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From Antitrust Law Daily, September 18, 2013

LED lighting manufacturer’s deceptive claims violated FTC Act, resulting in $21 million award

By Tobias J. Gillett, J.D., LL.M.

LED lighting manufacturer Lights of America, Inc. (LOA) and two of its executives violated Section 5(a) of the FTC Act by making false and unsubstantiated claims regarding the amount of light its lamps would produce and the amount of time they would last, the federal district court in Los Angeles has ruled in an FTC action against the company (FTC v. Lights of America, Inc., September 17, 2013, Selna, J.). The court found the company and its executives jointly and severally liable for over $21 million for the violations.

LOA is a manufacturer of lighting products sold through retailers such as Costco, Home Depot, Wal-Mart, Amazon.com, ACE Hardware, and Kroger. In 2007, LOA entered the light-emitting diode (LED) lighting industry, introducing a range of LED lamps.

In September 2010, the FTC filed a complaint against LOA; its founder, President, and Chairman of the Board, Usman Vakil, who owned 51 percent of the company’ and its Executive Vice President, Farooq Vakil, who owned 49 percent of the company. The agency later filed an amended complaint setting forth additional factual support. The FTC alleged that LOA falsely represented, on the packaging of its lamps, that they could “replace __ watts,” ranging from 20 to 45 watts, even though they produced significantly less light than comparable incandescent lamps. The FTC also asserted that LOA falsely advertised the lifetime that the lamps could be expected to last.

The court agreed with the FTC that LOA’s “replaces watts” claims were false, concluding that LOA’s lamps did not provide comparable light output as incandescent lamps when measured by the Department of Energy’s CALiPER lumen output tests or by center beam candle power tests conducted by third-party laboratories. The court found that the total harm to consumers, as measured by LOA’s sales of the lamps during the period it used the “replaces watts” claims, was $10,497.102.

The court also found LOA’s lifetime claims to be deceptive, concluding that LOA “acted without any factual or reasonable basis” for its claims prior to receiving an e-mail from one of its LED suppliers and that the e-mail’s claim that the LEDs would last 30,000 hours, without supporting test data, was not a reasonable basis on which LOA could have relied. Later test data provided by another supplier and other sources provided insufficient support for LOA’s 30,000 hour, 20,000 hour, and 12-15,000 hour claims, and instead “show[ed] that none of the LEDs or Lifetime Lamps tested would last beyond a few thousand hours.” LOA’s own internal testing and testing by the Department of Energy also demonstrated that its claims were false.

The court concluded that the individual defendants, Usman and Farooq Vakil, had the authority to control LOA’s claims and sufficient knowledge of them. Usman Vakil was responsible for the day-to-day operations of LOA, and made the decision to enter the LED market, while Farooq Vakil retained oversight of numerous departments even though he only worked part-time. The Vakils had the authority to control all other employees at LOA, and knew of or were recklessly indifferent to the misrepresentations made by LOA, according to the court.

The court found that LOA’s total gross sales for all of the LED lamps that it deceptively advertised amounted to $21,165,863, that LOA did not adequately identify refunds it purportedly made to consumers, and that LOA did not show any errors in the FTC’s calculation of consumer harm. The court rejected LOA’s theory that consumers did not sustain any damages because their energy savings were “likely in excess of $100 million,” finding that the “conferral of benefits” theory was not legally cognizable and that the theory ignored “the fact that consumers did not get what was represented.”

The court concluded that LOA’s lifetime and “replaces watts” claims violated Section 5(a) of the FTC Act. The “replaces watts” claims “were express, and therefore per se material.” Even if the claims were implied, they would be material because they related to the efficiency of the product. LOA did not have adequate substantiation for its claims, as the court had previously determined. Moreover, testing ordered by LOA itself showed that its lamps “produced only a small fraction of the amount of light (in lumens) compared to incandescent lamps of similar wattage,” and therefore LOA’s claims were false.

LOA’s lifetime claims were also express, and “were material both because the claims were express, and because the claims concerned the efficacy of LOA’s LED Lamps.” As previously determined, LOA’s lifetime claims lacked adequate substantiation, and testing demonstrated that the claims were false. Therefore, the court found that “LOA violated Section 5(a) of the FTC Act in making false claims about how long its Lifetime Lamps would last.”

The court ruled that injunctive relief under Section 13(b) of the FTC Act was warranted against LOA, Usman Vakil, and Farooq Vakil. Injunctive relief was warranted against LOA because its claims would be relied on by consumers selecting lighting products and because consumers were harmed by purchasing a different product than was advertised. Further, “both Usman Vakil and Farooq Vakil had the authority to control LOA’s LED Lamp business,” and therefore injunctive relief was warranted against them as well.

The particular injunctive relief requested by the FTC would both enjoin illegal conduct and seek to prevent future violations, according to the court. The defendants had “acted deliberately” in making inadequately substantiated claims for more than two years, and in continuing to make the claims even after receiving test data showing they were false. The defendants’ contention that they acted in good faith because they “could not acquire proper substantiation” due to the lighting community’s purported indecision regarding which test standards to adopt ignored Section 5(a)’s requirement that manufacturers must “have a reasonable basis before making a claim.” The violations were likely to recur because the defendants previously had been involved in litigation regarding false claims concerning its compact fluorescent products; the conduct leading to the false claims “appear[ed] to be systemic,” involving delegation of authority without proper controls in place; and the deceptive acts were “easily transferable to LOA’s other products,” of which it had many.

The court found LOA, Usman Vakil, and Farooq Vakil to be jointly and severally liable for equitable monetary relief. LOA had made its statements with the expectation that consumers would rely on them, and had widely disseminated them. Consumers had purchased mire than 3 million of LOA’s LED Lamps with deceptive packaging, and had thus been harmed. Usman Vakil and Farooq Vakil had final authority over all aspects of LOA’s business, and had actual knowledge of LOA’s deceptive lifetime claims from at least August 2009. The court also found it could infer the Vakil’s knowledge prior to that date, and that the Vakil’s demonstrated reckless indifference to the truth of LOA’s claims even if their knowledge was not sufficient.

Although the Vakils claimed to have delegated most of their authority to their managers, they had not put procedures in place to ensure the managers followed their instructions. Moreover, Farooq Vakil had sent e-mails to LOA employees discussing policies and procedures for addressing quality control and production problems. The Vakils continued to allow LOA to make its claims even after Costco required LOA to take back several pallets of its lamps after Costco received Department of Energy test data, a fact the court found was “evidence of reckless indifference.”

The amount of LOA’s gross revenues from its deceptively advertised products was “a conservative, yet proper measure for monetary liability” for restitution and disgorgement purposes, according to the court, and the defendants were not entitled to any offsets. Therefore, the court found LOA, Usman Vakil, and Farooq Vakil to be jointly and severally liable for $21,165,863.

The court also determined that LOA’ purported warranty program was “irrelevant,” and not a defense to any of the claims. Similarly, the FTC did not have to prove that the defendants intended to deceive consumers, and therefore any evidence of their good faith was “immaterial.”

The court ordered the FTC to submit a proposed form of judgment that would embody the court’s rulings.

The case is No. SACV10-0133 JVS (MLGx).

Attorneys: Barbara Y. K. Chun for Federal Trade Commission. Andrew B. Serwin and William J. Robinson (Foley and Lardner LLP) for Lights of America, Inc.

Companies: Lights of America, Inc.

MainStory: TopStory ConsumerProtection FederalTradeCommissionNews

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