Testing Systems, Inc. v. Magnaflux Corporation
251 F. Supp. 286, 10 Fed. R. Serv. 2d 76, 149 U.S.P.Q. (BNA) 129 (1966)
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Rule of Law:
A specific, false statement of fact about a competitor's product is actionable as trade libel and is not protected as mere "unfavorable comparison" or puffery. However, to maintain such an action, the plaintiff must plead special damages with particularity by identifying lost customers or alleging a quantifiable general loss of business.
Facts:
- Testing Systems, Inc. and Magnaflux Corp. were direct competitors in the manufacture and sale of chemical products for non-destructive testing of materials.
- Testing Systems' product was known as 'Flaw Finder,' and Magnaflux's product was identified as 'Spotcheck.'
- On or about May 6, 1965, Magnaflux, through its agents, circulated a false report to Testing Systems' current and prospective customers.
- The report falsely claimed that the United States Government had tested both products and found that Testing Systems' 'Flaw Finder' was only about 40% as effective as Magnaflux's 'Spotcheck.'
- On or about May 23, 1965, at a manufacturer's convention, a Magnaflux agent loudly stated in the presence of customers that Testing Systems' product was 'no good' and that 'the government is throwing them out.'
Procedural Posture:
- Testing Systems, Inc. filed a lawsuit against Magnaflux Corp. in the U.S. District Court for the Eastern District of Pennsylvania.
- Jurisdiction in the federal court was based on diversity of citizenship between the parties.
- Magnaflux Corp. filed a motion to dismiss the complaint for failure to state a claim upon which relief can be granted.
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Issue:
Does a competitor's specific, false statement of fact about another's product, such as claiming a government test found it to be 40% as effective, constitute actionable trade libel, and must the plaintiff plead specific evidence of financial loss (special damages) to state a valid claim?
Opinions:
Majority - Lord, District Judge
Yes, a competitor's specific, false statement of fact about another's product constitutes actionable trade libel, but yes, the plaintiff must plead special damages with specificity to state a valid claim. The court distinguished between permissible 'unfavorable comparison' or 'puffery' (general statements of superiority) and actionable false assertions of fact. Stating that a product is only '40% as effective' based on a purported government test is a specific factual claim, not a general opinion, and implies the speaker is fortified with substantive proof. Invoking the credibility of a third party, the U.S. Government, removes the statements further from the realm of protected comparison. However, the court found that under Pennsylvania law, an action for trade libel (disparagement of property) requires the plaintiff to plead and prove special damages. The plaintiff's general allegation of lost customers without naming them or quantifying the loss is insufficient. The statements did not constitute libel 'per se' because they did not directly attack the plaintiff's personal character or business integrity, which would have obviated the need to plead special damages. Therefore, while the defendant's statements were actionable, the complaint was deficient for failing to plead damages with the required particularity.
Analysis:
This case clarifies the boundary between permissible competitive speech ('puffery') and actionable trade libel. It establishes that while general claims of superiority are often protected, specific and false factual assertions, especially those that invoke the authority of a credible third party, fall outside this protection. The decision also underscores the significant procedural hurdle of the special damages rule in disparagement cases. By requiring plaintiffs to plead specific economic losses, the rule protects businesses from frivolous lawsuits based on vague claims of harm, but it can also make it difficult for genuinely injured parties to seek redress if they cannot precisely trace their losses to the disparaging statements.
