Neuros Co. v. Kturbo, Inc.

• Decision Date: 15 October 2012
• Docket Number: Nos. 11–2260,11–2375.,s. 11–2260
• Citation: 698 F.3d 514
• Parties: NEUROS CO., LTD. and Aviation and Power Group Inc., Plaintiffs–Appellees/Cross–Appellants, v. KTURBO, INC., Defendant–Appellant/Cross–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

698 F.3d 514

NEUROS CO., LTD. and Aviation and Power Group Inc., Plaintiffs–Appellees/Cross–Appellants,

v.KTURBO, INC., Defendant–Appellant/Cross–Appellee.

Nos. 11–2260, 11–2375.

United States Court of Appeals,Seventh Circuit.

Argued Sept. 5, 2012.

Decided Oct. 15, 2012.

Joshua D. Yount (argued), Attorney, Mayer Brown LLP, Chicago, IL, for Plaintiff–Appellee.

Deborah L. Carstens, Attorney, Bullivant Houser Bailey PC, Constance Susan Manos Martin (argued), Schwabe, Williamson & Wyatt, Seattle, WA, Michael G. Kelber, Attorney, Neal, Gerber & Eisenberg LLP, Chicago, IL, for Defendant–Appellant.

Before POSNER, KANNE, and SYKES, Circuit Judges.

POSNER, 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-dependent) bacteria that play a critical role in the treatment process by breaking down organic waste into carbon dioxide, nitrogen, and water. The plaintiffs operate 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 executive 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:

Image 1 (5.9" X 4.06") Available for Offline Print

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 Industrial Solutions, “Municipal Wastewater Treatment Plant Energy Baseline Study,” PG & E New Construction Energy Management Program, pp. 5–6 (June 2003), www. cee 1. org/ ind/ mot- sys/ ww/ pge 1. 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 specified 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 unattainable. 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); and to estimate total efficiency 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 wire power claimed in one Neuros document implied a 2 to 7 percent overstatement of the efficiency of its blowers, but such overstatements do not, as KTurbo argues, make its defamatory accusations “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 overstatement; 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 were not impressed by the slide show. Lee also published his accusations on one of KTurbo's websites and sent them to the sales representatives that the company 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 “terminate” 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 defamation; 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., 156 Ill.2d 16, 188 Ill.Dec. 765, 619 N.E.2d 129, 134–35 (1993); Parker v. House O'Lite Corp., 324 Ill.App.3d 1014, 258 Ill.Dec. 304, 756 N.E.2d 286, 298 (2001); Haywood v. Lucent Technologies, Inc., 323 F.3d 524, 533 (7th Cir.2003) (Illinois law); Restatement (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, 188 Ill.Dec. 765, 619 N.E.2d at 135–36;Naleway v. Agnich, 386 Ill.App.3d 635, 325 Ill.Dec. 363, 897 N.E.2d 902, 913 (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 exceptions (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 competence or honesty. Tuite v. Corbitt, 224 Ill.2d 490, 310 Ill.Dec. 303, 866 N.E.2d 114, 121 (2006). And that was the character of KTurbo's defamation of Neuros. KTurbo accused it of committing 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 “compensatory” damages without proof of injury, id.;Van Horne v. Muller, 185 Ill.2d 299, 235 Ill.Dec. 715, 705 N.E.2d 898, 903 (1998); Restatement, supra, § 621 comment. a—and, if the defendant in committing the defamation was grossly negligent or worse, to punitive damages as well. Slovinski v. Elliot, 237 Ill.2d 51, 340 Ill.Dec. 210, 927 N.E.2d 1221, 1224–25, 1228–29 (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...