Federal Trade Commission v. Innovative Designs

• Court: Court of Appeals for the Third Circuit
• Decided: July 22, 2021
• Docket: 20-3379
• Status: Unpublished

Opinion

NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT ______________

No. 20-3379 ______________

FEDERAL TRADE COMMISSION, Appellant

v.

INNOVATIVE DESIGNS, INC. ______________

Appeal from the United States District Court for the Western District of Pennsylvania (D.C. Civil No. 2-16-cv-001669) District Judge: Honorable Nora B. Fischer ______________

Argued July 8, 2021 ______________

Before: SHWARTZ, KRAUSE, and RENDELL, Circuit Judges

(Filed: July 22, 2021) ______________

OPINION ______________

 This disposition is not an opinion of the full Court and, pursuant to I.O.P. 5.7, does not constitute binding precedent. Imad D. Abyad [ARGUED] Katherine Johnson Omolara B. Joseney Alejandro G. Rosenberg Federal Trade Commission 600 Pennsylvania Avenue, N.W. Washington, DC 20580

Counsel for Appellant

Anthony E. Patterson [ARGUED] Anthony E. Patterson & Associates 304 Ross Street Suite 505 Pittsburgh, PA 15219

Counsel for Appellee

SHWARTZ, Circuit Judge.

The Federal Trade Commission (“FTC”) sued Innovative Designs, Inc. (“IDI”)

under Section 5(a) of the Federal Trade Commission Act (“FTCA”), 15 U.S.C. § 45(a),

alleging that IDI made misrepresentations about its house wrap product. Because the

FTC failed to prove that IDI’s claims were false or unsubstantiated, the District Court

correctly granted IDI’s motion for judgment on partial findings, and we will therefore

affirm.

I

A1

1 The facts are based on the parties’ joint stipulations and evidence admitted at trial. 2 IDI manufactures and sells Insultex House Wrap, a weather-resistant barrier used

in building construction. IDI’s advertisements include Insultex’s R-value, a numeric

measure of the product’s ability to restrict the flow of heat. The higher the R-value, the

better the product’s insulating ability. One way to determine a product’s R-value is to

use testing approved by the American Society for Testing and Materials (“ASTM”).2 The

standard test for insulation is set forth in ASTM C518. See 16 C.F.R. § 460.5(a).

IDI advertises that ASTM C518 testing revealed that Insultex has an R-value of

either R-3 or R-6, but “standard” ASTM C518 testing conducted on Insultex has not

yielded those results. Instead, IDI’s claimed R-values derive from “modified” ASTM

C518 testing conducted by BRC Laboratory, Inc. (“BRC”). BRC’s testing unit is

“modified” because it has ¾-inch air gaps built into the sides of the unit. BRC provided

IDI with Certificates of Analysis documenting the test results and noting that the test

material was “prepared and analyzed as outlined in,” among other things, “ASTM

Guidelines.” App. 599, 603. IDI also advertises that Insultex provides energy savings to

its users based upon its claimed R-values, but it has conducted no energy savings studies.

2 ASTM is a Pennsylvania nonprofit corporation that “provide[s] a forum for volunteer technical experts to develop and publish standards for materials, products, systems, and services.” Am. Soc’y for Testing & Materials v. Corrpro Cos., Inc., 478 F.3d 557, 559 (3d Cir. 2007). “ASTM also develops methods for testing different properties and materials.” Id. Its members include “individuals from academic institutions, government agencies, consulting groups, testing laboratories, and private corporations.” Id. Its numerous “technical committees . . . develop[] standards,” and its board “governs the standard-setting process.” Id. 3 B

The FTC sued IDI under 15 U.S.C. § 53(b),3 seeking permanent injunctive relief

and other equitable remedies because IDI’s promotion of Insultex allegedly violated 15

U.S.C. § 45(a). The FTC asserted three counts, specifically that (1) IDI’s representations

about Insultex’s R-values, and hence its performance, were false or unsubstantiated since

IDI did not use the standard ASTM C518 test to yield its purported R-values; (2) the

represented R-values were false since standard ASTM C518 testing did not yield IDI’s

claimed results and thus its claims were not established; and (3) IDI’s promotional

materials, which allegedly contained false or misleading representations, were the means

and instrumentalities constituting deceptive acts affecting commerce.

In a pretrial ruling, the District Court held that R-value testing results could be

admitted only with expert testimony explaining them. In response, the FTC represented

that expert Dr. David Yarbrough would testify about the test results.

Dr. Yarbrough was the FTC’s only trial witness. Following his testimony, the

FTC rested its case and IDI moved to exclude or strike portions of the testimony. The

District Court granted IDI’s motion to strike, finding that Dr. Yarbrough’s opinions were

not reliable or fit pursuant to Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579

(1993). See FTC v. Innovative Designs, Inc., No. 2:16-cv-01669-NBF, 2020 WL

758727, at *1, 10-11, 14-15 (W.D. Pa. Feb. 14, 2020).

3 Title 15 U.S.C. § 53(b) permits the FTC to sue any corporation or entity in a United States District Court to enjoin its trade practices if the FTC believes that the corporation “is violating . . . any provision of law enforced by [the FTC]” and that “the enjoining thereof . . . would be in the interest of the public.” 4 The District Court then granted IDI’s motion for judgment on partial findings. See

FTC v. Innovative Designs, Inc., 489 F. Supp. 3d 378, 402 (W.D. Pa. 2020). The Court

explained that: (1) the FTC’s experts were not reliable or credible, id. at 398-400; (2) the

FTC did not produce expert testimony showing that BRC’s testing did not conform with

the ASTM C518 standard, id. at 400; (3) without expert testimony, the Court could not

evaluate the testing, id.; and (4) the FTC produced no evidence showing that IDI’s

advertisements were false, id. at 398.

The District Court also concluded that: (1) the FTC failed to demonstrate that

IDI’s substantiation lacked a reasonable basis, id. at 402; (2) the FTC did not demonstrate

that IDI lacked substantiation for its energy saving claims because the FTC did not rebut

IDI’s substantiation representations concerning its R-values or explain why it was

improper for IDI to rely on the Federal Register statement that a high R-value leads to

energy savings, id. (citing 70 Fed. Reg. 31258 (2005)4); and (3) because the FTC failed to

establish that IDI’s representations were misleading, its means and instrumentalities

count also failed, id.

The FTC appeals.5

4 That statement, from an FTC notice of final rulemaking, provides that “R-value is the numerical measure of the ability of an insulation product to restrict the flow of heat and, therefore, to reduce energy costs.” 70 Fed. Reg. 31258. 5 Because the FTC presented no arguments challenging the order striking Dr. Yarbrough’s opinions relating to the R-value of Insultex, it has waived any appeal of that order. See United States v. Pelullo, 399 F.3d 197, 222 (3d Cir. 2005). 5 II6

A

The District Court properly granted IDI’s motion for judgment on partial findings

pursuant to Federal Rule of Civil Procedure 52(c). That Rule provides:

If a party has been fully heard on an issue during a nonjury trial and the court finds against the party on that issue, the court may enter judgment against the party on a claim . . . that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue.

Fed. R. Civ. P. 52(c). “In considering whether to grant judgment under Rule 52(c), the

district court applies the same standard of proof and weighs the same evidence as it

would at the conclusion of the trial,” so “the court does not view the evidence through a

particular lens or draw inferences favorable to either party.” EBC, Inc. v. Clark Bldg.

Sys., Inc., 618 F.3d 253, 272 (3d Cir. 2010) (citation omitted). “[I]f the district court’s

account of the evidence is plausible in light of the record viewed in its entirety,” we will

affirm, “even if we would have weighed that evidence differently.” Id. at 273 (quotation

marks and citation omitted).

B

We first identify the FTC’s theory of liability. The FTC did not sue IDI for

violating a specific regulation regarding how R-value testing is to be performed. At the

6 The District Court had jurisdiction pursuant to 15 U.S.C. § 45 and 28 U.S.C. §§ 1331, 1337(a), and 1345. We have jurisdiction pursuant to 28 U.S.C. § 1291. We review the District Court’s factual findings for clear error and its legal conclusions de novo. EBC, Inc. v. Clark Bldg. Sys., Inc., 618 F.3d 253, 273 (3d Cir. 2010). 6 time IDI made its advertising claims, Section 460.5 provided that R-values in labels and

promotional materials “must be based on tests done under the methods listed below.” 16

C.F.R. § 460.5 (2005). Subsection (a) stated one of those methods is “ASTM C 518[],”

and that such a test “must be done on the insulation material alone (excluding any

airspace).”7 Id. § 460.5(a) (2005). Subsection (e) incorporated the ASTM standard into

the regulation. Id. § 460.5(e) (2005). ASTM C518 provided that “[s]tandardization of

[the ASTM C518] test method is not intended to restrict in any way the future

development of improved or new methods or procedures by research workers.” App.

566.

The FTC does not dispute that a modified test may be used. Nor does the FTC

assert that IDI “br[oke] any of [the Act’s] rules,” which itself can constitute a deceptive

act or practice under the FTCA.8 16 C.F.R. § 460.1 (2005). Rather, the FTC argues that

IDI’s admission that a standard ASTM C518 test never returned the purported R-values

7 The version of ASTM C518 in effect at the time the FTC filed its complaint in this case was ASTM C518-15, with the “15” referring to the year the version in effect was approved. The current version of Section 460.5, effective in 2020, refers to ASTM C518-17. This difference has no impact on our ruling. 8 The FTC does not base any of its claims on the fact that the modified testing used air gaps or allege that IDI’s R-values violated 16 C.F.R. § 460.5. Moreover, at trial, the FTC admitted that its issue with IDI’s testing methods was not “about whether [the testing] can add air gaps or add layers or stack or sandwich,” since “[a]ll of those things are acceptable alterations of the parameters of the test method if you understand what you are doing and how to interpret the results.” App. 499. This admission indicates not only that the FTC’s theory of liability is not premised on the air gaps used in BRC’s modified testing, but also that a test’s use of air gaps does not constitute a per se violation of the FTCA. 7 establishes that IDI’s claims about its test results are false and that IDI did not adequately

substantiate its R-value claims.

We next examine what the FTC must prove under the substantiation theory of

liability. When the FTC brings a deceptive advertising claim based on the theory that the

advertiser lacked substantiation, that is, a reasonable basis for its claim, the FTC must

show the claim was material, POM Wonderful, LLC v. FTC, 777 F.3d 478, 490 (D.C.

Cir. 2015), and must also “(1) demonstrate what evidence would in fact establish such a

claim in the relevant scientific community; and (2) compare [] the advertisers’

substantiation evidence to that required by the scientific community to see if the claims

have been established,” FTC v. Direct Mktg. Concepts, Inc., 624 F.3d 1, 8 (1st Cir. 2010)

(alteration in original) (quotation marks and citation omitted); see also POM Wonderful,

777 F.3d at 491 (“The Commission . . . determines what evidence would in fact establish

such a claim in the relevant scientific community and then compares the advertisers’

substantiation evidence to that required by the scientific community.” (quotation marks

and citation omitted)); FTC v. Pantron I Corp., 33 F.3d 1088, 1096 (9th Cir. 1994) (“In

determining whether an advertiser has satisfied the reasonable basis requirement, the . . .

court must first determine what level of substantiation the advertiser is required to have

for his advertising claims. Then, the adjudicator must determine whether the advertiser

possessed that level of substantiation.”). Therefore, to prevail, the FTC must identify the

evidence that the advertiser should have to support its claim in the relevant scientific

community, see POM Wonderful, 777 F.3d at 491, and then prove that the substantiation

8 evidence the advertiser claims to possess would not satisfy the relevant scientific

community, see Direct Mktg. Concepts, 624 F.3d at 10. If an advertising claim “states a

specific type of substantiation,” as some of IDI’s claims at issue here, the “advertiser

must possess the specific substantiation claimed.” POM Wonderful, 777 F.3d at 491

(quoting Removatron Int’l Corp. v. FTC, 884 F.3d 1489, 1492 n.3 (1st Cir. 1989)).

“Where the advertiser[] lack[s] adequate substantiation evidence, [it] necessarily lack[s]

any reasonable basis for [its] claims,” and therefore its “ads are deceptive as a matter of

law.” Direct Mktg. Concepts, 624 F.3d at 8.

The FTC’s substantiation theory has two components. First, the FTC asserts that

IDI lacked substantiation because it did not conduct a standard ASTM C518 test and did

not disclose that it used a modified test. The FTC, however, failed to prove that use of a

modified ASTM test is not ASTM C518 testing. ASTM C518 sets forth a standard test

and explicitly contemplates that variations of the standard method may be acceptable.

Moreover, the FTC concedes that alternative tests, including those with air gaps, are not

barred by ASTM C518.9 Thus, modified testing, including tests with air gaps, is captured

within ASTM C518 and the use of such testing could provide substantiation that satisfies

ASTM C518. If the FTC took the position that consumers confronted with IDI’s

representations that it tested the product “as outlined in . . . ASTM Guidelines,” App.

9 At argument, the FTC asserted that the modification-permitting language of the ASTM Guidance was intended to cover future standards developed by “standard-setting bodies” and “research workers,” not any modifications that “individual marketers” might wish to make. Oral Arg. 45:27-45:37, July 8, 2021. That may well be the case, but the FTC has not met its burden of proof in that respect. 9 599, understood them to mean standard ASTM C518 and not modified ASTM C518, the

FTC would have the burden to prove those claims had the capacity or tendency to cause

such a misunderstanding. See Am. Home Prods. Corp. v. FTC, 695 F.2d 681, 687 n.10

(3d Cir. 1982). In the absence of expert testimony or even lay testimony, for that matter,

the FTC cannot carry this burden.

Second, the FTC asserts that IDI failed to prove that the relevant scientific

community would accept the use of the modified test, which yielded R-values of R-3 and

R-6, as constituting adequate substantiation evidence. That argument conflates the FTC’s

burden to “compare [IDI’s] substantiation evidence to that required by the scientific

community,” with IDI’s obligation only to “possess evidence sufficient to satisfy the

relevant scientific community of the claim’s truth.” POM Wonderful, 777 F.3d at 491

(quotation marks and citation omitted). In other words, the FTC had the burden to show

IDI’s substantiation evidence would not satisfy the relevant scientific community. See

Direct Mktg. Concepts, 624 F.3d at 10-11 (concluding that the FTC carried its burden of

proof by comparing the defendant’s substantiation evidence to the available scientific

literature). The FTC neither proved that the modified test would not satisfy the scientific

community, see id., nor showed that the modified test yielded inaccurate results. Thus,

the FTC’s substantiation theory fails.

The FTC’s falsity theory fails for similar reasons. To establish a falsity claim, the

FTC must prove: (1) there was a representation; (2) the representation was material; and

(3) the representation was likely to mislead a reasonable consumer under the

10 circumstances.10 See FTC v. Tashman, 318 F.3d 1273, 1277 (11th Cir. 2003). The

parties do not dispute the R-value representations are material. First, to show that IDI

falsely claimed that its R-values were based on ASTM C518 testing specifically, the FTC

needed to establish that the modified test did not comply with ASTM standards, which,

for the reasons discussed above, it failed to do. Second, to show that IDI falsely claimed

that scientific tests, generally, supported its R-values, the FTC needed to prove that the

modified ASTM C518 unit did not accurately measure Insultex’s R-values. See Pantron,

33 F.3d at 1097 (stating that an efficacy claim is “false” under the FTCA “if evidence

developed under accepted standards of scientific research” so demonstrates). Because the

FTC did not demonstrate, through expert testimony or otherwise, that the modified

ASTM C518 test resulted in false R-values and did not show that IDI’s energy savings

claims were therefore false, see 70 Fed. Reg. 31258 (2005), the FTC cannot prove

falsity.11

III

For the foregoing reasons, we will affirm.

10 Although a party claiming false advertising need not always prove actual falsity, see Am. Home. Prods. Corp. v. FTC, 695 F.2d 681, 683-84 (3d Cir. 1982), here, the FTC’s falsity theory is based on its argument that IDI’s claimed R-values are false. 11 Because the FTC did not establish that IDI’s R-value and energy savings claims were false or misleading, it cannot establish that IDI’s promotional materials were a means and instrumentality to mislead the public. Cf. FTC v. Five-Star Auto Club, Inc., 97 F. Supp. 2d 502, 530-31 (S.D.N.Y. 2000) (concluding that the defendant provided the public with the means and instrumentalities to deceive others by distributing deceptive marketing materials). 11