Tuesday, August 19, 2014

safe distance rule allows contempt after injunction without full infringement hearing

Innovation Ventures, LLC v. N2G Distributing, Inc., Nos. 12–1635, 13–1817, 2014 WL 3953734 (6th Cir. Aug. 14, 2014)

The Sixth Circuit continues to help trademark lawyers and scholars out by including pictures of the products at issue.  There are a lot of 5-hour Energy cases.  This one involves a trial that found N2G and another defendant to have infringed the trademark and trade dress of 5-hour Energy (5HE), an energy shot.  The district court held defendants, and their common owner Diehl, in contempt for violating the permanent injunction after trial.  The court of appeals affirmed everything.

FHE’s sales spiked in 2005 and increased “astronomically” from there.  By March 2009, FHE had nearly 70% of the market for energy shots, and spent about 25% of its gross sales for advertising (on $620 million of revenue for 2011).  While the mark was rejected as descriptive in 2005, and went on the Supplemental Register late that year, FHE was ultimately registered in August 2011, shortly before this case was tried.  FHE also used litigation to protect its “mark and market position,” suing many alleged infringers, including defendants.

In 2008, defendants began to sell “6 Hour Energy Shot,” “Nitro2Go Instant Energy,” and “Extreme Monster Energy Shot.”  The first of these bore a resemblance to FHE.  Diehl testified that the similarities were due to other factors, not copying, though the warning labels were word for word copies of the one on FHE’s bottle.  FHE sued, and the district court preliminarily enjoined 6 Hour Energy and ordered a recall, which resulted in the return of almost half of the 77,000 bottles defendants had sold, causing a huge loss.  Defendants also had to take their Extreme Monster Energy Shot off the market after complaints of trademark and trade dress infringement Monster, “one of the largest players in the energy drink market.”
5-hour Energy and 6 Hour Energy Shot

The court noted the size disparity, which isn't present in the photos: the Extreme Monster energy shot is small while the Monster energy drink is large
Defendants (after consulting with counsel) then came out with what eventually were seven variations of energy shots about which FHE amended its complaint to allege that these infringed too.  Ultimately, a jury found that six of defendants’ products infringed the 5 Hour Energy mark, that two infringed FHE’s trade dress, that the infringement was intentional except for one product, and that two of the products were falsely advertised.  The jury awarded $1.75 million in damages.
jury verdict form

The district court permanently enjoined defendants from selling the six products found to infringe, and from using marks confusingly similar to FHE’s mark and trade dress.  Defendants were also ordered to surrender all products subject to the injunction and file a compliance report.  Diehl, who was not personally enjoined, signed the report under penalty of perjury, stating that he’d long ago stopped selling 6 Hour Energy and Pure Energy (the first variant he tried); that he had changed the labels for all the other infringing products; and that he had instructed the enjoined products not be sold on the N2G website. In 2012, both defendants declared bankruptcy. 

However, in July 2012, FHE had three orders placed on the N2G website, and each order contained enjoined products as well as the modified-label products advertised on the website.  The modified products were marketed by a new company and the orders were filled by another new company, both of which were created by Diehl, whose various entities “commingle assets essentially based on Diehl’s whims.”  The presence of the old products was attributed to a new employee acting without higher-ups’ knowledge.  But in April 2013, more than six months after FHE filed a motion for contempt, enjoined products were still being advertised on Groupon and an inspection of a warehouse showed that “scores” of enjoined bottles were still in stock, despite Diehl’s assurances that the products had been destroyed.  The district court found defendants and Diehl in contempt. 
modified products

The court of appeals first rejected defendants’ motion for a new trial.  “[T]he likelihood-of-confusion factors can rarely be applied with mathematical precision—this is a holistic endeavor.”  Here, the jury heard ample evidence to support its likely confusion findings.  “First—and most importantly—the jury could use their eyes and see that Defendants’ products use similar marks.”  The differences in numbers, use of the plural “hours,” and small “+” or other signs “should not be considered in isolation—we ‘view marks in their entirety and focus on their overall impressions, not individual features.’”  

The jury also heard a lot of testimony on the strength of the FHE mark.  Relatedness of the goods obviously favored FHE, and the parties used similar marketing channels.  “One exhibit even showed the parties’ display boxes side-by-side next to a convenience store cash register.” And the jury heard testimony that the products were impulse purchases and consumers just bought what was prominently displayed to them (which would go to materiality, if we cared about materiality), so they weren’t tremendously careful and could easily be confused by proximate placements.

Defendants’ arguments about lack of actual confusion and lack of bad intent were unavailing.  FHE didn’t need to show actual confusion, but there was testimony from an FHE ad purchaser about a representative from the Discovery Channel who told her that he loved FHE, and even said he had one in his pocket, when the bottle in his pocket was actually a 6 Hour Energy.  Diehl’s testimony didn’t absolve FHE of bad intent; the jury could have disregard it, and there was circumstantial evidence of copying (the warning label). In any event, intent isn’t required.

A similar analysis applied to the trade dress claim.  FHE didn’t introduce evidence about the strength of its trade dress, but it did introduce several TV ads that emphasized the bottle’s look and size.  The relatedness of the goods, actual confusion, marketing channels, low degree of purchaser care, and defendants’ intent supported the jury’s trade dress verdict, along with “a brief glance at the parties’ competing products.”  Though defendants’ products omitted blue, a color featured prominently on FHE’s bottle, trade dress is total image and overall appearance, so “parsing minute differences between products” wasn’t right.  The court didn’t abuse its discretion in denying a new trial.

What about descriptive fair use?  The jury heard evidence that defendants’ use wasn’t descriptive.  The first version used a symbol after the term “6 Hour Energy,” which would allow the jury to infer that defendants weren’t simply describing the product but trying to lay claim to a mark.  Also, Diehl testified that he didn’t have a basis to claim that his products gave 7 (or more) hours of energy, so the jury could infer that defendants “did not intend to describe what their products did when Defendants weren’t sure of that themselves.”  Plus, the evidence on intent also would support a finding of bad faith: “circumstantial evidence suggesting that Defendants knew of Plaintiff’s protected mark and proceeded to copy it.”

It was also ok to deny defendants discovery about FHE’s formula.  Discovery about defendants’ formula was relevant to FHE’s false advertising claim, but reciprocal discovery about FHE’s formula was only tangentially relevant—if the formulas had been similar, they could’ve extrapolated from evidence that allegedly existed about FHE’s effectiveness.  But they had a far easier method to evaluate their own products—they could’ve tested them.

And it was ok to exclude the text of a different FHE case rejecting a trade dress claim on dissimilarity grounds.  Defendants were able to introduce Diehl’s testimony that his experience with the case taught him that he wasn’t infringing as long as there were slight differences between packages.  The text of the opinion, from another circuit, “might well have confused the issues at trial or misled the jury.”

The judge likewise allowed photos of defendants’ Extreme Monster Energy shot contrasted with Hansen’s Monster energy drink, but did not allow the jury to be shown Hansen’s actual complaint (as FHE had asked for).  FHE argued that this was probative of defendants’ motive/intent.  Defendants argued that the photos weren’t relevant, but that was “clearly wrong,” for example as related to the descriptive fair use defense.  “The picture of the Monster can side-by-side with Defendants’ product shows that at the same time Defendants were conceiving 6 Hour Energy, they were also imitating the trade dress of another major player in the energy drink market. A jury could use this evidence to infer that Defendants’ choice of trade dress was not a mistake.”  Other evidentiary objections were also resolved against defendants.

On the contempt ruling, defendants appealed the portion relating to the modified products.  The district court didn’t find that the modified products themselves violated the Lanham Act, but instead used the “safe distance rule” to find that the modified products were confusingly similar to FHE’s trademark and trade dress.  This was not clear error/an abuse of discretion.  “Equity allows courts, faced with recalcitrant parties who repeatedly violate the law, to craft permanent injunctions which ‘proscribe activities that, standing alone, would have been unassailable.’”   In IP, this means the safe distance rule: barring known infringers from using marks whose use by noninfringers wouldn’t necessarily be actionable.

This is justified because once infringement has occurred, “the confusion sowed ‘is not magically remedied’ by de minimis fixes.”  Confusion lingers, justifying a requirement that the infringer move so far from the plaintiff’s mark that the public is on notice that they’re unrelated.  A court need not retry confusion for each small variation a defendant makes.  Nothing in the Lanham Act indicated a congressional intent to curb the traditional equitable powers of the courts, including the safe distance rule. That rule was “particularly apt in this case—where a serial infringer has tinkered with products to skirt a permanent injunction for commercial gain.”  The court also rejected the idea that the safe distance rule wasn’t appropriate for trade dress claims because they were too subjective.  (In a footnote, the court of appeals said that it wasn’t addressing whether it would’ve been an abuse of discretion to require a full likely confusion analysis from FHE—hinting perhaps that it would’ve been.)

Using the safe distance rule, the district court didn’t abuse its discretion in finding the modified products confusingly similar.  Another “glance” showed that the factual findings of similarity (“a black bottom with a yellow sunrise fading to red”) weren’t clearly erroneous.  Defendants argued that they were attempting to make their products look more like Nitro2Go Instant Energy Extra Strength, which the jury found not to infringe FHE’s mark, but the jury didn’t make any finding about that product’s trade dress.  The district court heard all the trial evidence and could visually compare the products; that was fine.

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