Monday, November 01, 2010

Broken contract leads to trademark and false advertising verdict as well

Irwin Industrial Tool Co. v. Worthington Cylinders Wisconsin, LLC, 2010 WL 3895698 (W.D.N.C.)

Previous discussion.

Irwin, doing business as BernzOmatic, sued Worthington Cylinders over an agreement for the supply of fuel cylinders. Along with breach of contract, BernzOmatic sued for violations of the Lanham Act, unfair and deceptive trade practices under state law, and tortious interference with prospective business relations. Worthington counterclaimed for fraudulentinducement and breach of contract. Summary judgment got rid of many of the claims/counterclaims and the case went to trial. The jury found that Worthington breached the Supply Agreement and awarded BernzOmatic nearly $1.3 million for the breach of contract arising from Worthington's unauthorized use of BernzOmatic's trade name, trademarks, and logos in violation of the agreement and nearly $11.7 million for other breaches of contract. The jury further found that Worthington engaged in willful trade dress infringement and false advertising, awarding one dollar. Basically, Worthington started competing with BernzOmatic, using a label highly similar to BernzOmatic’s label and telling customers that its cylinder was a replacement for BernzOmatic’s (given that Worthington had been making the same cylinders for BernzOmatic). For example, Worthington told some potential customers that "Worthington cylinders are replacing BernzOmatic labels as a rolling change" and directed them to "notice our cylinders next to the BernzOmatic label." The court upheld the verdict.

Things I noticed: the court held that the reference in the contract to “trade names, logos, and trademarks” covered unregistered as well as registered marks. BernzOmatic met its burden to show nonfunctionality of its overall trade dress, in part by submitting rules from the Compressed Gas Association stating that color should not be used to identify container content—an industry rule designed to prevent the color functionality found in other cases.

Worthington argued that BernzOmatic abandoned its trade dress packaging claim and proceeded only on a product configuration claim and was thus required to show secondary meaning. The court noted that BernzOmatic had maintained throughout trial that the cylinder itself, along with the label, was packaging trade dress, but did not resolve the issue as it found that BernzOmatic had shown secondary meaning, because evidence of intentional, direct copying establishes a prima facie case of secondary meaning. The court cited a 1986 case for this proposition, M. Kramer Mfg. Co. v. Andrews, 783 F.2d 421, 448 (4th Cir. 1986). But this is a shaky precedent for product design trade dress, because—after Wal-Mart and Traffix especially—one may have perfectly legitimate non-trademark reasons for copying a product design one thinks is functional; even if one is wrong about functionality, that doesn’t translate into an intent to capitalize on the plaintiff’s reputation. However, given that Worthington copied the label colors, font, and design in creating a “virtually indistinguishable” label, as well as the shape, size, and color of the cylinder, that point probably wouldn’t have changed the result here. Thus, the jury’s finding of willful infringement was upheld, along with a finding of false advertising through literal falsity.

The court also found that eBay did not change the presumption of irreparable harm stemming from a finding of likely confusion; the court stated that it was applying the traditional four-factor test (along with a presumption of irreparable harm). In addition, a presumption of irreparable harm may arise in false advertising cases, though some courts have limited this to comparative advertising cases and some have not. Here, BernzOmatic established literal (and willful) falsity, creating a presumption of irreparable harm.

However, the court denied a mandatory recall of all infringing cylinders remaining on retailers’ shelves; this would place a substantial burden on Worthington and its customers and there was evidence that it was unlikely to result in any recovery of infringing cylinders. Worthington sold comparatively few infringing cylinders, and, since 2008, when Worthington replaced the infringing cylinders with a new brand, its customers have turned over their inventories 7-15 times. The burden of a likely futile search of every store and distribution center was too much compared to BernzOmatic’s harm in the absence of a mandatory recall. Two BernzOmatic employees testified that they’d seen or purchased infringing cylinders “in stores” shortly before the February 2010 trial, but that didn’t suggest a present widespread availability of infringing cylinders some two years after Worthington ceased selling the infringing product to its retail customers.

In addition, the court did not require Worthington to issue a joint letter with BernzOmatic correcting its false advertising. Corrective advertising is typically reserved for cases involving a danger to the general public, which was not at issue here. In addition, corrective advertising is designed to correct public confusion, but BernzOmatic didn’t present actual confusion, relying instead on literal falsity, so the remedy was inappropriate. Moreover, the court found that corrective advertising would be of little benefit to BernzOmatic. “The false advertisements at issue ran a total of four times in one professional publication over two years ago. … BernzOmatic has issued its own corrective advertising in the form of multiple press releases and letters to retail customers describing the outcome of the lawsuit.” BernzOmatic failed to show harm remaining to remedy.

BernzOmatic did, however, get an injunction prohibiting Worthington from illegally infringing BernzOmatic's trade dress or engaging in false advertising about the source of BernzOmatic cylinders in the future.

Worthington also got prejudgment interest of over $1.8 million and an award of attorneys’ fees. Fees weren’t available on the contract claims, only under the federal and state law trademark/advertising claims, but there’d only been a $1 award on those claims. So was Worthington the prevailing party? Courts have so held when Lanham Act plaintiffs obtained injunctions and nominal damages, as here, so the court awarded fees: this was an “exceptional case” because of the jury’s finding of willfulness, thus allowing the court to award fees in its discretion.

The evidence supported a finding of bad faith. When Worthington wrongfully terminated the Supply Agreement and decided to sell hand torch cylinders directly to retailers, Worthington abandoned its existing packaging. The new cylinder looked virtually identical to BernzOmatic's existing cylinder, and the decision to do this was carried out over the objections of Worthington’s marketing manager and of an outside consultant on branding strategy. Worthington then marketed its product by showing retailers photos of the parties’ cylinders side-by-side on retail shelves, describing how the Worthington labels were "replacing" the nearly-identical BernzOmatic labels. Worthington’s national retail account manager described the difference as “subtle to the consumer.”

Worthington also created an ad campaign designed to trade on the BernzOmatic name. “The ads pictured a BernzOmatic cylinder with its label being torn away to reveal a Worthington-labeled cylinder underneath, with the black circles on the labels lining up in the same position…. With the BernzOmatic label displayed on the first panel of the ad, the ads falsely stated that Worthington--not BernzOmatic--had been the ‘name’ that retail stores and consumers had ‘trusted all along.’" But Worthington's marketing manager knew at the time that this wasn’t accurate, because BernzOmatic had manufactured its own cylinders until the 1980's.

The court also found that fees were available under the coordinate state law, which allowed a fee recovery where (1) the defendant willfully engaged in the unfair or deceptive trade practice and (2) the defendant made an unwarranted refusal to settle the matter. As to the second element, Worthington didn’t ever come close to meeting BernzOmatic’s settlement demand of $12.25 million, which it stuck to through several rounds of mediation, even when dismissal of its key counterclaims decreased its litigation leverage substantially. Yet the amounts of many categories of BernzOmatic’s damages, including $9.3 million in contractual overcharges as well as prejudgment interest, were largely undisputed, and Worthington’s best offer didn’t approach even half of those undisputed amounts. Thus, its refusal to resolve those claims was unwarranted. BernzOmatic received over $900,000 in fees.

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