RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 ELECTRONIC CITATION: 2000 FED App. 0068P (6th Cir.) File Name: 00a0068p.06
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT _________________
; BALANCE DYNAMICS CORPORATION, Plaintiff-Appellant, No. 97-2023
v. > SCHMITT INDUSTRIES,
Defendant-Appellee. INCORPORATED, 1
Appeal from the United States District Court for the Eastern District of Michigan at Detroit. No. 94-75356—Robert E. DeMascio, District Judge. Argued: December 17, 1999 Decided and Filed: February 25, 2000 Before: NELSON and DAUGHTREY,* Circuit Judges; DOWD, District Judge.
* The Honorable David D. Dowd, Jr., United States District Judge for the Northern District of Ohio, sitting by designation.
1 2 Balance Dynamics Corp. No. 97-2023 v. Schmitt Industries
_________________ COUNSEL ARGUED: Robert H. Golden, GOLDEN AND KUNZ, Lathrup Village, Michigan, for Appellant. John F. Brennan, CHELI, HESS, Royal Oak, Michigan, for Appellee. ON BRIEF: Robert H. Golden, Armand D. Kunz, GOLDEN AND KUNZ, Lathrup Village, Michigan, for Appellant. John F. Brennan, CHELI, HESS, Royal Oak, Michigan, for Appellee. _________________ OPINION _________________ DAVID D. DOWD, JR., District Judge. I. Introduction The false advertising litigation before us has continued for six years, largely due to the paucity of legal rulings available to the trial court on some of the unique issues presented in this case. These issues pertain to the standards for establishing a violation of the Lanham Trade-Mark Act, the relief available once a violation is established, and the method of proofs necessary to establish entitlement to such relief. In particular, this case presents several issues of first impression: (1) whether, upon establishing a violation of the Lanham Act, a plaintiff can recover damage control costs without showing that the false advertising created actual confusion in the marketplace or actual damages in the marketplace; (2) whether a plaintiff can recover damages to goodwill or disgorgement of profits upon showing that an advertisement is literally false or deliberately false, where the plaintiff has no other proof of damages to its business; and (3) whether out-of-state, individual corporate officers who were personally involved in a Lanham Act violation are immune 26 Balance Dynamics Corp. No. 97-2023 No. 97-2023 Balance Dynamics Corp. 3 v. Schmitt Industries v. Schmitt Industries
While it is true that “jurisdiction over the individual from the exercise of personal jurisdiction under the fiduciary officers of a corporation cannot be predicated merely upon shield doctrine. jurisdiction over the corporation,” Weller v. Cromwell Oil Co., 504 F.2d at 929, we hold that the mere fact that the For the reasons set forth below, we hold: that a plaintiff actions connecting defendants to the state were undertaken in seeking to recover damage control costs under the Lanham an official rather than personal capacity does not preclude the Act for a defendant’s false advertising is not required to show exercise of personal jurisdiction over those defendants. that the false advertising created actual confusion or damages Hence, where an out-of-state agent is actively and personally in the marketplace; that in order to recover damage to involved in the conduct giving rise to the claim, the exercise goodwill or disgorgement of profits, a plaintiff must show at of personal jurisdiction should depend on traditional notions least some damage in the marketplace and cannot rely solely of fair play and substantial justice; i.e., whether she purposely on the literal falsehood of an advertisement; and personal availed herself of the forum and the reasonably foreseeable jurisdiction may be exercised over corporate agents based consequences of that availment. See Burger King Corp. v. upon their minimum contacts with the forum state, as long as Rudzewicz, 471 U.S. 462, 474 (1985); International Shoe Co. personal jurisdiction is not premised on the mere fact of v. Washington, 326 U.S. 310, 316 (1945). This proposition jurisdiction over the corporation. has been applied by other circuits in the exercise of personal jurisdiction over corporate officers who actively and II. Facts and History personally involved themselves in conduct violating the Lanham Act, notwithstanding the fact that the defendants Plaintiff-Appellant Balance Dynamics Corporation acted as agents when they did so. See, e.g., Committee for (“Balance Dynamics”), based in Ann Arbor, Michigan, and Idaho’s High Desert v. Yost, 92 F.3d 814, 823-24 (9th Cir. Defendant-Appellee Schmitt Industries (“Schmitt”), based in 1996); Electronic Laboratory Supply Co. v. Cullen, 977 F.2d Portland, Oregon, manufacture products that balance 798, 807-08 (3d Cir. 1992); Polo Fashions, Inc. v. Craftex, industrial grinders and other machines that have a spinning Inc., 816 F.2d 145, 149 (4th Cir. 1987); Donsco, Inc. v. shaft. In a process unique in the industry, Balance Dynamics’ Casper Corp., 587 F.2d 602, 606 (3d Cir. 1978). product uses a gas called Halon 1202 which is heated and vaporized in one chamber and allowed to condense back to The district court erred in dismissing Case and Morgan liquid form in another. Schmitt’s products accomplish the from the suit based merely on the fact that they acted as same result by balancing the spinning shafts with motor agents for the corporation. The matter will be remanded for driven metal weights. a determination of whether their contacts with the state of Michigan were such that due process permits the exercise of During the late summer of 1992, prior to Chicago’s personal jurisdiction over them. International Machine Tool Show in September, Schmitt mailed and distributed a postcard cartoon to 2,500 customers IX. Disposition or potential customers depicting a “freon balancer” at the top of a “dead wheel balancer bone pile.”1 The trial court’s ruling on Schmitt’s Rule 50 motion is REVERSED and the judgment is VACATED. The case is REMANDED to the district court for further proceedings 1 At the time the cartoon was mailed, Balance Dynamics referred to consistent with this opinion. its product as a “freon balancer.” As this appellation took on negative connotations in the wake of increasing environmental awareness, Balance 4 Balance Dynamics Corp. No. 97-2023 No. 97-2023 Balance Dynamics Corp. 25 v. Schmitt Industries v. Schmitt Industries
In late 1992 or early 1993, Schmitt received queries Case and Morgan were acting in their official capacity as regarding its possible use of halons, freons, or other ozone- agents for Schmitt when they signed the offending letters. depleting materials. On March 16, 1993, Schmitt sent a letter to approximately 3,200 customers and prospective customers In the seminal case of Marine Midland Bank, N.A. v. Miller, stating that 664 F.2d 899 (2d Cir. 1981), the fiduciary shield doctrine is formulated as follows: “if an individual has contact with a Effective May 15, 1993, all products which contain or particular state only by virtue of his acts as a fiduciary of the have been processed with ozone depleting substances corporation, he may be shielded from the exercise, by that (ODS) must have warning labels affixed. Subsequently, state, of jurisdiction over him personally on the basis of that these substances will be banned from general use. conduct.” Id. at 902. In that form, the fiduciary shield Canada has already banned the substances. The ultimate doctrine prevents the exercise of personal jurisdiction financial responsibility for environmentally sound whenever an out-of-state officer’s contacts occur by virtue of disposal of products containing ODS materials will rest her official capacity. However, in Weller v. Cromwell Oil Co. with the end user. the doctrine is stated more mildly: jurisdiction over a corporate officer cannot be predicated merely upon After stating that Schmitt’s balancing system did not use jurisdiction over the corporation. 504 F.2d at 929. ozone depleting substances, the letter continued: Some courts in the Sixth Circuit have followed the Marine Perhaps because one manufacturer of automatic grinding Midland Bank formulation, holding that the mere fact that an wheel balancers uses halon, this type of device has come out-of-state defendant performed the alleged tortious or under close scrutiny . . . Should your company operate violative conduct while acting as a corporate agent precludes any halon balancers, and wish to dispose of them prior to the exercise of personal jurisdiction over that person. See, May 15, Schmitt Industries can supply an SBS Balance e.g., United States v. Flack, No. 2:96-CV-122, 1997 WL System as an easy replacement. 187373 at *5 (S.D. Ohio January 31, 1997); Cincinnati Sub- Zero Products, Inc. v. Augustine Medical, Inc., 800 F.Supp. The letter was signed by defendants Wayne A. Case, 1549 (S.D. Ohio 1992). But other courts have found that the Schmitt’s president, and James Morgan, Schmitt’s sales exercise of jurisdiction over the agent depends on the extent manager. of that agent’s personal involvement in the conduct. See, e.g., State of Ohio v. Browning Ferris Indus. Inc., No. C 86-7387, In April of 1993, one of Balance Dynamics’ largest 1987 WL 16940 (N.D. Ohio March 26, 1987); James v. HRP, customers faxed the letter to Thomas Schulte, Balance Inc., 852 F.Supp. 620 (W.D. Mich. 1994); Morton Walker, Dynamics’ then-vice president of sales. Schulte consequently D.P.M. v. Robert Concoby, ___ F.Supp.2d ___, 1999 WL spoke with approximately 40 individuals from 12 different 1210871 (N.D. Ohio October 12, 1999). These courts corporate customers with regard to the letter. Some of these exercised personal jurisdiction over corporate officers where customer contacts were initiated by Schulte, others by the the officers were active participants in the tortious conduct. customers themselves. After investigation, Balance There is support for this approach in Sixth Circuit case law. See Chattanooga Corp. v. Klingler, 704 F.2d 903, 906-07 (6th Cir. 1983); Serras v. First Tennessee Bank N.A., 875 F.2d 1212, 1217 (6th Cir. 1989). Dynamics began referring to its product as a “halon balancer.” 24 Balance Dynamics Corp. No. 97-2023 No. 97-2023 Balance Dynamics Corp. 5 v. Schmitt Industries v. Schmitt Industries
the jury’s verdict in favor of Schmitt were sound, the trial Dynamics confirmed that its halon balancer was not subject court’s ruling on the Rule 50 motion would be harmless. to regulation, did not require labeling, and was not slated to However, we agree with Balance Dynamics that the jury be banned. It then responded by making visits to customers instructions were both infirm and prejudicial. and sending a “fact sheet” to those customers who expressed concern. In reviewing the jury instructions of a trial court, an appeals court considers “whether the charge, taken as a whole, fairly Schmitt disagreed with certain items in the “fact sheet” and and adequately submits the issues and applicable law to the hired an environmental chemist to write an opinion, which jury.” United States v. Martin, 740 F.2d 1352, 1361 (6th Cir. stated that Halon 1202 had “managed to slip through the 1984). At trial, the court instructed the jury that in order to regulatory net” but that it is “quite certain the EPA would recover damages relating to a particular letter, Balance regulate its production and use.” It also suggested that if the Dynamics had to show the following elements: (1) a literally EPA failed to act, a private person could obtain a court order false or a misleading statement of fact regarding plaintiff’s requiring the EPA to list Halon 1202 as a regulated substance, product; (2) that the statement actually deceived plaintiff’s and that “it is almost certain that in the relatively near future customer or customers; (3) that the statement actually Halon 1202 will become very difficult to obtain.” The paper influenced the purchasing decision of a customer or was provided to approximately 12 Schmitt customers or customers that plaintiff had; (4) a connection to interstate prospective customers. commerce; (5) that plaintiff actually lost a sale or sales from one or more of its customers as a result of defendant’s In February of 1994, Balance Dynamics brought suit statement. Plaintiff’s counsel objected, preserving the issue against Schmitt, Wayne A. Case, and James Morgan, seeking for appeal. The jury was out for ten minutes before returning compensatory damages, treble damages, attorney fees, a verdict for Schmitt. disgorgement of Schmitt’s profits, and an injunction restraining Schmitt from similar mailings. Balance Dynamics Again, the trial court lacked the benefit of Podiatric claimed the defendants had violated various state laws as well Physicians. That case shows that it is not necessary to show as the false advertising language of the Lanham Trade-Mark lost sales in order to establish a violation of the Lanham Act, Act, 15 U.S.C. § 1051 et seq. In orders signed by Judge nor is it necessary to establish that customers were actually George LaPlata, based on reports and recommendations deceived. Therefore, the jury instructions were erroneous as (“R&Rs”) of Magistrate Judge Steven D. Pepe, the district a matter of law and obviously prejudicial. court dismissed Case and Morgan from the suit for lack of personal jurisdiction and dismissed all of Balance Dynamics’ VIII. Dismissal of Defendants Wayne Case and James state law claims for failure to state a cause of action. Morgan Balance Dynamics dropped its claim for injunctive relief on In a November 28, 1994 Order, Judge LaPlata dismissed August 21, 1994. Balance Dynamics also stipulated that it Schmitt employees Wayne Case and James Morgan on the experienced no lost sales, no lost profits, and no increased grounds that the fiduciary shield doctrine frustrated the cost of seeking capital investments. However, Balance court’s personal jurisdiction over them. Citing Weller v. Dynamics reserved the right to seek treble damages, Schmitt’s Cromwell Oil Co., 504 F.2d 927, 929 (6th Cir. 1974), the profits, damage control costs, and compensation for harm to court found that personal jurisdiction was lacking because goodwill. Schmitt then brought a supplemental motion for 6 Balance Dynamics Corp. No. 97-2023 No. 97-2023 Balance Dynamics Corp. 23 v. Schmitt Industries v. Schmitt Industries
summary judgment on Balance Dynamics’ damages claims. companies. Engineers know just exactly what those In August of 1995, Judge LaPlata adopted an R&R granting standards are, just exactly what . . . the EPA rulings are Schmitt’s motion as to lost profits and costs but denying it as . . . frankly I have no idea why this case has been hanging to Balance Dynamics’ claim for damage control activities. around the court for three and a half years. Judge LaPlata retired in 1996 and the litigation was Balance Dynamics protests this finding on the grounds that transferred to Judge Horace W. Gilmore. Judge Gilmore Mr. Schulte had testified that, after the letter was signed an order, purporting to reaffirm an earlier order of disseminated, some of his customers contacted him in Magistrate Judge Pepe, denying Balance Dynamics’ punitive reference to its claims. Schulte further stated that of those damages claim and declaring Balance Dynamics’ companies with whom he had initiated contact, most had disgorgement claim moot. Judge Gilmore presided over a received the letter. Schulte testified that his customers told trial for several days in April of 1997, but later recused him “they didn’t want to necessarily have anything to do with himself and declared a mistrial. The case was then assigned a product that had these stipulations associated with it.” He to Judge Robert L. DeMascio, who conducted a trial in also testified that many customers were concerned about the August of 1997. regulation and disposal of the Balance Dynamics products. Judge DeMascio bifurcated the trial, with the issue of Obviously, the trial court did not have the benefit of an liability coming first. A three-day jury trial was conducted in articulated standard for recovery of damage control costs. which Balance Dynamics called two of its principals (Thomas Under that standard, the testimony above contradicts the trial Schulte and Wayne Winzenz), an expert witness (Dr. court’s conclusion that Balance Dynamics failed to put on Jonathan Nimitz) and the president of Schmitt, Wayne Case. evidence showing the existence of a “fire” to put out. The Schmitt called no witnesses, rested and moved for entry of a customer inquiries Balance Dynamics received could be taken verdict as a matter of law under Fed.R.Civ.P. 50. The court as proof of the likelihood of damage, cf. Harper House, Inc. took the Rule 50 motion under advisement and instructed the v. Thomas Nelson, Inc., 889 F.2d at 210; PPX Enterprises, jury. Plaintiff’s counsel objected to the instructions, Inc. v. AudioFidelity Enterprises, Inc., 818 F.2d at 272, and preserving the issue for appeal. The court granted Schmitt’s may suffice to show that the deception was material and likely Rule 50 motion and the jury returned a finding of no cause of to influence a purchasing decision. Further, the customer action. inquiries belie the proposition that Balance Dynamics’ customers are so familiar with EPA regulations that Schmitt’s The trial court entered its formal findings of fact, communications would not be off-putting. Therefore, this conclusions of law and judgment on September 17, 1997. evidence creates a material issue of fact and the trial court Balance Dynamics timely filed an appeal from the final should have let the matter go to a jury for determination. judgment and preceding interlocutory orders. Schmitt moved Jackson v. Quanex, 191 F.3d at 647. for attorney fees under the provision in the Lanham Act authorizing such awards in “exceptional” cases. The court VII. Jury Instructions denied this motion as well as a motion for reconsideration. In a companion case to Balance Dynamics’ appeal, Schmitt In a laudable attempt to conserve resources in the event its appealed from these two orders. (Case No. 98-1143). decision on Schmitt’s Rule 50 motion was not sustained on appeal, the trial court allowed the jury to return a verdict. If 22 Balance Dynamics Corp. No. 97-2023 No. 97-2023 Balance Dynamics Corp. 7 v. Schmitt Industries v. Schmitt Industries
considers de novo the evidence “in the light most favorable to III. Jurisdiction the non-movant, giving that party the benefit of all reasonable inferences.” Jackson v. Quanex, 191 F.3d at 657. In ruling on The district court correctly exercised federal question a Rule 50 motion, a trial court is not permitted to “weigh the jurisdiction under 28 U.S.C. § 1331 and diversity jurisdiction evidence or make credibility determinations, as these are jury under 28 U.S.C. § 1332. Appellate jurisdiction is proper functions.” Id. A dismissal pursuant to Rule 50 is improper under 28 U.S.C. § 1291. where the nonmovant presents sufficient evidence to raise a material issue of fact for the jury. Id. IV. Schmitt’s Rule 50 Motion
First, the trial court acknowledged that Balance Dynamics Rule 50 gives district courts the discretion to grant a motion could prove actual confusion by presenting evidence that the for judgment as a matter of law “[i]f during a trial by jury a Schmitt communications were literally false; but it found that party has been fully heard on an issue and there is no legally even Balance Dynamics’ expert had been unwilling to testify sufficient evidentiary basis for a reasonable jury to find for that the Schmitt communications were literally false. Since that party on that issue.” Fed.R.Civ.P. 50(a)(1). An appeals we have ruled that a showing of literal falsity in this case court reviews de novo a district court’s decision to grant would not have aided Balance Dynamics in its quest to judgment as a matter of law. Jackson v. Quanex Corp., 191 recover damages to goodwill, there is no need to decide F.3d 647, 658 (6th Cir. 1999). “Without weighing the whether the trial court erred in its factual determination that evidence or assessing the credibility of the witnesses, and Balance Dynamics presented no evidence of literal falsity. after drawing all reasonable inferences in favor of plaintiff, [an appeals court] must determine whether the record contains Second, Balance Dynamics contests the trial court’s finding evidence sufficient to have allowed jurors to find in favor of that its damage control activities were an over-reaction to the plaintiff.” Monday v. Oulette, 118 F.3d 1099, 1101-02 (6th problem. The trial court made the following factual Cir. 1997). determinations: The Lanham Trade-Mark Act provides as follows: the evidence really taken as a whole shows what happened here. Plaintiff got a copy of this letter just as (1) Any person who, on or in connection with any goods Mr. Schulte testified, called a few of his partners together or services, or any container for goods, uses in commerce and began to over-react something horrible, and ran out any word, term, name, symbol, or device, or any and tried to, quote, put out the fire, when no fire was ever combination thereof, or any false designation of origin, testified to. I don’t know what fire the plaintiff is talking false or misleading description of fact, or false or about. There was just no fire produced for this Court misleading representation of fact, which— . . . . That damage that you called loss control is an over- (A) is likely to cause confusion, or to cause mistake, reaction by the Plaintiff that I think the evidence on or to deceive as to the affiliation, connection, or liability makes it very clear, you didn’t even have to do association of such person with another person, or as it. You could have handled half of these customers on to the origin, sponsorship, or approval of his or her the telephone, but more importantly his customers goods, services, or commercial activities by another included sophisticated engineers at Ford Motor Car person, or Company, the other auto manufacturers and big (B) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or 8 Balance Dynamics Corp. No. 97-2023 No. 97-2023 Balance Dynamics Corp. 21 v. Schmitt Industries v. Schmitt Industries
geographic origin of his or her or another person’s Balance Dynamics argued that because it could show that goods, services, or commercial activities Schmitt knowingly and willfully made false statements, it was shall be liable in a civil action by any person who entitled to disgorgement of profits. In a closely reasoned believes that he or she is or is likely to be damaged by R&R, Magistrate Judge Pepe rejected this contention and such act. found that Balance Dynamics was only entitled to disgorgement if it could show that defendant gained 15 U.S.C. § 1125(a). The damages to which a plaintiff may additional sales due to the advertisement, or that plaintiff lost be entitled under the Lanham Act are specified in 15 U.S.C. sales, or was forced to see its product at a lower price. As § 1117: Magistrate Judge Pepe pointed out, § 35(a) of the Lanham Act makes clear that an award of damages shall be “subject to the When . . . a violation under § 1125(a) of this title, shall principles of equity” but also states that the award is to have been established in any civil action arising under “constitute compensation and not a penalty.” Reviewing the this chapter, the plaintiff shall be entitled . . . subject to legislative history and case law concerning disgorgement of the principles of equity, to recover (1) defendant’s profits, Magistrate Judge Pepe concluded that unless there is profits, (2) any damages sustained by the plaintiff, and some proof that plaintiff lost sales or profits, or that defendant (3) the costs of the action. gained them, the principles of equity do not warrant an award of defendant’s profits. We agree with and adopt Magistrate Schmitt made its oral Rule 50 motion at the close of proofs Judge Pepe’s reasoning.6 on the grounds that Balance Dynamics had failed to show actual confusion in the marketplace and was therefore not VI. Trial Court’s Findings of Fact entitled to relief under the Lanham Act. The district court agreed, finding that Balance Dynamics had not met its In granting Schmitt’s Rule 50 motion, the trial court made “burden of proving that some customer, just one, was two factual findings that Balance Dynamics contests. In confused or changed a purchasing decision, or lost a sale of considering the factual findings that a trial court has made in some kind.” the context of granting of a Rule 50 motion, a reviewing court In ruling on Schmitt’s Rule 50 motion, the district court did not have the benefit of this circuit’s recent decision in 6 American Council of Certified Podiatric Physicians and We do not believe that the “deterrence theory,” in which one of the Surgeons v. American Bd. of Podiatric Surgery, Inc., 185 trial court’s primary functions is to make violations of the Lanham Act F.3d 606 (6th Cir. 1999), in which we set forth guidelines for unprofitable to the infringing party, See Wynn Oil Co. v. American Way Service Corp., 943 F.2d 595, 606-07 (6th Cir. 1991) (citing Roulo v. Russ deciding liability for false advertising claims under the Berrie & Co., 886 F.2d 931, 941 (7th Cir. 1989)), supports disgorgement Lanham Act. In Podiatric Physicians, which also involved in this case. As Magistrate Judge Pepe noted, the cases awarding profits appellate review of a district court’s Rule 50 decision, the under the deterrence theory upon a finding of willfulness or bad faith have court established a five-element test for plaintiffs seeking to been infringement cases “where defendant benefits directly from its prove liability under the Lanham Act: wrongful conduct.” See, e.g., International Star Class Yacht Racing Ass’n v. Tommy Hilfiger, U.S.A., Inc., 80 F.3d 749, 753 (2d Cir. 1996); Roulo v. Russ Berrie & Co., Inc., 886 F.2d at 941. Even in false [A] plaintiff must establish the following: 1) the advertising cases, disgorgement has not been awarded in the absence of defendant has made false or misleading statements of fact harm to the plaintiff or benefit to the defendant. See, e.g., U-Haul Int’l v. Jartran, Inc., 793 F.2d at 1036. 20 Balance Dynamics Corp. No. 97-2023 No. 97-2023 Balance Dynamics Corp. 9 v. Schmitt Industries v. Schmitt Industries
in the same market.” Id.; see also Harper House, Inc. v. concerning his own product or another’s; 2) the statement Thomas Nelson, Inc., 889 F.2d 197, 209 fn.8 (9th Cir. 1989). actually deceives or tends to deceive a substantial portion of the intended audience; 3) the statement is material in The reasoning of Porous Media is applicable to the present that it will likely influence a deceived consumers’ case since Schmitt specifically targeted Balance Dynamics’ purchasing decisions; 4) the advertisements were balancer, which was the only product of its kind in the introduced into interstate commerce; 5) there is some market. However, as stated above, the evidence shows that causal link between the challenged statements and harm Balance Dynamics did not suffer marketplace injury as a to the plaintiff. result of Schmitt’s advertisements. Therefore, even if the advertisements were found literally false and Balance Id. at 613 (citing U.S. Healthcare, Inc. v. Blue Cross of Dynamics presented evidence of willfulness or bad faith, the Greater Philadelphia, 898 F.2d 922-23 (3d Cir. 1990); ALPO evidence defeats any presumption of damage to goodwill in Petfoods, Inc. v. Ralston Purina Co., 913 F.2d 958, 964 (D.C. the present case. Cir. 1990). C. Disgorgement The second element of the Podiatric Physicians test shows that a plaintiff may establish a violation of the Lanham Act Balance Dynamics also claims it was improperly precluded without proving actual confusion or a lost sale; that is, a from seeking disgorgement of Schmitt’s profits. In an April communication that has a “tendency to deceive” can be the 21, 1997 Order Concerning Damages Available at Trial, subject of a Lanham Act violation if all other elements of the Judge Gilmore denied as moot plaintiff’s claim for test are met. Hence, the trial court erred in granting Schmitt’s defendant’s sales and profits as a measure of damages. Judge Rule 50 motion. Gilmore stated that this claim had already been denied in an October 17, 1996 Order of Judge LaPlata, id.,5 which V. Available Relief purportedly adopted Magistrate Judge Pepe’s September 27, 1996 R&R on plaintiff’s motion in limine regarding punitive The posture of this case requires that we examine the forms damages and defendant’s sales. In fact, Judge LaPlata’s of relief for which Balance Dynamics may be eligible under Order adopts Judge Pepe’s August 30, 1995 R&R concerning the Lanham Act. The granting of Schmitt’s Rule 50 motion Balance Dynamics’ claims for damages based on its own lost is harmless error if Balance Dynamics was ineligible for any sales or lost profits, and it makes no mention of disgorgement forms of relief under the Lanham Act. In addition, a remand of Schmitt’s profits. According to Balance Dynamics, the of this case to the trial court will require a determination as to September 27, 1996 R&R concerning disgorgement was the relief to be granted. Lastly, the substantial confusion objected to but never ruled on. It appears Judge Pepe’s demonstrated in this case underscores the importance of September 27, 1996 R&R concerning disgorgement never clearly distinguishing the elements necessary to prove a received de novo review of the district court. Consequently, breach of the Lanham Act from the elements necessary to this Court will engage in such a review. justify a certain remedy for that breach: “the inquiries should be kept separate because a violation of the Lanham Act can be remedied in more ways than one.” Web Printing Controls Co., Inc. v. Oxy-Dry Corp., 906 F.2d 1202 (7th Cir. 1990). 5 Here, by not following the Podiatric Physicians test for Judge LaPlata’s Order was actually issued in 1995, not 1996. 10 Balance Dynamics Corp. No. 97-2023 No. 97-2023 Balance Dynamics Corp. 19 v. Schmitt Industries v. Schmitt Industries
establishing liability under the Lanham Act, the district court BASF Corp. v. Old World Trading Co., 41 F.3d at 1085-88 may have “read out of the Lanham Act the remedies that do (finding literal falsity but requiring further proof of not rely on proof of injury caused by actual confusion.” Web marketplace damages); Castrol, Inc. v. Pennzoil, 987 F.2d Printing Controls, 906 F.2d at 1205. 939, 941-43 (3d Cir. 1993) (affirming trial court decision granting injunctive relief but denying monetary damages A. Damage Control Costs despite finding of literal falsity). The first form of relief to which Balance Dynamics stakes 2. Deliberate Intent or Bad Faith a claim is that of damage control—the costs of responding to Schmitt’s false advertising.2 Balance Dynamics argues that Though literal falsity alone does not raise an inference of it can receive compensation for its damage control activities damage to goodwill, some courts have created a presumption without showing actual confusion or what are commonly of damages when literal falsity is accompanied by deliberate called “actual” damages. In other words, Balance Dynamics intent or bad faith. The Ninth Circuit reasons that argues that Magistrate Judge Pepe was correct as a matter of law when he recommended denying Schmitt’s motion for the expenditure by a competitor of substantial funds in an summary judgment on the issue of loss control. The R&R effort to deceive consumers and influence their that Judge LaPlata adopted states: purchasing decisions justifies the existence of a presumption that consumers are, in fact, being deceived. In light of the inquiries made by customers and other He who has attempted to deceive should not complain business contacts, a factfinder could conclude that when required to bear the burden of rebutting a plaintiff’s actions in response to Schmitt’s letter were presumption that he has succeeded. reasonable attempts to nullify any potential damage to the corporation. A factfinder could also conclude that the U-Haul Int’l, Inc. v. Jartran, Inc., 793 F.2d at 1040-41; see letter caused serious risk to plaintiff’s future sales and also Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, reputation . . . . Unlike plaintiff’s claim for lost profits 1146 (9th Cir. 1997); Resource Developers, Inc. v. Statue of and costs, for purposes of this issue it is irrelevant Liberty-Ellis Island Foundation, Inc., 926 F.2d 134, 140 (2d whether plaintiff actually suffered damage through lost Cir. 1991). or potential sales . . . . Contrary to defendants’ assertion, plaintiff’s “damage control activities” are recoverable In Porous Media Corp. v. Pall Corp., 110 F.3d 1329 (8th under the Lanham Act, which authorizes an award for Cir. 1997), the court followed the Ninth Circuit’s reasoning any damages plaintiff sustains. 15 U.S.C. § 1117(a)(2). and permitted a presumption of money damages where there existed proof of willful deception. Id. at 1336. However, acknowledging that a plaintiff seeking monetary relief under the Lanham Act generally must meet a higher level of proof 2 See Magistrate Judge Pepe’s Memorandum Opinion and Order of than those seeking injunctive relief, the court clarified the October 24, 1996 for a summary of damage control activities undertaken presumptive damages rule as extending only to cases of by Balance Dynamics. There is some question as to whether all of comparative advertising where the plaintiff’s product was Balance Dynamics’ claimed damage control losses really related to an effort to mitigate damages from Schmitt’s false advertising, or whether specifically targeted. Id. at 1334-35. Otherwise, stated the Balance Dynamics was simply overreaching and seeking a windfall for Porous Media court, “a plaintiff might enjoy a windfall from activities in which it would have engaged anyway. a speculative award of damages by simply being a competitor 18 Balance Dynamics Corp. No. 97-2023 No. 97-2023 Balance Dynamics Corp. 11 v. Schmitt Industries v. Schmitt Industries
compensate for marketplace injury such as harm to goodwill.3 But for Schmitt’s letter, plaintiff would not have incurred A contrary rule would risk conferring an undue windfall on any expenses because it would not have had to take any Balance Dynamics. Balance Dynamics presented no evidence corrective action. Therefore, the cost of plaintiff’s that its goodwill was harmed, or that customers were actually response activities, if found reasonable and necessary by deceived by its advertisement.4 To the contrary, the evidence a jury, constitute ‘damage’ under the Lanham Act.” indicated that Balance Dynamics’ business was not harmed by Schmitt’s letters. Balance Dynamics’ sales increased after the (emphases in original). period in question, and there was no decrease in the price of its product. Further, Balance Dynamics admitted that no On the other hand, Schmitt relies on Electronics Corp. of customers had ever informed it that it was losing a sale due to America v. Honeywell, 358 F.Supp. 1230 (D.Mass. 1973), to the Schmitt communications. While literal falsehood or the suggest that damage control costs are not recoverable in the likelihood of deception may be sufficient to entitle Balance absence of actual confusion or “actual” damages. In Dynamics to injunctive relief or reimbursement for responsive Electronics Corp. of America, plaintiff had waived any advertising, it should not permit Balance Dynamics to recover attempt to show so-called “actual business harm” in dollars for injuries to goodwill in the absence of some more and cents but nevertheless pressed its case for damages, substantial indication that these injuries actually occurred. Cf. punitive damages, costs, and attorney fees. Id. at 1233. The court held that the plaintiff could not recover in the absence of “actual business harm.” Id. at 1234. 3 Like many other circuits, we have held that where plaintiffs Our research uncovered only one case that has awarded damages based merely on the fact that an advertisement was literally false. In PPX seek to recover monetary damages for false or misleading Enterprises, Inc. v. AudioFidelity Enterprises, Inc., 818 F.2d 266 (2d Cir. advertising that is not literally false, “a violation can only be 1987), a record producer falsely labeled eight albums to represent that established by proof of actual deception (i.e., evidence that they contained performances by Jimi Hendrix. Because of the literal falsity of the packaging, the court allowed plaintiffs to prove entitlement individual consumers perceived the advertisement in a way to damages without recourse to consumer surveys, witness testimony, or that misled them about the plaintiff’s product).” Podiatric reaction tests. Id. at 272-73. The court made clear, however, that this was Physicians, 185 F.3d at 614 (quoting Sandoz Pharm. Corp. v. a special circumstance—the misrepresentation occurred on the product Richardson-Vicks, Inc., 902 F.2d 222, 229 (3d Cir. 1990)) itself, so actual damages were inferable from the fact that the records (citations omitted). In Podiatric Physicians, we also set forth successfully sold on the market. Id. at 272. Such is not the case here. a more lenient standard for obtaining injunctive relief under 4 the Lanham Act: “injunctive relief may be obtained by Customer inquiries were taken as evidence of actual damage to showing only that the defendant’s representations about its goodwill in Criticare Systems, Inc. v. Nellcor Inc., 856 F.Supp. 495 (E.D. Wisc. 1994), where an allegedly false letter was presented at a product have a tendency to deceive consumers . . . .” Id. at conference, prompting audience members to “press [plaintiff] to explain 618 (quoting Max Daetwyler Corp. v. Input Graphics, Inc., [the false] allegations during the remainder of the conference and 608 F.Supp. 1549, 1551 (E.D. Pa. 1985)). “This lower afterwards.” Id. at 507. From these inquiries, the court opined that a jury standard has arisen because when an injunction is sought, could reasonably conclude that the plaintiff had lost business and suffered courts may protect the consumer without fear of bestowing an depletion of goodwill in the marketplace. Id. at 508-09. But we rejected this approach in Podiatric Physicians, where we held that a letter of undeserved windfall on the plaintiff.” Id. inquiry may have demonstrated some confusion but did not show that the customer was “tricked into believing an untruth about plaintiff.” 185 F.3d at 617. 12 Balance Dynamics Corp. No. 97-2023 No. 97-2023 Balance Dynamics Corp. 17 v. Schmitt Industries v. Schmitt Industries
Although Podiatric Physicians held that recovery of deliberate intent or bad faith does not entitle Balance monetary damages is only available upon a showing of actual Dynamics to recover money for damages to goodwill. confusion, the question of the standard upon which damage control costs may be recovered is one of first impression. 1. Literal Falsity None of the courts requiring actual confusion as a prerequisite to monetary recovery have applied that rule to limit recovery Because proof of “actual confusion” can be difficult to for damage control activities; their opinions simply were not obtain, Lindy Pen Co. Inc. v. Bic Pen Corp., 982 F.2d 1400, written to take account of that kind of damages. Rather, when 1407 (9th Cir. 1993), most of the circuits have ruled that courts have held that actual confusion must be demonstrated when a statement is literally false, a plaintiff need not before monetary damages are recoverable, they have referred demonstrate actual customer deception in order to obtain to plaintiffs who were seeking damages that would have been relief under the Lanham Act. However, the “literal falsity” suffered in the marketplace, i.e., lost sales, lost profits, or loss rule has never permitted a plaintiff to recover marketplace of goodwill. See, e.g., Web Printing Controls, Inc., 906 F.2d damages without other proof that such damages occurred. at 1204-05 (plaintiff wishing to recover damages for a Rather, this rule has been stated in suits in which the plaintiff violation of the Lanham Act must prove “actual injury, i.e., a sought injunctive relief, see, e.g., United Indus. Corp. v. loss of sales, profits, or present value (goodwill).”); Podiatric Clorox Co., 140 F.3d 1175, 1180 (8th Cir. 1998); Seven-Up Physicians, supra; PPX Enterprises, Inc. v. AudioFidelity Co. v. Coca-Cola Co., 86 F.3d 1379, 1389 (5th Cir. 1996); Enterprises, Inc., 818 F.2d 266 (2d Cir. 1987); Electronics McNeil-P.C.C., Inc. v. Bristol-Myers Squibb Co., 938 F.2d Corp. of America v. Honeywell, supra. 1544, 1549 (2d Cir. 1991); cf. Federal Trade Commission v. Brown & Williamson Tobacco Corp., 778 F.2d 35 (D.C. Cir. Actual confusion is a prerequisite to an award of such 1985); or literal falsity was not found, see, e.g., Podiatric “marketplace damages” because actual confusion tends to Physicians, 185 F.3d at 614-18; C.B. Fleet Co., Inc. v. show that these hard-to-prove damages probably exist. Yet Smithkline Beecham Consumer Healthcare, L.P., 131 F.3d there is no need to use such proxies with regard to damage 430, 434 (4th Cir. 1997); or marketplace damages were not control expenses, for the proof of such expenses is in the awarded under the Lanham Act, see, e.g., Rhone-Poulenc possession of the plaintiff and is therefore easily produced. Rorer Pharmaceuticals, Inc. v. Marion Merrell Dow, Inc., 93 Hence, there seems little reason to require “actual confusion” F.3d 511, 516 (8th Cir. 1996); Avila v. Rubin, 84 F.3d 222, before awarding compensation for damage control expenses, 227 (7th Cir. 1996); or literal falsity was accompanied by even though such an award is “monetary.” As Magistrate other proof of marketplace damages. See, e.g., BASF Corp. Judge Pepe noted, the plain language of the Lanham Act v. Old World Trading Co., 41 F.3d 1081, 1085-88 (7th Cir. permits recovery of “any damages sustained by the plaintiff” 1994); U-Haul Int’l v. Jartran, Inc., supra. upon a showing that the plaintiff is or is likely to be damaged by misrepresentative advertising. 15 U.S.C. §§ 1125(a), At trial, Balance Dynamics attempted to show that 1117. Magistrate Judge Pepe’s view is reinforced by Schmitt’s advertisements were literally false. But the above Podiatric Physicians, which allows a plaintiff to establish cases demonstrate that literal falsity, without more, is liability under the Lanham Act by showing that a false insufficient to support an award of money damages to advertisement has a tendency to deceive a substantial portion of the audience, and that it has caused harm to the plaintiff. 185 F.3d at 613. 16 Balance Dynamics Corp. No. 97-2023 No. 97-2023 Balance Dynamics Corp. 13 v. Schmitt Industries v. Schmitt Industries
unwillingness to irk customers as the plaintiff pursues proof Damage control expenses must be treated differently from of harm. marketplace damages because, like an injunction, damage control is undertaken precisely to prevent such things as lost Therefore, because a company may justifiably act before it sales, lost profits, and lost goodwill. As is the case with actually sustains injury, standards similar to those applicable plaintiffs seeking injunctive relief, plaintiffs engaging in to injunctive relief are appropriate where plaintiffs seek to damage control are still at a stage where substantial recover damage control expenses. Hence, to recover loss uncertainty exists as to the extent of “business harm” being control damages, plaintiffs must show that a violation of the inflicted by the false advertising. Cf. ALPO Petfoods, Inc. v. Lanham Act occurred, and that (1) there was a likelihood of Ralston Purina Co., 997 F.2d 949, 952 (D.C. Cir. 1993). In confusion or damages to sales, profits, or goodwill; (2) its the present case, Balance Dynamics first heard about damage control expenses are attributable to the violation (i.e., Schmitt’s March 16, 1993 letter when a customer faxed it to caused by the violation); and (3) that its damage control Mr. Schulte. The letter contained disparaging remarks which, efforts were reasonable under the circumstances and if true, would ruin Balance Dynamics’ business. Not yet proportionate to the damage that was likely to occur. knowing whether the letter was true or false, Schulte called his most important customers and found that most of them B. Damage to Goodwill had received the letter and were concerned about the regulations pertaining to the halon balancer. Meanwhile, Although Balance Dynamics stipulated that it suffered no other customers initiated contact with Mr. Schulte or other lost sales or change in financial condition, it reserved the right officers of Balance Dynamics, and also expressed serious to seek, inter alia, damages to its goodwill. To recover for reservations about the continued use of the halon balancer. damage to goodwill, the plaintiff bears the burden of proof. Balance Dynamics then investigated the veracity of the claims Web Printing Controls Co., Inc. v. Oxy-Dry Corp., 906 F.2d made in the letter and found they were false. at 1204-05; Lithuanian Commerce Corp. v. Sara Lee Hosiery, 47 F.Supp.2d 523, 533 (D.N.J. 1999). Schmitt At this point, with 3,200 letters in circulation, must Balance contends that Balance Dynamics offered no evidence that its Dynamics wait to take action until a customer actually tells goodwill or reputation within the industry was actually someone at Balance Dynamics that she will not buy the halon damaged by Schmitt’s communications. But Balance balancer? Is Balance Dynamics limited to seeking injunctive Dynamics presented evidence of the literal falsity of the relief to stop future letters being mailed out, when 3,200 Schmitt advertisements and also contended that Schmitt people are reading statements about the halon balancer that, violated the Lanham Act with deliberate intent and bad faith. if believed, will be fatal to Balance Dynamics’ business? At Though the “actual confusion” rule would ordinarily preclude such a juncture, an injunction may be a mere palliative. We Balance Dynamics’ claim for goodwill, in certain think it appropriate that Balance Dynamics, upon recognizing circumstances the literal falsity of an advertisement or the reasonable likelihood of confusion, would undertake to evidence of deliberate intent or bad faith has sufficed to protect its business. Cf. ALPO Petfoods, Inc. v. Ralston entitle a plaintiff to certain forms of relief or to create a Purina Co., 997 F.2d at 952. We also think it appropriate that presumption of damages in the marketplace. The trial court Schmitt, having violated the Lanham Act and thereby being seems to have acknowledged this in stating that literal falsity responsible for “any damages” caused by such violation, could prove the existence of actual confusion. However, we should compensate Balance Dynamics for any reasonable and hold that in the present case, evidence of literal falsity and 14 Balance Dynamics Corp. No. 97-2023 No. 97-2023 Balance Dynamics Corp. 15 v. Schmitt Industries v. Schmitt Industries
necessary expenses incurred in mitigating the detrimental who is successful in preventing marketplace damages would effects of that transgression. Id. not be able to recover under the Lanham Act, but a plaintiff who is unsuccessful would be permitted to recover. That Consequently, similar standards as apply to injunctive relief would be an anomaly. should also apply to recovery of damage control expenses. That is, damage control expenses should be recoverable upon We also note that the practical realities of business a showing of the likelihood of actual confusion, rather than litigation favor a rule that damage control costs should be upon a showing of actual confusion itself. This rule recoverable even where plaintiffs do not demonstrate actual recognizes that it is unreasonable to expect a businessperson confusion or marketplace injury. For one, marketplace faced with a Lanham Act violation to sit idly by until a damages and actual confusion are notoriously difficult and customer manifests actual confusion. The law should expensive to prove. See PPX Enterprises, Inc. v. encourage quick responses and the mitigation of damage, and AudioFidelity Enterprises, Inc., 818 F.2d at 272-73; U-Haul should not require parties to suffer an injury before trying to Int’l, Inc. v. Jartran, Inc., 793 F.2d at 1041. More prevent it. Moreover, a rule allowing recovery for damage importantly, however, even where marketplace damages or control costs upon the likelihood of actual confusion does not actual confusion are provable in theory, such proof often risk an “undeserved windfall” to the plaintiff since such an requires that a plaintiff solicit its own customers for award would not speak to the underlying marketplace affidavits, which puts the customers at risk of being damages. Cf. Podiatric Physicians, 185 F.3d at 618. subpoenaed by the defendant. Plaintiffs are justifiably hesitant to alienate or upset their customers in this way. In Distinct from Schmitt’s argument that damage control costs addition, plaintiffs may hesitate to put marketplace damages are not recoverable without a showing of actual confusion is at issue because that would entitle a defendant to discover its assertion that damage control costs are not recoverable in information about plaintiff’s business. As may have been the the absence of “actual damages” or, we assume, marketplace case here, oftentimes the rational business decision is for a damages. But we find that argument similarly unacceptable. plaintiff to embark on a campaign of damage control and No court has excluded damage control costs from its forego a demonstration of injury in the marketplace or actual definition of damages that are considered “actual.” And confusion of their customers. Such a plaintiff should not be several courts have awarded damages for the expense of required to give up compensation for its damage control responsive or reparative advertising quite apart from an award expenses when the defendant’s wrongful action necessitated of marketplace damages. See, e.g., ALPO Petfoods, Inc. v. those expenses in the first place. Ralston Purina Co., supra; U-Haul Int’l, Inc. v. Jartran, Inc., 793 F.2d 1034, 1041 (9th Cir. 1986); Otis Clapp & Son, Inc. Nor should plaintiffs who are unwilling or unable to prove v. Filmore Vitamin Co., 754 F.2d 738, 745 (7th Cir. 1985). marketplace damages or actual confusion be limited to Although none of these courts have awarded damage control seeking injunctive relief. An injunction can halt a wrongful costs in the absence of marketplace damages, none have activity but it will not correct its effects. Responsive treated marketplace injury as a prerequisite to recovery of advertising may be the quickest, most effective way to damage control costs either. Moreover, a rule that predicated mitigate damages or prevent them altogether. Further, recovery of damage control expenses on a showing of limiting a plaintiff to injunctive relief is especially unfair marketplace damages would penalize successful efforts at where a plaintiff’s inability to prove marketplace damages or mitigating damages. That is, under such a rule, a plaintiff actual confusion may merely reflect an understandable