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Boltex Manufacturing Co., L.P. v. Ulma Piping USA Corp.

United States District Court, S.D. Texas, Houston Division

June 28, 2019

BOLTEX MANUFACTURING COMPANY, L.P., et al, Plaintiffs,
v.
ULMA PIPING USA CORP., et al, Defendants.

          MEMORANDUM & ORDER

          Andrew S. Hanen United States District Judge

         Defendants Ulma Forja S. Coop, and Ulma Piping USA Corp. (hereinafter collectively referred to as "Ulma" or "Defendants") have filed a Motion for Summary Judgment (Doc. No. 92). Plaintiffs Boltex Manufacturing Company, LP and Weldbend Corporation (hereinafter collectively referred to as "Boltex" or "Plaintiffs") have filed a Response (Doc. No. 114). Defendants subsequently filed a reply (Doc. No. 127).

         I. Factual Background

         This dispute arises between carbon steel flange manufacturers. A flange is a "disc collar or ring that attaches to a pipe, providing a method of connecting pipes, valves, pumps and other equipment to form a piping system." (Doc. No. 1 at 4). Plaintiffs allege that Defendants falsely advertise their product in violation of § 43(a) of the Lanham Act, codified at 15 U.S.C. § 1125(a).[1] Specifically, Plaintiffs contend that Defendants misrepresent that they "normalize" their flanges.

         Normalization is a heat treatment process that changes some of the properties of steel to give it a "more fine-grained homogenous micro structure and more predictable properties and machinability." (Id. at 8). In other words, normalization makes the steel more durable. The process involves reheating the steel, holding it at that temperature, and subsequently cooling it at room temperature, and consequently, involves additional time and resources. Accordingly, it is more expensive for manufacturers to produce normalized flanges than unnormalized ones.

         The American Society of Testing and Materials ("ASTM") has a published set of standards and specifications applicable to carbon steel flanges to ensure uniformity in the industry. Some customers will only purchase certain flanges if they are normalized according to industry standards.

         Plaintiffs' normalization processes comply with the ASTM standards, which require manufacturers to apply the heat treatment described above to certain types of flanges. Plaintiffs stamp normalized flanges with the code "A105N" to indicate their compliance with the ASTM standards. The "N" represents "normalization." Plaintiffs charge more for these normalized flanges. Plaintiffs also indicate normalization in a Mill Test Report ("MTR"), an industry-standard report, which Plaintiffs liken to a birth certificate for a flange because it indicates certain specifications about the flange. (Id. at 7). Plaintiffs point out that customers cannot simply look at a flange to determine whether it has been normalized; rather, customers rely on the manufacturers to let them know whether a flange has been normalized or not. (Doc. No. 1 at 6, 7).

         Plaintiffs and Defendants sell their flanges to distributors who in turn sell the flanges to customers. Some of these distributors include: DNOW, L.P., Industrial Valco, and Wolseley Industrial Group/Ferguson.[2] Plaintiffs claim that Defendants misrepresent the normalization-status of their flanges "in the catalogs, brochures, price lists and websites of third-party distributors of Ulma flanges," "in the MTRs that accompany each flange," and "by stamping A105N" on each flange. (Doc. No. 1 at 11-13). Specifically, Plaintiffs state:

Defendants advertise and promote the flanges as ASTM "A105N" indicating that the flanges (a) meet all the requirements of ASTM A105 and (b) are normalized. Defendants' purported ASTM "A105N" compliant flanges are advertised, among other places, in catalogs Defendants distribute to their customers and potential customers and make publicly available via their website . . .[and] in the catalogs, brochures, price lists and websites of third-party distributors of Ulma flanges . . . Defendants further promote their flanges as normalized and as compliant with the requirements of ASTM A105 in the MTRs that accompany each flange . . . Defendants further advertise and promote their flanges as normalized and complying with ASTM A105 by stamping "A105N" on the flanges themselves.

(Doc. No. 1 at 11-13). According to Plaintiffs, Defendants flanges do not comply with ASTM standards for normalization. Plaintiffs further contend that since non-normalized flanges can be manufactured and sold at a lower cost, Defendants' misrepresentations allow them to unfairly undercut Plaintiffs' prices and interfere with Plaintiffs' market share. Plaintiffs have sued Defendants for false advertising and unfair competition in violation of the Lanham Act as well as common law unfair competition.

         II. Standards of Review

         A. Summary Judgment

         Summary judgment is warranted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). "The movant bears the burden of identifying those portions of the record it believes demonstrate the absence of a genuine issue of material fact." Triple Tee Golf, Inc. v. Nike, Inc., 485 F.3d 253, 261 (5th Cir. 2007) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-25 (1986)). Once a movant submits a properly supported motion, the burden shifts to the non-movant to show that the Court should not grant the motion. Celotex, 477 U.S. at 321-25.

         The non-movant then must provide specific facts showing that there is a genuine dispute. Id. at 324; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). A dispute about a material fact is genuine if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The Court must draw all reasonable inferences in the light most favorable to the nonmoving party in deciding a summary judgment motion. Id. at 255. The key question on summary judgment is whether a hypothetical, reasonable factfinder could find in favor of the nonmoving party. Id. at 248.

         B. False Advertisement Under the Lanham Act

         "The Lanham Act was enacted to protect persons engaged in such commerce against unfair competition." Seven-Up Co. v. Coca-Cola Co., 86 F.3d 1379, 1382-84 (5th Cir. 1996) (internal quotation marks omitted). To state a prima facie case of false advertising, a plaintiff must establish: (1) a false or misleading statement of fact about a product; (2) such a statement either deceived, or had the capacity to deceive a substantial segment of potential customers; (3) the deception is material, in that it is likely to influence the consumer's purchasing decision; (4) the product is in interstate commerce; and (5) the plaintiff has been or is likely to be injured as a result of the statement at issue. Derrick Petrol. Servs. v. PLS, Inc., Civil Action No. H-14-1520, 2017 WL 3456920, at *5 (S.D. Tex. Aug. 11, 2017). "The failure to prove the existence of any element of the prima facie case is fatal to the plaintiffs claim." Pizza Hut, Inc. v. Papa John's Int'l, Inc., 227 F.3d 489, 495 (5th Cir. 2000).

         "To obtain money damages for false advertising under § 43(a) of the Lanham Act, the plaintiff must first demonstrate that the advertisement was (1) literally false; or (2) likely to mislead and confuse customers." IQ Prods. Co. v. Pennzoil Prods. Co., 305 F.3d 368, 375 (5th Cir. 2002). "For a statement to be literally false, the statement must be 'false on its face.'" Derrick, 2017 WL 3456920, at *5. "If the statement at issue is shown to be literally false, the court must assume that it actually misled consumers, without requiring any evidence of such deception from the plaintiff." IQ Prods., 305 F.3d at 375; see also Pizza Hut, 227 F.3d at 497 ("[P]laintiff need not introduce evidence on the issue of the impact the statements had on customers."). However, "if the statement is . . . misleading or ambiguous ... the plaintiff must demonstrate actual deception." IQ Prods., 305 F.3d at 375. "The statements at issue must be a specific and measurable claim, capable of being proved false or being reasonably interpreted as a statement of objective fact." Pizza Hut, 227 F.3d at 496 (internal quotation omitted).

         In Seven-Up, the Fifth Circuit held that in order to be actionable, the alleged misrepresentations must be within the meaning of "commercial advertising or promotion under the [Lanham] Act." Seven-Up, 86 F.3d at 1382-83. The Lanham Act does not explicitly define "advertising or promotion." Thus, the Circuit adopted the following test:

In order for representations to constitute "commercial advertising or promotion" under Section 43(a)(1)(B), they must be: (1) commercial speech; (2) by a defendant who is in commercial competition with plaintiff; (3) for the purpose of influencing consumers to buy defendant's goods or services. While the representations need not be made in a "classical advertising campaign," but may consist instead of more informal types of "promotion," the representations (4) must be disseminated sufficiently to the relevant purchasing public to constitute "advertising" or "promotion" within that industry.

Id. at 1384 (holding that the requisite level of circulation and consumption may "vary according to the specifics of the industry").

         III. Analysis

         A. Standing

         As an initial matter, Defendants argue that Plaintiffs lack Article III and prudential standing because Plaintiffs have not proven that Plaintiffs and Defendants are competitors, nor have they proven causation. (Doc. No. 92 at 33).

         Article III of the United States Constitution requires that parties seeking to resolve disputes before a federal court present actual cases or controversies. U.S. Const, art. Ill. § 2, cl. 1. This requirement limits "the business of federal courts to questions presented in an adversary context and in a form historically viewed as capable of resolution through the judicial process." Flast v. Cohen, 392 U.S. 83, 95 (1968). Plaintiff, as the party invoking the Court's jurisdiction, bears the burden of satisfying the Article III requirement by demonstrating that it has standing to adjudicate its claims in federal court. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992). The "irreducible constitutional minimum of standing contains three elements." Id. at 560. First, a plaintiff must demonstrate that they have "suffered a concrete and particularized injury that is either actual or imminent." Massachusetts v. E.P.A., 549 U.S. 497, 517 (2007). Second, a plaintiff must show that there is a causal connection between the alleged injury and the complained-of conduct-essentially, that "the injury is fairly traceable to the defendant." Id. Finally, standing requires that it "be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision." Lujan, 504 U.S. at 560 (internal quotation marks omitted).

         In addition to the constitutional requirements for standing, "the federal judiciary has also adhered to a set of 'prudential' principles that bear on the question of standing." Valley Forge Christian Coll. v. Americans United for Separation of Church & State, Inc., 454 U.S. 464, 474 (1982). Many opinions refer to these principles as being under the banner of "prudential" standing. See, e.g., Bennett v. Spear, 520 U.S. 154, 164 (1997).

         In Lexmark Int'l, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014), the Supreme Court laid out a two-part test for prudential under the Lanham Act. "To invoke the Lanham Act's cause of action for false advertising, a plaintiff must plead (and ultimately prove) an injury to a commercial interest in sales or business reputation proximately caused by the defendant's misrepresentations." Id. at 140. The Court held that "a direct application of the zone-of-interest test and the proximate-cause requirement supplies the relevant limits on who may sue." Id. at 134.

         The first part of this test concerns "the question whether the interest sought to be protected by the complainant is arguably within the zone of interests to be protected or regulated by the statute or constitutional guarantee in question." Ass 'n of Data Processing Serv. Orgs., Inc. v. Camp, 397 U.S. 150, 153 (1970). Relying on the text of the Lanham Act, the Supreme Court concluded that "to come within the zone of interests in a suit for false advertising under § 1125(a), a plaintiff must allege an injury to a commercial interest in reputation or sales." Lexmark, 572 U.S. at 131.

         The second part of this test requires that injuries be proximately caused by violations of the statute. The question presented in a proximate cause analysis "is whether the harm alleged has a sufficiently close connection to the conduct the statute prohibits." Id. at 1390. A plaintiff "must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties." Valley Forge, 454 U.S. at 474 (quoting Warth v. Seldin, 422 U.S. 490, 499 (1975)). Since "the Lanham Act authorizes suit only for commercial injuries, the intervening step of consumer deception is not fatal to the showing of proximate causation required by the statute." Lexmark, 572 U.S. at 133. Therefore a "plaintiff suing under § 1125(a) ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant's advertising; and that that occurs when deception of consumers causes them to withhold trade from the plaintiff." Id. at 133. "Although the classic false advertising case involves a party inducing customers to switch from a competitor by making false statements about its or the competitor's goods, this is not the only cognizable injury under Section 1125(a)." Greater Houston Tramp. Co. v. Uber Tech., Inc., No. 4:14-0941, 2015 WL 1034254, at *7 (S.D. Tex. Mar. 10, 2015) (citing Lexmark, 572 U.S. at 137). Indeed, it is "a mistake to infer that because the Lanham Act treats false advertising as a form of unfair competition, it can protect only the false-advertiser's direct competitors." Lexmark, 572 U.S. at 136.

         Defendants argue that Plaintiffs do not have standing because they lack evidence as to whether: (a) Plaintiffs and Defendants are competitors, and (b) the alleged deception was the proximate cause of Plaintiffs' purported losses. With regard to Defendants' proximate cause argument, Defendants claim that there are meaningful differences in the prices between the flanges (beyond normalization), and that Plaintiffs failed to demonstrate that Boltex has the capacity to normalize their own flanges.

         Plaintiffs have demonstrated that they have suffered or are imminently threatened with a concrete and particularized injury that is fairly traceable to the challenged action. See Lujan, 504 U.S. at 560. Plaintiffs have provided evidence in the form of deposition testimony that Ulma's purported misrepresentations directly affect the market in which the Plaintiffs participate and that customers compare Ulma and Boltex prices. (Weldbend Rep. James Coulas Depo. Doc. No. 121, Ex. 7 at 179-80; Varner Depo. Doc. No. 122, Ex. 17 at 153). Plaintiffs have also demonstrated that "the[ir] injury is fairly traceable to the defendant." Lujan, 504 U.S. at 560. Plaintiffs provide evidence in the form of deposition testimony, which states that had Ulma not advertised their flanges as normalized, "a portion of [the market] definitely would have come to Boltex." (Bernobich Depo. Doc. No. 122, Ex. 4 at 201). Finally, Plaintiffs have shown their injury could be redressed by a favorable decision. See Lujan, 504 U.S. at 560. Plaintiffs have provided a damages model as evidence of their purported losses. (See Doc. No. 122, Ex. 5). This is sufficient to enable a reasonable factfinder to find that Plaintiffs have standing under Article III. See Lujan, 504 U.S. at 560-61.

         Plaintiffs also have prudential standing under the Lanham Act. Defendants argue that because Boltex is a domestic manufacturer and Ulma is a foreign manufacturer, the two companies are not competitors. As such, they argue, Plaintiffs are outside of the zone-of-interest. According to Defendants, customers usually choose either a foreign or domestic brand of flange and stick to it. Plaintiffs' evidence refutes this argument. Plaintiffs provide deposition testimony from Defendants' expert, Thomas Varner, who stated that "there are certain segments in which [Boltex and Ulma] compete." (Varner Depo. Doc. No. 122, Ex. 17 at 153-54, 260). Plaintiffs also provide deposition testimony from Weldbend Representative James Coulas, agreeing that Weldbend and Ulma compete in the marketplace for carbon steel flanges and that "all domestic [flange] manufacturers compete with all imported [flange] manufacturers" because they all "sell the same products." (Coulas Depo. Doc. No. 121, Ex. 7 at 179-80). Thus, Plaintiffs have demonstrated that a genuine issue of material fact remains concerning whether Boltex and Ulma are competitors. As competitors, Plaintiffs would fall squarely within the zone-of-interest described by the Court in Lexmark. See Lexmark, 572 U.S. at 136.

         Next, Plaintiffs have also demonstrated that a fact issue remains regarding whether the alleged harm was caused by a violation of the Lanham Act. As described above, Plaintiffs present evidence that they lost sales based on Ulma's allegedly false statements about whether their flanges were normalized because non-normalized flanges cost less to manufacture and can be offered at a lower price to customers. This is the type of harm contemplated by the Lanham Act. See Lexmark, 572 U.S. at 133. Thus, the ...


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