The court of appeals, for reasons that don’t seem sufficient to me but are consistent with the generally favorable treatment trademark owners receive in the Third Circuit, reversed the district court’s holding that defendant’s Forsthin didn’t infringe plaintiff’s ForsLean and remanded for entry of judgment in plaintiff’s favor. Sabinsa Corp. v. Creative Compounds, LLC, 609 F.3d 175 (3d Cir.2010). On remand, Sabinsa sought disgorgement of profits and attorneys’ fees.
Subject to the principles of equity, a prevailing plaintiff is entitled to recover defendants’ profits and (nonduplicative) damages. An accounting of profits is equitable, and courts consider (1) whether the defendant had the intent to confuse or deceive, (2) whether sales have been diverted, (3) the adequacy of other remedies, (4) any unreasonable delay by the plaintiff in asserting his rights, (5) the public interest in making the misconduct unprofitable, and (6) whether it is a case of palming off.
On intent: the court of appeals said there were disputed factual issues on defendant’s intent, including its trademark search and whether its ads were intentionally misleading to trade on Sabinsa’s goodwill. (The underlying ingredient had been off the market for a while due to supply issues, and defendant’s ad offered “the return of [the ingredient].”)
Sabinsa argued that knowledge of the ForsLean mark plus failure to conduct an adequate trademark search equaled a clear intent to confuse. The court found that, while the testimony about the thoroughness of the search was inconsistent, any such search would have confirmed what defendant already knew: ForsLean was a mark. Defendant’s knowledge and care in evaluating proposed marks was highly relevant, but did not automatically mandate a finding of intent to confuse. The court also didn’t agree that the ads showed intent to trade on Sabinsa’s goodwill: they contained defendant’s name and contact information, and included other of defendant’s products that consumers (here manufacturers of supplements) might know as belonging to defendant, or at least not from Sabinsa.
Sabinsa argued that the Forsthin name was “aimed at” the ForsLean mark, while Creative Compounds responded that it had a subjective bona fide belief that it acted in good faith by expanding its preexisting “thin” line of weight loss products. Sabinsa argued that defendant in fact violated its own naming strategy, because Creative Compounds uses “thin” with the abbreviation of the first word of the active or plant ingredient, while here Forsthin used the second name of the Coleus forskohlii plant. The court disagreed, because in all of the Creative Compounds products, the abbreviated word combined with thin was not the plant name but that of the chemical extract, here forskohlin. It put great weight on this preexisting naming strategy and the existence of a line of similarly named products. “Had there been no such naming strategy, a different outcome may be warranted, as it would appear more likely that Creative Compounds' mark was intentionally aimed at Sabinsa's.”
Intent weighed in favor of Creative Compounds, and thus against disgorgement of profits.
Sales diversion: actual confusion is not required, but plaintiff is only entitled to recover the amount demonstrably attributable to unlawful use of its mark. Once plaintiff proves confusion likely, defendant has the burden of proof to show that profits weren’t derived from infringing use. Sabinsa had no evidence of actual confusion over 3½ years of coexistence, but the parties stipulated to profits of just under $160,000. (The court paused to echo the concern of the concurrence above that Sabinsa offered no survey “and that was especially concerning where it could have easily conducted a survey of customers to assess actual confusion in the relevant market,” which allowed the court to infer that Sabinsa expected that surveys would undermine its case. “It would be expected that a company would gather such evidence in an infringement claim, especially where, as here, the product to be protected generates such large revenues for the company. Judge Ambro's observation seems especially poignant where, as in the present case, there was a small, finite, and identifiable amount of customers that purchased Forsthin from Creative Compounds during the three-and-a-half year period in question, and Sabinsa could afford to do such a survey.” Nobody likes being reversed. In reversing, the court of appeals focused on the ultimate supplement consumers “who read a ForsLean pamphlet and chose to buy a pharmaceutical containing forskholin,” but the district court pointed out that there was no evidence of confusion among them either.)
Because of the burden-shifting, “[i]t is not enough to say Plaintiff did not present evidence of confusion; Defendant must itself present evidence that the customers were not actually confused.” Creative Compounds didn’t do that, or prove deductions from gross receipts. Thus, this factor favored Sabinsa, except that the court credited the testimony of one customer who testified that his company made no mistake. The court thus subtracted nearly $20,000 in profits derived from that particular sale.
Other remedies: was a permanent injunction sufficient, or would it wrongly allow Creative Compounds to profit from its infringement? Likely confusion amounts to irreparable injury as a matter of law (so much for eBay), and the other factors favored an injunction, which would be an appropriate remedy.
There was no delay Sabinsa’s assertion of its rights, but that doesn’t automatically weigh in its favor.
Public interest in making misconduct unprofitable: this obviously applies when the infringer engaged in culpable conduct, but it’s less clear what to do in the absence of ill intent. Does this factor weigh in favor of disgorgement in every case of success on the merits? The court declined to so hold. “To do so would directly conflict with the principle that an accounting of profits is a form of equitable relief that is not given as a matter of course upon the mere showing of an infringement. Further, any such award would be an improper punishment, and not a fair compensation.” There is a middle ground, or a spectrum of culpability. The public can be protected by injunction in many instances, and might well be here.
“Palming off”: did Creative Compounds misrepresent its goods as someone else’s? The court said no. The parties are raw material suppliers who sell through the same channels, but Creative Compounds lacked the requisite intent to pass off. Creative Compounds gave specific instructions to buyers on its product’s intended use (apparently it was seeking a patent on a specific application), and a majority of its customers were repeat customers who were more likely than not to know with whom they were dealing.
Weighing the factors, the presumption of sales diversion tipped the scale towards partial disgorgement. “The burden on Defendant is heavy, perhaps unduly so.” In the past, the willfulness requirement protected innocent infringers, but now they have to prove a double negative, “that they did not intend to infringe and did not profit from unintentional conduct.” “While this may seem to perversely give mark holders a free pass, and to treat infringement as if it were a strict liability crime without the need to show either malicious intent or unjust enrichment, that is the law the court must uphold.” Elaborating, the court continued,
Thus it appears difficult for a defendant, innocent or not, to defend himself in a claim for disgorgement of profits. To succeed on such a claim, Plaintiff need not show actual confusion or willfulness on the part of Defendant (indeed, in this case, Sabinsa did neither). Defendant, though, must itself now show that its profits were not derived from the infringing use, even after it proves that its infringement was innocent.Then the court said again that an innocent infringer was being forced to pay money that might not have been derived from infringement, and that an injunction alone “may well have been sufficient,” but that the unrebutted presumption of sales diversion meant that profits “must” be disgorged.
I get the feeling that the district court is suggesting that, if the court of appeals is going to tilt the confusion factors towards a plaintiff’s victory and not require willfulness for a recovery of profits, it should perhaps give district courts more equitable discretion on damages—this certainly seems teed up for a reversal on whether the district court felt unduly constrained in its ability to weigh the other factors in the multifactor test. I wonder whether, given the denial of the fee award, this will actually result in an appeal or merely give Creative Compounds negotiating leverage to drop the actual amount paid in return for accepting this outcome, an award of nearly $140,000.
But was this an exceptional case warranting a fee award? No. Such an award requires culpable conduct such as litigation misconduct, bad faith, fraud, malice, or knowing infringement, and many courts require clear and convincing evidence of same. This was not present. Even if Sabinsa had shown the requisite culpable conduct, the court would still exercise its equitable discretion and not deem this case exceptional.
Sabinsa argued that it was entitled to recover attorneys’ fees under New Jersey law for its state law claims, because culpable conduct is not required as it is under the Lanham Act. However, while culpable conduct is not formally required, New Jersey courts do consider the equities of the case, and an award was inappropriate here, where an accounting had already been ordered and the infringement was innocent. (The court also suggested that plaintiff’s suggestive mark might get less protection under New Jersey law than the arbitrary mark in the state case establishing the availability of attorneys’ fees in cases of deliberate copying in related markets.)