Eco Elec. Sys. v. Reliaguard Inc.

ECO ELECTRICAL SYSTEMS, LLC, Plaintiff, v. RELIAGUARD, INC.; GREENJACKET, INC.; and MAYDWELL &HARTZELL, LLC. Defendants.

No. C 20-00444 WHA

United States District Court, N.D. California

April 19, 2022

ORDER RE MOTIONS FOR SUMMARY JUDGMENT

WILLIAM ALSUP UNITED STATES DISTRICT JUDGE

INTRODUCTION

In this unfair business practices suit, defendants move for summary judgment. To the extent stated below, the motions are GRANTED IN PART and DENIED IN PART.

STATEMENT

This case arises from a fierce fight between two competitors to supply Pacific Gas & Electric Company with specialized guards that protect birds and other animals from electrocution.

In 2000, Michael Lynch founded plaintiff Eco Electrical Systems which designs, manufactures, and sells “avian protection devices” to utility companies. In about 2003, PG&E asked Eco to design a “cutout cover” to prevent animals from coming into contact with “cutouts, ” a type of electrical device that rests atop utility poles. In response, Eco developed the ECC-3 cutout cover, which it sold, unchanged, to PG&E until 2019. The ECC-3, which is designed for cutouts made out of porcelain, is Eco's most successful product and is also sold to other utility companies. PG&E also purchases, in much smaller quantities, the ECC-10 cutout cover, which is made from the same material but is designed for particularly large porcelain cutouts. Additionally, Eco sells to other utilities - but not PG&E - the ECC-2 cutout cover, which is designed for smaller cutouts made from polymer (Lynch Decl. ¶ 3-6; Cart Decl. Exh. 5 at 78-79).

In late 2013, a PG&E employee told Lynch that PG&E was concerned about the fire risk associated with Eco's ECC-3 and ECC-10 cutout covers. Specifically, PG&E feared that in the event electrical equipment on a utility pole caught on fire, Eco's cutout covers could cause a wildfire by melting and “dripping” hot material to the ground below. In response to PG&E's concerns, Eco developed what it contends is flame-resistant material and told PG&E it had the ability to sell cutout covers composed of this new material. In early 2014, Lynch met with a “large group” of PG&E employees to share third-party test reports illustrating the new material's efficacy and to discuss the possibility of altering the ECC-3 to accommodate PG&E's concerns. PG&E, however never requested a change or otherwise followed up on the meeting, so Eco continued to sell it the ECC-3 product without modifications (Lynch Decl. ¶¶ 14-15; Noll Exhs. 17, 35; Cart Exh. 15).

Meanwhile, PG&E was discussing the fire issue with other potential vendors. In 2013, a PG&E employee, Rudy Movafagh, informed Cantega Technologies, a company involved in electrical distribution equipment, about PG&E's fire concerns. Cantega recognized an opportunity to establish a business relationship with PG&E and in 2015 began to develop a cutout cover to compete with Eco's products. Cantega coordinated these development efforts through a subsidiary that eventually rebranded itself as defendant Reliaguard, Inc. (Noll M&H Exh. 5; Jacobsen Decl. ¶¶ 2-4).^[1] Eco contends that Reliaguard engaged in a “targeted campaign” to undermine Eco's reputation and business relationship with PG&E (Opp. 7; Noll Exh. 8-9). Eco asserts this campaign had three central elements.

First, Reliaguard sought to establish personal relationships with key decisionmakers at PG&E, including by “wining and dining” them. These efforts were driven, according to Eco, by Maydwell & Hartzell, a consulting firm in the electrical equipment industry that had established relationships with PG&E employees and had become familiar with PG&E's internal processes for approving outside vendor products. For example, Bob Frase, one of M&H's managers, had a longstanding personal relationship with Movafagh, the PG&E employee spearheading PG&E's effort to replace the ECC-3 with a fire-resistant cutout cover. Reliaguard and M&H (together, “defendants”) thought they could capitalize on this relationship to win business from PG&E. Movafagh asserted his Fifth Amendment rights in this litigation and refused to be deposed, a circumstance that was never previously brought to the Court's attention (Opp. 11; Noll M&H Exhs. 2, 5; Bowles M&H Decl. ¶¶ 24-25).

Defendants also established a relationship with Dan Hernandez, another PG&E employee involved in PG&E's cutout cover approval process. This effort, which began in 2016, included the son of Bob Frase, named Gavin Frase, and Mark Jacobsen, a Reliaguard employee, inviting Hernandez to attend baseball games in private suites, taking him out for drinks and a dinner, and coordinating a round of golf and a professional golf lesson. Gavin Frase and Jacobsen also regularly exchanged text messages with Hernandez during PG&E's approval deliberations. And, at one point in 2017, Hernandez sold used car parts to Jacobsen for $600 (Noll Exhs. 14, 18, 46; Noll M&H Exh. 26; Cart. Supp. Exh. 65 at 124-31).

Eco contends these relationships were “improper” and resulted in Reliaguard receiving favorable treatment from PG&E. In 2015, for example, Hernandez began working directly with Reliaguard to design a new cutout cover. This included Hernandez providing Reliaguard with photographs and measurements of Eco's cutout covers. Bob Frase (the dad) also used his relationships at PG&E to procure samples of Eco's products and Eco pricing information, which he then supplied to Reliaguard (Opp. 11-12; Noll Exhs. 8-9, 11, 13-15, 26, 30; Noll M&H Exhs. 18, 21, 23, 34-35, 41; Lynch Decl. ¶ 10).

Second, Reliaguard created and shared with PG&E defamatory videos that allegedly misrepresented Eco's products. Two videos have center stage. In the “YouTube Video, ” Reliaguard's founder, Marty Niles, sets a Reliaguard cutout cover and Eco cutout cover next to each other on two energized cutouts and tests the covers with a probe to assess whether they present a risk of electrocution. Niles touches the Eco cover with the probe and says: “That's a fail.... Obviously, a fail with the exposed parts.” Then, in the “Crow Video, ” Niles similarly sets a Reliaguard cover and an Eco ECC-10 cover next to each other, except he holds a pole to which is attached, for illustrative effect, a fake crow with an energized probe in place of a beak. Niles again says “that's a fail” after the touching the Eco cover with the probe (Noll. Exh. 15; M&H Exhs. 14-15).

Eco contends these videos were defamatory because they both depict an ECC-10 cover, which is designed for large porcelain cutouts, placed on a smaller polymer cutout. The cutout covers in the videos are also not installed properly. The result, according to Eco, is an inaccurate depiction of how loosely Eco's cutout covers fit over PG&E's cutouts. Because the purpose of the covers is to prevent animals from coming into contact with energized cutouts, Eco asserts that portraying Eco's cutout covers as having a loose fit falsely suggested to PG&E that Eco's products were not effective (Br. 14; Lynch Decl. ¶¶ 30-31).

Defendants shared the videos with PG&E at least four times. Reliaguard and M&H representatives played the Crow Video to PG&E employees at a meeting in March 2018. The videos were published on Reliaguard's YouTube channel, and Gavin Frase sent Movafagh and Hernandez a link to the channel in March 2018. In September 2018, Niles emailed the Crow Video directly to Pat Hogan, PG&E's Senior Vice President. And, in October 2018, Niles emailed one of the videos to Movafagh (Noll. M&H Exhs. 27, 29, 31; Noll Exhs. 8, 67, 75).

Third, Eco contends that Reliaguard provided PG&E a doctored test report falsely suggesting that Eco's ECC-2 cutout cover was not flame resistant. PG&E required any new cutout cover it approved for purchase to comply with an industry standard called UL 94.

Specifically, the cutout cover had to receive a “V-0 rating” under the UL 94 standard, which essentially meant the cover must withstand high heat for a certain length of time without catching on fire, melting, or dripping. The test report that Reliaguard gave to PG&E stated that the tested sample, which Reliaguard told PG&E was Eco's “ECC-2 Cutout Cover, ” failed to achieve a V-0 rating (Cart Exhs. 64; 22 at 25).^[2]

Eco disputes the reliability of the test and contends that Reliaguard presented the results to PG&E in a misleading way. In September 2018, a Reliaguard employee sent a piece of Eco's ECC-2 cutout cover to a third-party laboratory to test the flame resiliency of the piece - called a “pin” - under the UL 94 standard. The laboratory then sent the results of the test to Reliaguard on a document that included the laboratory's letterhead. After receiving the results, Reliaguard employees modified the document to change the letterhead and omit language clarifying that the tested sample had been previously burned and that the tested sample was merely a pin as opposed to the entire cover.^[3]

Niles sent the altered version of the test report to Movafagh on October 1, 2018. The next day, Movafagh sent an email attaching the test report to the team at PG&E conducting the approval process for the new cutout cover. In late October and early November 2018, PG&E began the process of approving Reliaguard's cutout cover for purchase. In February 2019, PG&E announced it had placed Eco's ECC-3 cutout cover on its “Do Not Purchase” list and had approved Reliaguard's cutout cover for purchase. The ECC-3 has been Eco's best seller but has gone unsold to PG&E since 2019 (Noll. Exhs. 75, 86, 89, 98; Lynch Decl. ¶ 29).

Eco contends that PG&E would have chosen to replace the ECC-3 cutout cover with the ECC-2 cover if not for Reliaguard's efforts to undermine PG&E's confidence in Eco's products. Reliaguard replies that PG&E's decision was driven by concerns that had...