Antitrust Law Daily Insulation manufacturer defeats FTC’s deceptive practices suit
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Friday, September 25, 2020

Insulation manufacturer defeats FTC’s deceptive practices suit

By Robert B. Barnett Jr. J.D.

The FTC’s two experts relied on non-standard testing that ignored the recognized industry standards without explaining why.

A home insulation manufacturer was entitled to judgment in its favor in the middle of a trial in which the FTC alleged that the company made false claims about the insulating qualities of its product, Insultex, because the FTC failed to offer qualified expert testimony, leaving no proof of the allegations, a Pittsburgh federal district court has ruled in granting judgment under Fed. R. of Civ. P. 52(c). Both experts offered by the FTC were deemed inadequate because they relied on non-standard tests and, as a result, offered opinions that were not credible in support of the charge that Innovative Designs’ representations were likely to mislead consumers in violation of the FTC Act (FTC v. Innovative Designs, Inc., September 24, 2020, Fischer, N.).

Background. The FTC sued Innovative Designs, Inc., alleging that the Pittsburgh-based insulation manufacturer falsely claimed that its home insulation product, called Insultex, had insulating properties far in excess of what the company claimed in its advertising. Insulation is assigned an R-value, with the higher the R-value, the better the insulation, and, thus, the better the cost savings to consumers. The company claimed that one of its products had an R-3 and that a slightly thicker product had an R-6. In reality, the FTC contended, the R-value of both products was less than one, providing no value to consumers.

To support its claims at trial, the FTC offered the testimony of two expert witness, Dr. Yarbrough, who was to testify live, and Dr. Mavrokefalos, who was to testify via taped deposition. It also offered the testimony of a third expert witness, Dr. Malen, whose only role was to serve as a rebuttal witness. After Dr. Yarbrough completed his testimony, which included a statement that the R-value was negligible at best, the company moved to exclude his testimony. After stopping the trial and accepting additional briefing, the court granted the motion, ruling that Dr. Yarbrough’s testimony was unreliable, failed to fit the case, and lacked credibility. In granting the motion, the court noted that the witness used nonstandard techniques and failed to explain why he did not incorporate the prevailing standards known as the C518 Standards.

After the court granted the motion, the company moved for judgment under Rule 52(c), which allows the federal judge in a nonjury trial to render a judgment prior to the conclusion of a trial where conditions merit it.

Rebuttal witness. The FTC sought to offer the testimony of its rebuttal witness in addition to the deposition testimony of Dr. Mavrokefalos. The court, however, refused because Dr. Malen had always been identified as a rebuttal witness and, given that the company had not yet begun to present its case, no witnesses existed who could be rebutted. The case, therefore, would rise and fall on Dr. Mavrokefalos’ testimony.

Falsity theory. A claim under the FTC Act requires proof of (1) a representation, (2) a likelihood of consumers being misled, and (3) materiality in the representation. The parties agreed that elements one and three were satisfied, thus leaving the case to be determined on the second item. To establish that the representations were misleading, the FTC could use either the falsity theory or the reasonable basis theory. The falsity theory required that the FTC prove that the company’s advertisements were false.

The court ruled that the FTC’s claim failed under the falsity theory because Dr. Mavrokefalos’ testimony failed for many of the same reasons that Dr. Yarbrough’s testimony failed. Like Dr. Yarbrough, he relied on non-standard tests. As with Dr. Yarbrough, he failed to incorporate the C518 Standards and never explained why.

Second, Dr. Mavrokefalos’s opinion was deemed unreliable. He used three tests of his own devising, none of which he had, by his own admission, any experience using. On one test, he had to be trained by a grad student on how to use it. He never explained the known errors that were associated with each of the tests or how those errors impacted the results. The court doubted that he had the qualification to perform the tests and render results. In addition, the tests were sometimes performed on one or two of the components of Insultex despite the fact that the product consisted of three components. Thus, a gap existed between the purported test results and what the FTC sought to prove.

Third, the court found that the testimony lacked credibility. The expert initially took the position that Insultex had the R-value it claimed. He then reconsidered after a rebuttal witness’ report, switching to a belief that the products did not have the R-value they professed to have. Before receiving the report, the expert witness had never considered whether the testing used was problematic or conducted his own testing.

The FTC also sought to offer other laboratory testing by third parties that existed on the product to support its falsity theory. Without an expert witness to support those findings, however, the court denied the FTC the right to rely on those results. The FTC, therefore, failed to support the falsity theory.

Reasonable basis. Under the reasonable basis theory, the FTC sought to prove its claim by establishing that the company failed to provide sufficient scientific evidence to satisfy an expert in the field that the claims were true. In essence, the FTC argued that its claim was valid because the company lacked a reasonable basis for making the assertions that it made in the advertisements. To support the theory, the FTC was required to show what facts would establish such a claim and then compare those facts to the claims made in the ad.

The FTC tried to shift the burden to the company to prove the claims in its ads. The court said, however, that the primary burden was on the FTC to prove that the company’s substantiation was inadequate. Given, however, that the FTC had not offered any credible expert testimony to support its claims, it was unable to meet that burden. Thus, the reasonable basis theory failed as well. Having failed both tests, and lacking any expert testimony, the FTC was unable to prove its claim of an FTC Act violation.

The case is No. 2:16-cv-01669-NBF.

Attorneys: Alejandro G. Rosenberg for the FTC. Anthony E. Patterson (Anthony E. Patterson & Associates) for Innovative Designs, Inc.

Companies: Innovative Designs, Inc.

MainStory: TopStory Advertising ConsumerProtection FederalTradeCommissionNews PennsylvaniaNews GCNNews

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