In a written Memorandum and Order that was issued on Monday, U.S. District Court Judge Leonard Sand granted USGBC’s motion to dismiss Henry Gifford’s amended complaint in Gifford et al. v. USGBC. As you will recall, the motion was fully submitted to the Southern District of New York on May 6 and Judge Sand heard oral argument back on July 26. Again, the motion was based on Rule 12(b) of the Federal Rules of Civil Procedure and claimed that (1) Mr. Gifford and his fellow plaintiffs lacked standing to maintain their suit; and (2) the amended complaint failed to state a cause of action upon which the SDNY could grant relief to Mr. Gifford and his fellow plaintiffs.

Unfortunately for those of us who were hoping that the Southern District would analyze the 2008 NBI study – and USGBC’s dissemination thereof – as part of its analysis, Judge Sand’s decision rested squarely on his finding that Mr. Gifford and his fellow plaintiffs lacked standing to assert their claims under Section 43(a) of the Lanham Act. (In other words, the opinion does not address the underlying merits of Mr. Gifford’s claims against USGBC.)

Judge Sand identified two tests that Second Circuit courts have used to assess standing under the Lanham Act: the “strong categorical” and the “reasonable commercial interest” tests. The former requires a plaintiff to “be a competitor of the defendant and allege a competitive injury.” The latter requires a plaintiff to demonstrate “(1) a reasonable interest to be protected against the false advertising; and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising.”

After quickly disposing of any standing argument under this first test, Judge Sand turned to the second test:

Plaintiffs do not adequately allege a reasonable commercial interest that is likely to be damaged by USGBC’s alleged false statement: the press release indicating that new LEED-certified buildings perform on average “25-30% better than non-LEED-certified buildings in terms of energy use.” The “reasonable basis” prong requires the plaintiff to show “both likely injury and a causal nexus to the false advertising.” As to likely injury, Plaintiffs’ allegation that “LEED has begun to subsume the Plaintiffs’ roles’ is entirely speculative.” . . . Because there is no requirement that a builder hire LEED-accredited professionals at any level, let alone every level, to attain LEED certification, it is not plausible that each customer who opts for LEED certification is a customer lost to Plaintiffs. . . . Whatever the merits of Plaintiffs’ claim that the conclusion of the [NBI study] was false, their allegation that their “sales are specifically affected by [USGBC's] behavior” is too speculative to permit recovery under the Lanham Act.

By dismissing Mr. Gifford’s federal claims, Judge Sand was also able to dismiss his state law claims (alleging false advertising and deceptive trade practices) on jurisdictional grounds.

Earlier today, USGBC issued a press release with comments on the decision from Rick Fedrizzi. We’ve reached out to Mr. Gifford’s attorneys – who could still, among other things, appeal the decision up to the Second Circuit – for a reaction and will follow up here at GRELJ as warranted.

A copy of the decision is available for download here.

It’s not of the magnitude of the Destiny USA fiasco or as meat and potatoes as Bain v. Vertex Architects, but a recent case out of United States District Court for the Central District of California suggests that the growing market for green building products and LEED certification is also greasing the wheels for commercial disputes between industry stakeholders.

In Kinetics Noise Control, Inc. v. ECORE International, Inc., 2010 WL 4449118 (C.D. Cal.), an Ohio-based supplier of flooring products, including rubber acoustical underlayment products, brought a series of antitrust and false advertising claims against ECORE, a Pennsylvania-based manufacturer and supplier of underlayment products, and the holder of the patent giving rise to the dispute. According to Kinetics’ allegations in the complaint, ECORE fraudulently procured the patent, wrongfully enforced it, and “almost exclusively enjoyed [the] increased demand for rubber acoustical underlayment, at the expense of Kinetics, its competitors, and the consumers in the industry.”

In its complaint, Kinetics specifically identifies the growth of the green building industry as fueling that increased demand, and points to the proliferation of LEED in state- and local-level legislation as a major factor in creating this new market. Complaint ¶ 21. Kinetics was thus likely motivated to file the suit in order to defend – and hopefully capture more market share in an industry that its complaint describes as “recession-proof.”

The “Industry Background” section of Kinetics’ complaint is helpful in understanding exactly how acoustical underlayment functions, its role in earning project teams credits towards LEED certification, and how the plaintiff perceived the green building industry’s growth as contributing to the overall market effect of ECORE’s allegedly anti-competitive conduct:

Industry Background

16. Acoustical underlayment is a flat, resilient substrate used under floor finishes to dampen sound. Underlayment products are made using a variety of materials including cork, foam, rubber and a combination thereof.

17. Rubber acoustical underlayment is made from recycled automobile, bus and truck tires that are turned into crumb rubber and recombined into a log that is sliced into rolled underlayment.

18. Compared to underlayment made from other materials, rubber acoustical underlayment provides the greatest sound dampening characteristics and points for Leadership in Energy and Environmental Design (“LEED”) certification. Rubber acoustical underlayment also is known for durability and compatibility with all floor finishes including hard surface flooring often used in high rise buildings and condominiums.

19. In the past decade, there has been significant movement in the building industry to build or renovate commercial construction and high rise buildings with sustainable materials that comply with “green” building standards, which include acoustical underlayment described herein.

20. In the United States and in a number of other countries around the world, LEED certification has become the recognized standard for measuring environmentally sustainable construction.

21. In addition to environmental benefits, obtaining LEED certification allows participants to take advantage of unprecedented levels of government initiatives available for green projects and to market buildings as premier projects with increased potential for profitability. These factors, as well as heightened awareness and demand for green construction and improvements in sustainable materials have contributed to rapid growth of the green build market.

22. According to the United States Green Building Council, since its inception in 1998, LEED certified projects have grown to encompass more than 14,000 projects in the United States and 30 countries covering 1.062 billion square feet of development area.

23. Also, according to the United States Green Building Council, the overall green building market is likely to more than double from today’s $36-49 billion to $96-140 billion by 2013.

. . .

25. By its wrongful enforcement of the fraudulently procured [patent], ECORE has almost exclusively enjoyed this increased demand for rubber acoustical underlayment, at the expense of Kinetics, its competitors, and the consumers in the industry.

Although the Central District of California dismissed the case earlier this year on the basis that it lacked personal jurisdiction over ECORE, and it also denied Kinetics’ motion for reconsideration of that decision last month, I think that the lawsuit is still important to note from the perspective of the massive market that green building practices – including the demand for LEED certification – have created for green building materials and technologies.

Indeed, Kinetics’ complaint specifically states that “as a result of the significant demand for sustainable construction, the market for acoustical flooring underlayment made of recycled materials such as recycled tired has rapidly expanded despite the overall decline in the U.S. and world markets and has been called ‘recession proof.’” Complaint, ¶ 24.

While it is not traditional “LEEDigation” or the same factual posture as in Vertex Architects (as we prognosticated late last year), Kinetics suggests that the potential commercial causes of action arising out of a green building dispute could be limitless. If the green building market comes close to meeting USGBC’s ambitious projections for the next decade, the likelihood that other plaintiffs will emerge in an effort to defend – or obtain – market share in similar fashions will also increase.

The action is noteworthy because of its similarities to AHRI – where a decision on the plaintiffs’ application for a preliminary injunction remains pending in the District of New Mexico – and the potential it suggests for other similar litigation over state- and local-level green building legislative implementation on the horizon. However, what’s most interesting about the complaint is its level of detail, particularity, and emphasis on the legislative history behind the applicable federal statutes regulating energy efficiency and energy use standards for the residential HVAC and plumbing products which the plaintiffs manufacture.

Filed in United States District Court for the Western District of Washington, Building Industry Association of Washington et al. v. Washington State Building Code Council alleges that certain amendments to the Washington State Energy Code that were passed back in November and slated to take effect on July 1 are preempted by various federal regulations, including the National Appliance Energy Conservation Act of 1987 and the Energy Policy Act of 1992, on the basis that they require homes to have HVAC, plumbing, or water heating equipment whose efficiency exceeds the standards set by the federal government in applicable legislation.

The specific amendments to the Washington code at issue in BIAW propose that single-family residences earn at least 1.0 credits from a list of 9 options that range from 0.5 to 2.0 credits. The complaint alleges that – as drafted – it is not possible to earn 1.0 credits from the 9 options without selecting those options which require higher efficiency equipment. According to allegations in Paragraph 46 of the complaint, the table “outlines a set of false choices. In effect, the ‘options’ in this table mandate the installation of products with efficiency standards in excess of federal standards.”

The economic essence of the preemption argument as alleged in both AHRI and BIAW is also articulated well in Paragraphs 22 through 24 of the BIAW complaint. These allegations are important to consider from an overall policy perspective with respect to why other industry groups may be inclined to spend the time and resources necessary to attack similar legislation in other jurisdictions:

“Plaintiffs, in reliance on the federal energy efficiency and energy use standards, have valuable investments in inventories of equipment and home designs which comply with federal standards but which do not comply with the [disputed amendments to the state energy code]. The state code will disrupt sales of HVAC products, water heaters and plumbing products intended for use in the state due to confusion of manufacturers, distributors and contractors about which standards they must adhere to. Distributors and contractors in neighboring states which have not adopted the same regulatory provisions challenged in this action will not suffer the same or similar adverse effects on their businesses. Those effects place Washington distributors and contractors with a uniquely affected class harmed by the regulations challenged here.”

In Paragraph 53, the complaint also describes in detail the two ways in which a state or local government can avoid federal preemption if legislation does include equipment or products with higher energy efficiencies.

First, as was discussed in AHRI, the state or local government can obtain an express waiver of preemption from the federal government. (An interesting note here is that no state has ever received such a waiver). Alternatively, under the 42 U.S.C § 6297(f) “building code exception,” state and local governments are permitted to set energy efficiency targets for new construction which can be reached with equipment or products whose efficiencies exceed federal standards, provided the enabling legislation also includes other means to achieve the targets with products that do not exceed the federal standards. As the complaint also notes in Paragraph 55, the legislative history to the building code exception states that the “flexibility provided to states in this provision is limited, to ensure that performance-based codes cannot expressly or effectively require the installation of covered products whose efficiencies exceed the applicable federal standard.”

The building code exception’s preemption analysis is performed under what some have described as a “convoluted” 7-part test that is outlined in 42 U.S.C. § 6297(f)(3). That test will be the focus of the Western District’s analysis when it evaluates the merits of the plaintiffs’ application for (i) a declaratory judgment finding that the amendments are preempted and (ii) an injunction preventing the state from enforcing the amendments as drafted.

These preemption issues are fascinating, particularly given the specific allegations in BIAW relating to the building code exception and the amendments’ failure to satisfy the 7-part test. Undoubtedly, similar issues will be raised again in other jurisdictions as additional green building legislation takes effect in 2010 and beyond. As always, we’ll follow up on BIAW here at GRELJ as the litigation moves forward.

In a suit that was filed earlier this month in New York County Supreme Court under Index Number 105958/10, the owners of a condominium unit at the LEED Gold-hopeful Riverhouse development in lower Manhattan’s Battery Park City are seeking the recovery of $1.5 million in damages from the project’s developer for a variety of alleged construction defects. While this type of construction litigation is not uncommon, the purchasers also claim that “the building’s much-heralded ‘green’ heating system consistently fails to provide adequate heat” to their unit and that this failure is a condition which is “is materially different from those represented by the project sponsor and its principals in the condominium offering plan.” These allegations – which are the the basis for two claims in the complaint alleging fraud and misrepresentation – mark the first time we have seen claims asserted against the developer of a green building for the developer’s alleged failure to deliver the project as represented during pre-construction. (Note that this is not the scenario which many in the legal community predicted would arise out of green building projects, but rather a much more specific type of claim that has been folded here under other allegations of design and construction defects).

More specifically, the Riverhouse complaint alleges that the building “was marketed as being at the cutting edge of ‘green’ technology. It is supposedly a LEED Gold-rated building featuring fresh filtered air, filtered water, eco-friendly materials and is designed for low energy consumption. However, plaintiffs have consistently experienced cold drafts and insufficient heat in their Unit. An energy audit performed on plaintiffs’ Unit revealed a number of defects in the Unit that contribute to the unsatisfactory heating situation. First, too much cold air is infiltrating the Unit through doors, windows, and exterior walls. Plaintiffs’ engineers found a deviation of 49 percent over the USGBC’s LEED and [Battery Park City Authority] standards in the cumulative size of holes and cracks allowing infiltration of cold air.”

This line of allegations goes on to describe pipes that are not insulated, heating unit covers that are not sealed, and air filters that are clogged. The purchasers then allege that these failures constitute a breach of contract under the offering plan, and that the developer’s representations in the offering plan about the building and its units were false and therefore fraudulent. However, it is important to note that there are no specific allegations in the complaint with regard to the representations – if any – that the developer made in the offering plan related to the building’s LEED application and/or green features which were allegedly breached.

While the allegations of the project’s construction defects are noteworthy standing alone- and will likely be fleshed out in more detail through discovery if the lawsuit moves forward – it is the fraud allegations that are particularly critical to analyze in the context of the project’s offering plan. For this reason, it is important just to briefly consider here why this type of alleged fraud or misrepresentation may be actionable under New York law.

Offers to sell residential condominiums in New York are governed by a particular section of the Martin Act (Article 23 of the General Business Law), whose purpose is to provide prospective purchasers with sufficient factual information for them to make an informed decision about purchasing the property through an offering plan. Accordingly, an offering plan must be filed with and approved by the state Attorney General’s office. Under the Martin Act, the offering plan must “not omit any material fact or contain any untrue statement of material fact.” Although there is no private cause of action under the Martin Act (i.e., the Attorney General is invested with exclusive authority to investigate and prosecute alleged violations), the Martin Act does not preclude a private party from prosecuting an otherwise valid common law fraud claim in connection with the sale of securities – including under an offering plan – whenever the alleged fraudulent conduct is such that the Attorney General would be authorized to bring a statutory action against the same defendant under the Martin Act. See, e.g., Kramer v. W10Z/515 Real Estate Ltd. Partnership, 44 A.D.3d 457, 844 N.Y.S.2d 18 (1st Dep’t 2007). In other words, if representations in an offering plan about a project’s green features or pursuit of third-party certification turn out to be inaccurate, the sponsor and/or developer of the project may be exposing itself to liability.

For your reference, the 31-story, 264-unit Riverhouse development is located at One Rockefeller Park in Battery Park City and continues to seek LEED Gold under New Construction Version 2.1. Specific green features that the project promoted in its pursuit of LEED Gold were a geothermal heating and cooling system, photovoltaic cells, low-E double-pane windows, a green roof, Energy Star appliances, recycled-content and locally-sourced building materials, a $1 million wastewater treatment plant, and a 60kW microturbine installation. It has faced financing and other problems, but celebrity purchasers Leonardo DiCaprio and Tyra Banks have made the project somewhat of a media favorite over the past two years and – after significant price cuts earlier this year – the building is reportedly 75 percent sold out.

We’ll keep an eye on this lawsuit and follow up here at GRELJ if it eventually becomes a full-blown litigation, or if it spawns other similar lawsuits at other green condominium buildings.

In a two-part series that was published last weekend, Diana Zlomislic of the Toronto Star reviews the green building landscape in Ontario and concludes that although “[s]hoddy building is not unique to the green sector . . . with governments aggressively promoting green construction and green building still an emerging practice, consumers who opt for more eco-friendly homes and renovations are more vulnerable.” Zlomislic specifically identifies the over $1 billion in financial incentives that have been distributed to date by Canada’s provincial and local governments as having “few quality-control standards to protect consumers from incompetent ‘eco experts’ looking to cash in on the booming [green building] industry.”

For example, Zlomislic tracked down 26 homeowners who paid over $600,000 in deposits to a now bankrupt geothermal contractor. Several of these homeowners saw their energy bills double after the geothermal system was installed, while many others never even received a completely operational system. Among other things, Zlomislic points to the contractor’s rush to sign up customers and capitalize on a $10,000 provincial and federal rebate for qualifying HVAC replacement systems as a basis for the contractor’s misrepresentations.

Of particular interest to us here at GRELJ, Part 1 also identifies a pending lawsuit in the Ontario courts against a developer who converted a century-old building in downtown Toronto into a 4-unit, mixed-use building that was touted as one of the city’s top green building projects in 2006 by Now magazine. In a litigation that alleges fraud, the purchasers of the units seek over $900,000 in damages from the developer for the project’s failure to satisfy certain Ontario building codes, including those for its geothermal system – a highly publicized green selling point for the project.

Part 2 of the series starts out by concluding that Canadian governments “have created what some describe as a ‘Wild West’-like situation by urging homeowners to go green when they renovate or build from scratch. Green government grants and other incentives have boosted the building sector but few guidelines or quality-control standards exist, and those that do are not policed.” In support of her conclusions, Zlomislic profiles a Toronto-area couple who retained an architect that drastically overstated her green building design expertise, recommended a “green builder” for their 2200-square-foot renovation project, and left the couple with a house that’s only 60 percent complete and still contains over 60 individual building code violations.

What I found so interesting about these two articles is that they suggest a different type of risk growing out of government activity, while simultaneously shedding light on how that that activity has created an opaque regulatory structure on both sides of the border. The articles also build on many of the green building-related insurance claims which Frank Musica reported almost 3 years ago at the 2007 AIA National Convention in San Antonio. I also think that the Toronto fraud litigation is a major shot across the bow for owners and other marketing professionals who fail to accurately represent a project’s green features; this is one specific area of green real estate risk which continues to be insufficiently addressed by many industry professionals.

In any event, Zlomislic’s two pieces are must-reads and demonstrate practical applications of the many theoretical green building risk issues which have been discussed here at GRELJ and elsewhere over the past few years. Part one is here; part two is here.

First, I think that Ms. Shapiro’s last point is probably the biggest reason why we have yet to see a flurry of lawsuits. In my experience, plaintiffs will typically wait until they are up against the controlling statute of limitations before commencing a lawsuit. Here in New York, the applicable statutes of limitation for many of the causes of action under which green building liability may arise (such as negligence and breach of contract) range from three to six years. When you consider that LEED Version 2.2 only went live on January 1, 2006, many of the LEED-related green building claims that have been suggested to date remain well within the statute. This could be a significant reason why both LEED- and green building-related litigation will remain on the horizon for the near future. It is also important to consider that almost every construction agreement contains a confidentiality provision, which prevents the project team from disclosing any information about the project to certain third-parties. If aspects of an ongoing green building project’s design or construction are problematic, we will likely not hear about those failures until (a) the owner chooses to divulge that information; or (b) a lawsuit is commenced (subject to the foregoing SOL considerations).

Next, consider the following text describing the posture of the Shaw Development litigation from footnote 24 of the highly touted Harvard Law School green building liability study that was released last week: “[h]owever, a certificate of occupancy, which was necessary to obtain LEED certification, was not achieved within the requisite amount of time, and the developer failed to earn the tax credits.” (emphasis added). Moreover, in an article in the New York Times‘ Green, Inc. blog discussing the study, Robert Fox, a partner in the Philadelphia-based law firm that sponsored the study was quoted as stating that “the first lawsuit related to LEED, a green-building certification standard, occurred in Maryland, where a new condominium failed to get LEED certification and a certificate of occupancy in time to get substantial tax credits associated with green building.” These descriptions are simply not accurate. As discussed extensively here at GRELJ and over at gbNYC, LEED certification itself was not the source of liability in the Shaw Development litigation. Notwithstanding its pedigree and publicity, the Harvard study is an excellent example of attorneys misconstruing facts and, perhaps, creating heightened expectations that we will imminently see a crush of LEED-related litigation. There is no question that LEED and other third-party green building rating systems create an additional layer of risk that every project team must assess and mitigate through carefully drafted construction agreements, and I do believe that there is significant potential for LEED-related litigation. However, I think that the more imminent threat comes from regulatory structures that are, though perhaps well-intentioned, drafted poorly, enacted quickly, and confusing to project teams and their attorneys as was the case in Shaw Development.

Finally, I suspect that much of the activity that might fall within the purview of “green building litigation” will not jump off the page at us. Consider a recent news article in the Bakersfield Californian where a rooftop photovoltaic installation at a local Target caught fire and required officials to evacuate the store. Preliminary conclusions from the fire department indicated that the panels were not installed properly. These types of issues that arise in connection with green building projects- whether they lead to litigation or are otherwise managed through the insurance claims process- are likely to be far more pervasive than the higher profile LEED certification failures that have been discussed extensively to date. Of course, as LEED-driven mandates continue to proliferate, the potential for LEED-related litigation will continue to increase. But, I do think the relatively unspectacular failures similar to the Bakersfield Target fire are where we will find much of the activity in the short term.

• Solar Panel Mishap Sparks Fire at Target (Bakersfield.com)
• The Legal Risks of Building Green (Green, Inc.)
• Green Building Litigation: Whither the Lawsuits? (Greener Buildings)