Monday, January 24, 2011

Skin job: unauthorized reseller's bad acts doom it

Bad facts, bad law: an undisputed wrongdoer’s wrongful conduct is used to interpret Lanham Act (and potentially Copyright Act, given unclear facts) liability in ways with bad implications for legitimate businesses, sort of like what happened in INS v. AP where the Court treated wrongful methods and legitimate methods of acquisition as equivalent. Given that the defendant here proceeded pro se and that some of the key facts are unclear, this case is more a cautionary tale than a precedent affecting resellers of legitimate goods.

Klein-Becker USA, LLC v. Englert, 2011 WL 147893 (D. Utah)

Klein-Becker makes StriVectin, a topical cosmetic, packaged in “trademarked, copyrighted packaging that bears Klein-Becker's unique and distinctive trade dress.” It has “an exclusive and selective network of authorized manufacturers and distributors.” In addition, “Authorized Resellers are trained in and agree to meet Klein-Becker's quality control standards for storing and selling StriVectin-SD® products and for providing before and after sales support by personnel trained to assist customers to maximize the benefit of Klein-Becker products.”

Klein-Becker’s reseller purchase agreements restrict resale on the Internet or in e-commerce without Klein-Becker's express written authorization, and restrict sales to only individual customers as end-users. Resellers may also not copy any of Klein-Becker's trademarks, copyrighted materials, trade dress, marketing materials, or advertising materials without Klein-Becker's express permission.

Note: this may produce a contractual obligation, but copyright law itself expressly provides that sellers may show photos of the products they have to sell, even when those photos include copyrighted labels, without the permission of the copyright owner. 17 U.S.C. 113(c) (“In the case of a work lawfully reproduced in useful articles that have been offered for sale or other distribution to the public, copyright does not include any right to prevent the making, distribution, or display of pictures or photographs of such articles in connection with advertisements or commentaries related to the distribution or display of such articles, or in connection with news reports.”) Notably, and possibly relevant here, the question is whether the work has lawfully been reproduced in useful articles—not whether the defendant’s particular copy is being distributed within the copyright owner’s authorized distribution chain, which makes sense for a provision designed to protect both ads and reporting. The facts set forth in this opinion are insufficient to explain what exactly defendants did to infringe the copyrights at issue.

The court adopted Klein-Becker’s characterizations of its system as findings of fact, including that “the StriVectinTM brand name symbolizes high quality in the eyes of the consuming public and industry. In order to maintain the reputation and genuineness of the StriVectin-SD® line of products, the quality standards must be controlled by Klein-Becker.”

Defendants used various websites and email addresses, including,, Skin-Cream-Sales, and StriVectin Sales, among many others. They weren’t authorized resellers, but nonetheless dared to advertise and sell StriVectin products. (Horrors! Look, these are bad guys, as subsequent discussion will show. But there’s a difference between “not being an authorized reseller” and “selling illegitimate product,” which this opinion, by adopting the TM owner’s rhetoric, erases.) Their unauthorized sales “undermine the brand integrity, brand reputation and the goodwill associated with StriVectin-SD®,” because their websites don’t satisfy Klein-Becker’s criteria for Internet retailers, which require high quality and look and feel of the website, among other things. The unauthorized sales also damaged “Klein-Becker's relationships with authorized resellers, as well as their competitiveness in the cosmetics industry.”

Gross sales of StriVectin products were at least over $673,000.

Here comes the truly bad stuff: GNC stores are entitled to special prices from Klein-Becker. Englert posed as GNC stores, submitting fraudulent invoices. Klein-Becker’s direct damages from the unwarranted discount were over $78,000. Defendants also bought and sold stolen StriVectin. In 2007, thieves stole over $320,000 (retail) of StriVectin; the stolen items were marked with lot numbers that were never legitimately or legally sold. Pursuant to a seizure order granted by the court, Klein-Becker found 269 tubes of stolen product, with a retail value of more than $36,000, at defendant Patrick Englert's residence. Klein-Becker also seized numerous empty cardboard boxes marked with the stolen lot number, which would have contained at least another 84 tubes of stolen product. Klein-Becker bought 16 additional units of the stolen product off eBay from Englert. The court noted that Klein-Becker had determined that all stolen product, even if recovered, had to be destroyed because it had been out of Klein-Becker’s control.

The court found willfulness: the defendants were a large-volume unauthorized reseller who knew they were buying and selling StriVectin well below what they knew to be its actual wholesale price. In addition, Klein-Becker also found tubes with no lot number during the seizure and by buying from the defendants on eBay. The lack of a lot number likely indicates either counterfeiting or theft from the manufacturer prior to the manufacturer printing the lot number on the product package. (Not sure why this indicates knowledge, absent evidence that the significance of lot numbers is widely known among resellers.)

Defendants received StriVectin from Iowa Nutrition, an authorized customer. The invoices they received stated that the purchaser was not authorized to resell the product “via the Internet or in e-commerce or to other resellers, Internet sites, or auctions without express written authorization.” They knew about and induced authorized resellers to breach plaintiff’s reseller policy. (The evidence recited shows knowledge, but not inducement, unless paying for the product is inherently inducement; I’m not familiar enough with inducement of breach caselaw to say whether this is a standard result.)

Defendants also substantially obstructed discovery.

The court granted summary judgment on Klein-Becker’s claims for trademark infringement, copyright infringement, false advertising under federal and state law, intentional interference with existing and prospective business relations, fraud, and civil conspiracy. It only remained to calculate damages.

Lanham Act damages: Klein-Becker sought disgorgement of defendants’ profits. Defendants argued that this would be inappropriate because Klein-Becker didn’t show actual damages, didn’t show willfulness, and didn’t show defendants’ actual profits with reasonable certainty. Under circuit precedent, while a finding of actual damage is important in determining whether an award of profits is appropriate, a plaintiff could recover defendant’s profits without showing actual damage if the defendant acted willfully. Here, Klein-Becker showed actual damages: defendants agreed in their proposed findings of fact that their sales “undermine[] the reputation and goodwill of the StriVectin-SD® brand," and "damage Plaintiff's relationships with authorized resellers, as well as their competitiveness in the cosmetics industry." So, while the exact dollar amounts couldn’t be determined due to defendants’ misconduct in discovery and poor bookkeeping, they admitted that their infringement actually damaged Klein-Becker. And anyway, given defendants’ willfulness, the equities justified an award of profits regardless.

The equation of unauthorized with counterfeit/stolen bites again: Willfulness requires an intent to appropriate the goodwill of another’s mark. The court analogized to a case where a car manufacturer began marketing a warranty under a name nearly identical to that of a warranty offered by an aftermarket warranty dealer, in which the Tenth Circuit held that the deliberate adoption of “similar” marks could lead to an inference of intent to benefit from the dealer’s goodwill. The court considered this case “very similar,” because defendants “actually appropriated Klein-Becker's product.” Moreover, the court continued, their sales were aimed at those seeking to purchase actual StriVectin. The difference being, of course, with respect to the actual StriVectin, that defendants paid for and actually offered Klein-Becker’s product, which the defendants in the car case did not.

Further, defendants knew that their actions were prohibited by the reseller agreement. This creates an inference of intent to appropriate Klein-Becker’s goodwill. And thus are contracts converted into trademark rights.

Anyway, equity supported an award of profits, because the infringement likely diverted some customers from authorized resellers, and likely deceived consumers into believing they were purchasing Klein-Becker's product from an authorized reseller.

In calculating damages, some speculation is permissible, particularly when the need for it is attributable in part to defendants’ poor record-keeping. Defendants failed to show any elements of cost or deductions. Thus, the court awarded defendants’ gross sales as damages.

Klein-Becker also sought to multiply the damages under the Lanham Act, but the court declined because it was already awarding gross profits. The Act only provides for multiplying “the amount found as actual damages” where appropriate, and actual damages were indeterminate.

Copyright damages: The court found that defendants willfully infringed Klein-Becker’s copyright in its packaging. I presume this covers either the distribution of pure counterfeits or of copies as to which defendants were not actually the “owners” because they were stolen, because of course the product that merely got outside the distribution chain is subject to first sale.

The purpose of statutory damages is not just restitution but to discourage wrongful conduct. Because the copyright and Lanham Act damages were based on the same sales, the court considered the prospects of double recovery. Courts are split on this issue: some permit statutory damages in addition to actual Lanham Act damages, and some don’t; the central concern is whether the plaintiff receives a windfall. The Tenth Circuit hasn’t ruled on the issue, but has in the past disallowed double recovery when two claims arise from the same operative facts and seek identical relief. The Lanham Act clearly states that an award of defendant’s profits should be compensation, not a penalty, so additional compensation would likely result in a windfall for plaintiff. However, statutory damages also serve a punitive, deterrent purpose. Thus, awarding both is not impremissible double recovery.

Yet in determining appropriate statutory damages, a court considers the same factors as it does under the Lanham Act. Because Klein-Becker had already been compensated for its damages, only deterrence and willfulness were of much relevance. The court found that a $10,000 award was appropriate, compared to the $30,000 Klein-Becker sought. “Any lesser amount would be too easily absorbed as a cost of doing business by intentional violation of a copyright.”

Klein-Becker also got actual damages for the GNC fraud, which the court calculated as the difference between the GNC price and the retail price, which was the price defendants would have paid absent the fraud (since Klein-Becker wouldn’t have given them the wholesale price).

The Utah Truth in Advertising Act and Unfair Practices Act both allow recovery of three times actual damages or statutory damages of $2000, whichever is greater; Klein-Becker elected statutory damages. (Was this worth the litigation cost? Even assuming defendants actually pay an attorneys’ fee award that includes time spent on these counts, how much could a reasonable attorney charge for work on these counts?) Remember that prohibition on double recovery: whether relief is identical depends on whether the award is compensatory or punitive. Here, the statutory damages claim serves deterrent purposes, like the Copyright Act, and so no additional statutory damages were available for damages arising out of the same transaction. (Is Klein-Becker a prevailing party on these counts, then? I’m sure there’s law on this, but I thought that a simple declaration that its rights were violated isn’t enough to make it the prevailing party under current law.)

Klein-Becker did get an attorneys’ fees award under the Lanham Act, and would have been eligible for the same under the fraud the Truth in Advertising Act if that wouldn’t have been duplicative. Defendants’ conduct in discovery, plus its willful infringement, made the case exceptional for Lanham Act purposes: the defendants’ “business model itself is based on violations of Klein-Becker's trademark and copyright rights.”

Punitive damages could also have been available for the intentional torts, but weren’t warranted under the circumstances. Defendants had already been sanctioned for failure to comply with their duties as litigants, and the court already imposed statutory damages and awarded fees.

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