Eco suit spawns flurry of litigation: Class actions hit Honeywell in wake of thermostat fight

February 14, 2005

Industrial powerhouse Honeywell International Inc. suddenly finds itself under siege by an army of aggressive class-action attorneys-all because it decided to mess with a couple of determined entrepreneurs from Lebanon.

Attorneys from around the nation in recent months have filed six class action lawsuits in state courts charging New Jersey-based Honeywell used deception to obtain the trademark for its ubiquitous round thermostat, then used its lock on the round-thermostat market to overcharge customers.

T h e l eg a l assault is an outgrowth of litigation two years ago between Honeywell and Eco Manufacturing LLC, a startup formed by Lebanon businessmen Bill Daniels and Steve Peabody to bring a competing round thermostat to market.

When the pair debuted their round thermostat at a Chicago trade show in January 2003, Honeywell fired back with a harshly worded fax accusing Eco of infringing a 1988 trademark that protected the round design of its thermostat into perpetuity.

But instead of backing down, Daniels and Peabody sued Honeywell in federal court here, seeking a declaration they were doing nothing wrong. That summer, Judge David Hamilton refused to grant an injunction to block Eco, and he ruled that a federal panel erred when it granted the trademark protection in the first place.

The guts of Hamilton's 70-page ruling provide plenty of grist for class action attorneys. In reaching its decision, the judge said, the trademark panel had relied on "false statements" by Honeywell. He said the company used "careful phrasing and hedging" and provided information that "seems to have been designed to leave the wrong impression."

Attorneys with Abbey Gardy, the prominent New York firm leading the class action litigation, did not return phone calls. Nor did attorneys with three other firms also representing class action plaintiffs.

Henry Price, a class-action attorney with the Indianapolis firm Price Waicukauski & Mellowitz who has no tie to the Honeywell litigation, said: "I think it is a very creative use of this prior ruling to bring some benefit ... to the consumers who may have paid in excess of a fair price because of the monopoly."

Honeywell attorneys referred calls to company spokesman Larry Splett, who said in a statement: "We believe our business practices with regard to the round thermostat are sound and we will defend our position vigorously."

Court records show the attorneys have so far filed cases in California, Maine, Massachusetts, New York, Tennessee and Vermont. Each charges violations of state consumer protection laws and seeks to recover damages for purchasers of the round thermostats since 1986.

The suits don't say how many customers in each state would be part of the class. Nor do they quantify damages, which represent the difference between what customers paid and what they allegedly would have paid in a competitive marketplace.

However, many millions of dollars seem at stake for millions of customers. The round thermostats retail for about $40 at home improvement stores, about twice the price of rectangular thermostats with similar features.

Honeywell says it has sold 85 million of the round thermostats since their debut in 1952, making it the world's top-selling thermostat. Honeywell has devoted more than $70 million to advertising the round thermostats and continues to sell as many as 2.5 million of them a year.

In a court filing, Honeywell says it wants to transfer all the state suits into a single federal court. Legal observers say federal courts are widely perceived to treat class action plaintiffs less favorably than do state courts. The company calls its request "an effort to bring some order to this rapidly expanding quagmire of litigation."

Eco Manufacturing CEO Bill Daniels declined to discuss the class actions. He cited a confidentiality agreement he signed when settling the Honeywell litigation in May 2004, three months after the U.S. Court of Appeals in Chicago affirmed Hamilton's decision.

Whatever the settlement stipulates, it doesn't bar Eco from charging into the round thermostat market. Daniels said Eco completed testing of its round thermostat last October and began shipping it in December.

"We have just been c o n c e n t r a t i n g o n building a very good product," Daniels said. "We just want to be well-accepted in the market."

Daniels, 57, is the longtime CEO of another Lebanon firm, USA Manufacturing, a distributor of surplus HVAC equipment. He and Peabody, owner of CMI Engineering in Lebanon, have said they decided to take on Honeywell, one of the nation's 100 biggest companies, because they knew they could provide a superior product at a lower price.

The Eco thermostat is more environmentally friendly than the Honeywell thermostat, because it doesn't contain the heavy metal mercury, Daniels said. The Eco thermostat also boasts backlighting, glow-inthe-dark numerals and other features.

"Right now, if you want to get a circular thermostat, you are going to get the technology that was on your grandfather's wall and you are going to have to pay a premium price to get it," Daniels told IBJ two years ago. "That's simply not right."

Eco has only four employees. It outsources production to China, and sells the thermostats through other manufacturers and HVAC sales reps. This year, the company expects to sell about 300,000 thermostats, generating $5 million in sales. Within three years, it may generate $12 million in annual sales, Daniels said.

Eco is just the sort of aggressive rival that over the years Honeywell sought to keep at bay, court records show. The records show that Honeywell had a legitimate lock on the round thermostat market until 1970, when a design patent expired.

After that time, Judge Hamilton noted in his ruling, Honeywell used "aggressive l aw y e r i n g " a n d "threats of litigation" to keep most potential competitors from coming to market.

Honeywell had a strong financial incentive to do so. The round thermostat had became a favorite with consumers, who found the shape aesthetically pleasing, and with contractors, who liked not having to worry whether the casing was level or lined up with striped wallpaper.

Starting in 1968, Honeywell set out to defend its turf by using trademark law, which is intended to protect companies and customers from confusion that might result from rivals using similar identifying characteristics.

Early efforts on that front failed, however. Its 1968 trademark application was rejected, culminating in a string of appeals that ended in 1976 with Honeywell's losing. The ruling said the round design is functional and therefore ineligible for trademark protection.

Undeterred, Honeywell refiled its application in 1986, ultimately prevailing on appeal. In a filing in that case, Honeywell said that since the 1970 patent expiration, no competitors had introduced a round thermostat "even though they were entirely free to do so." Since competitors hadn't rushed into the market, the round design must not be functional after all, Honeywell argued.

In fact, however, two rivals had introduced round thermostats, and at the time it was pursuing the trademark Honeywell was trying to block a third from doing so, according to Judge Hamilton's ruling.

"The actual small number of competing round thermostats ... was itself at best merely an artifact of aggressive lawyering and the intimidating power of Honeywell in the market," Hamilton wrote.

He added: "Whenever Honeywell learned that a competitor was selling or planned to sell a round thermostat, it responded with threats of expensive litigation, and it managed to eliminate the competing design either by settlements or by buying the competitor outright."
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