liable for patent infringement, was not commercial
advertising or promotion.
These cases do not hold that “advertising or promo-
tion” is always limited to published or broadcast materi-
als—an interpretation that would put us at odds with all
seven other federal courts of appeals to have considered
the issue. LidoChem, Inc. v. Stoller Enterprises, Inc., No. 10-
Nos. 11-2260, 11-2375 13
1686, 2012 WL 4009709, at *6 (6th Cir. Sept. 12, 2012);
Podiatrist Ass’n, Inc. v. La Cruz Azul De Puerto Rico, Inc., 332
F.3d 6, 19-20 (1st Cir. 2003); Fashion Boutique of Short Hills,
Inc. v. Fendi USA, Inc., 314 F.3d 48, 57-58 (2d Cir. 2002);
Proctor & Gamble Co. v. Haugen, 222 F.3d 1262, 1273-74 (10th
Cir. 2000); Porous Media Corp. v. Pall Corp., 173 F.3d 1109,
1121 (8th Cir. 1999); Coastal Abstract Service, Inc. v. First
American Title Ins. Co., 173 F.3d 725, 734-35 (9th Cir. 1999);
Seven-Up Co. v. Coca-Cola Co., 86 F.3d 1379, 1384-85 (5th
Cir. 1996). All but one of these cases was decided before
Sanderson, and four were decided before First Health,
and there is no suggestion in either Sanderson or First
Health (or for that matter in ISI Int’l) of an intention
to create an intercircuit conflict. The cases from the
other circuits are not inconsistent with the holding in
Sanderson that three person-to-person communications
at trade shows do not add up to commercial adver-
tising or promotion or the holding in ISI Int’l that
letters threatening suit for patent infringement are not
commercial advertising or promotion; and in First
Health the Lanham Act was held applicable.
A classic advertising campaign is not the only form
of marketing embraced by the statutory term “com-
mercial advertising or promotion.” Podiatrist Ass’n
required merely “some medium or means through
which the defendant disseminated information to a
particular class of consumers.” 332 F.3d at 20. And the
most recent case, LidoChem, explained that “the required
level of dissemination to the relevant purchasing
public ‘will vary according to the specifics of the indus-
try.’ ” 2012 WL 4009709, at *6.
14 Nos. 11-2260, 11-2375
If “advertising or promotion” just meant “advertising,”
then “promotion” would do no work in the statute.
More important (because of the frequency of redundant
language in statutes, see, e.g., Lamie v. United States
Trustee, 540 U.S. 526, 536 (2004); Moskal v. United States,
498 U.S. 103, 119-21 (1990) (Scalia, J., dissenting); United
States v. Costello, 666 F.3d 1040, 1049 (7th Cir. 2012);
Brown v. Griggsville Community Unit School District No. 4,
12 F.3d 681, 683-84 (7th Cir. 1993)), there are industries
in which promotion—a systematic communicative en-
deavor to persuade possible customers to buy the
seller’s product—takes a form other than publishing or
broadcasting. The de facto customers (de facto rather
than de jure because they are the purchasers’ agents,
rather than the purchasers) for high-speed turbo
blowers used in waste water treatment plants are the
consulting engineers who manage the plants’ bidding
and purchasing. Lee’s road show visited most of the
engineering companies that do this, and each show pre-
sented promotional materials that trashed Neuros,
KTurbo’s most prominent competitor.
“Negative” ads—ads that denigrate a competitor—are
a conventional though frequently disparaged form of
commercial advertising. KTurbo’s negative ads reached
fewer customers than a conventional campaign of ad-
vertising or promotion would have done, but that was
because there are fewer customers for high-speed
turbo blowers in waste water treatment plants than
there are for dog collars. Road shows are a common
method of promotion; it is, for example, the standard
method of promoting IPOs. And remember that some
of KTurbo’s false statements were posted on one of its
Nos. 11-2260, 11-2375 15
websites—a reminder that methods of advertising
and promotion are changing with innovations in com-
munications media; they are no longer, if they ever were,
confined to newspaper and magazine ads, radio and
television commercials, and billboards.
The district court was troubled by the fact that “there
is no evidence that the statements at issue were
presented to any members of the general public.” Well
of course not; members of the general public do not
buy high-speed turbo blowers or advise waste water
treatment plants on the purchase of such blowers. 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. See, e.g., LidoChem, Inc. v. Stoller
Enterprises, Inc., supra, 2012 WL 4009709, at *8 (applying
the Act to letters sent and statements made to dis-
tributors of farm chemicals); Porous Media Corp. v. Pall
Corp., supra, 173 F.3d at 1114 (applying the Act to an
“alert” sent only to large makers of air filters and to
resellers of the filters); Coastal Abstract Service, Inc. v. First
American Title Ins. Co., supra, 173 F.3d at 735 (to state-
ments made only to one of two or three national refin-
ancing companies); Seven-Up Co. v. Coca-Cola Co., supra,
86 F.3d at 1381 (only to independent soft drink bottlers).
What advertising is not directed to subsets of the public
(dog owners in our previous example) rather than to 314
million individuals and millions of firms? One of the
subsets is engineering firms, and others are subsets of
engineering firms such as the civil engineering firms
that were faxed advertisements in CE Design Ltd. v. King
Architectural Metals, Inc., 637 F.3d 721 (7th Cir. 2011).
16 Nos. 11-2260, 11-2375
No one doubted that those advertisements (challenged
under a different statute) were—advertising.
The Lanham Act claim should not have been
dismissed; nor the parallel claim under the Illinois
Uniform Deceptive Trade Practices Act, 815 ILCS 510/1
et seq., a statute generally thought indistinguishable
from the Lanham Act except of course in its
geographical scope, Muzikowski v. Paramount Pictures
Corp., 477 F.3d 899, 907 (7th Cir. 2007); Israel Travel
Advisory Service, Inc. v. Israel Identity Tours, Inc., 61 F.3d
1250, 1259 (7th Cir. 1995); Thompson v. Spring-Green Lawn
Care Corp., 466 N.E.2d 1004, 1013, 1016 (Ill. App. 1984), and
dismissed by the district court on the same ground
as Neuros’s claim under the Lanham Act was dismissed.
A FFIRMED IN P ART, R EVERSED AND
R EMANDED IN P ART.
10-15-12