Tuesday, July 26, 2011

Failed Lanham Act case not sanctionable

Altvater Gessler-J.A. Baczewski International (USA) Inc. v. Sobieski Destylarnia S.A., 2011 WL 2893087 (S.D.N.Y.)

Defendants Sobieski and Adamba Imports filed post-trial motions against Gessler seeking sanctions, attorneys’ fees, and costs. Judge Baer awarded costs, but not sanctions or fees.

Gessler sued defendants, the manufacturer and importer of Old Krupnik Polish Honey Liqueur ("Sobieski's Krupnik"), alleging false advertising, trademark infringement, deceptive trade practices, and unjust enrichment. Gessler objected to internet ads in which an image of Sobieski's Krupnik appeared in close proximity to the description, "[o]nce produced by the famous Baczewski Distillery of Lwow, Poland, Krupnik is produced today according to its original recipe by Starogard Distilleries of Gdanks." Gessler claims trademark rights in Baczewski, and also argued that the text’s reference to “original recipe” was its own trade secret recipe for Gessler’s Krupnik.

The jury trial resulted in a verdict in favor of defendants on all counts.

Sanctions: attorneys who affix their signatures to papers filed in court have a duty to conduct a reasonable inquiry into their factual support (or likelihood of being supported after discovery). Continuing to espouse an untenable position is also sanctionable. Sanctions may not be imposed unless a particular allegation or legal argument is utterly lacking in support, and courts must resolve all doubts in favor of the party facing sanctions.

As to the false advertising claim, Sobieski argued that the prefiling investigation was unreasonable because Gessler had no evidence that Sobieski created or used the accused ad text, and that Gessler further engaged in sanctionable behavior by electing to proceed with trial after discovery, when Gessler found out that a non-party’s website was the source of the text and should have realized that its claims were no longer tenable.

The court disagreed. False advertising doesn’t require that the defendant have created or used the text. The Lanham Act allows vicarious liability, although Gessler did not plead this theory in the complaint or at trial. Gessler also claimed that Sobieski had control over its product, which it continued to supply to retailers knowing that one or more of them used the ad to sell it. Gessler argued that the jury could have found that Sobieski and its retailers were part of a common enterprise to market Sobieski's Krupnik using the ad; the non-party Sobieski claimed created the ad allegedly denies doing so. (Adamba’s motion failed on similar grounds—though it was clear that other retailers used the ad before Adamba did, that didn’t mean Adamba couldn’t have used the ad, and there was circumstantial evidence that it did.)

Gessler’s prefiling investigation included observing the proliferation of the ad text among retailers of Sobieski’s Krupnik, ordering bottles of it from NY retailers, and noting that it was advertised in multiple states. Gessler also presented circumstantial evidence at trial that Sobieski caused the text to be disseminated, including evidence that an entity affiliated with Sobieski had previously used similar language. Given the standard for sanctions, Sobieski failed to show that the initial investigation was unreasonable or that the allegation of false advertising was utterly lacking in support.

Similarly with trade secrets—before filing, Gessler knew that Sobieski had purchased the manufacturing facility which had previously been licensed to produce Gessler's Krupnik, and that retailers were using the ad, which by its own language indicated that Sobieski's Krupnik is manufactured according to Gessler's Recipe. Gessler presented more evidence at trial, including that Sobieski had a copy of Gessler's Recipe in its files and that Sobieski's promotional materials described Sobieski's Krupnik as being manufactured pursuant to an 18th century recipe.

And on trademark, Sobieski argued that Gessler failed to investigate the effect of the ad on the average purchaser or present confusion evidence, but juries can find confusion without survey evidence, and Gessler presented evidence that the ad was false on its face, allowing a presumption of deception. Gessler timely withdrew its dilution claim, immunizing it from sanctions on that claim.

What about attorneys’ fees, available in exceptional Lanham Act cases? The Second Circuit requires the prevailing party to show fraud or bad faith in bringing or prosecuting the suit. Sobieski made three arguments: (1) Gessler had an improper competitive purpose in bringing/prosecuting the suit, (2) its claims were meritless, and (3) it sued Adamba to gain jurisdiction.

As to (1), Sobieski argued that Gessler was simply frustrated by its competitive position and used this lawsuit to extract improper concessions based on unreasonable objections to Sobieski’s settlement offers. But Gessler provided reasonable explanations to avoid an inference of bad faith; Sobieski itself had initiated an earlier meeting at which it advised Gessler that Gessler couldn’t use “krupnik” to market a honey liqueur product that Gessler had been making and selling for decades, and Gessler argued that it rejected the settlement offer based on the offer’s insufficient terms. This was enough.

What about meritless claims? Cases awarding fees on this ground generally involve circumstances where the evidence was so thin that it was hard to imagine that the actions were brought for proper purposes. This theory failed for reasons similar to those in the Rule 11 analysis.

How about bringing in Adamba as an importer? Same thing: there was circumstantial evidence connecting Adamba to the ad text. A bad faith, baseless attempt to gain jurisdiction might justify a fee award, but that hadn’t been shown here; also, “while Gessler could theoretically have tried to chase down multiple parties in multiple jurisdictions, it instead elected to focus its limited resources on the supply chain of the product, as importers of liquor and cordials are generally responsible for promoting such products and are often contractually obligated to do so.” Thus the court would not infer bad faith in suing Adamba.

Adamba also sought fees and costs under Rule 68 pursuant to its offer of judgment. But Rule 68 only applies when the plaintiff obtains a judgment in its favor, which Gessler did not.

Other costs, however, were allowed to the prevailing party; this occurs as a matter of course unless the losing party convinces the district court to deny the award as an exercise of its equitable discretion. Perhaps of note, the court allowed Sobieski to recover $50,000 for the reasonable cost of trial technology consultants used to develop and present exhibits as “costs,” because the technology served the same function as exhibits and other papers used at trial and the visual aids were helpful to the jury and the court by focusing attention on salient documents and concepts.

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