Monday, November 29, 2010

Fees available in Lanham Act cases for abuse of process

Nightingale Home Healthcare, Inc. v. Anodyne Therapy, LLC, --- F.3d ----, 2010 WL 4721581 (7th Cir.)

Always interesting to wake up to a Posner Lanham Act opinion. Anodyne successfully defended against Nightingale’s lawsuit and then got an attorneys’ fees award of nearly $73,000, based on 15 U.S.C. § 1117(a), which allows such awards in in "exceptional cases."

Anodyne won summary judgment on the Lanham Act claim early in the litigation. Nightingale argued that the case was not "exceptional." Four circuits apply different tests depending on whether the plaintiff or defendant prevailed. In the Fourth and D.C. Circuits, a prevailing plaintiff is entitled to fees if the infringement was willful or in bad faith, while a prevailing defendant can show something less than bad faith, such as "economic coercion, groundless arguments, and failure to cite controlling law." In the Tenth Circuit, a prevailing plaintiff must show bad faith, whereas a prevailing defendant must show (1) lack of foundation for the suit, (2) bad faith in suing, (3) unusually vexatious and oppressive prosecution, or (4) perhaps other reasons, which led Judge Posner to call this “hardly … a test.” In the Sixth, a prevailing plaintiff must show that the infringement was "malicious, fraudulent, willful, or deliberate," whereas a defendant must show that the plaintiff's suit was "oppressive," quoting the Tenth Circuit’s list and adding that "a suit is oppressive if it lacked merit, had elements of an abuse of process claim, and plaintiff's conduct unreasonably increased the cost of defending against the suit."

By contrast, the Second, Fifth, and Eleventh circuits ask all prevailing parties to prove that the opponent litigated in bad faith or (for the defendant) that the suit was a fraud; the Fifth adds consideration of the merits and substance of the lawsuit. The First, Third, Eighth, and Ninth Circuits, like the Second and the Eleventh, don’t distinguish between parties, but they don’t require a showing of bad faith. They speak variously of willfulness short of bad faith or fraud (First), culpable conduct on the part of the losing parties (Third), or bad faith or other exceptional circumstances (Ninth, though with a later case saying that “exceptional” means that "the defendant acted maliciously, fraudulently, deliberately, or willfully" or that the plaintiff's case was "groundless, unreasonable, vexatious, or pursued in bad faith”). The Eighth just says bad faith isn’t a prerequisite.

The Seventh Circuit had previously said that the test was whether the conduct of the party from which the payment of attorneys' fees was sought had been "oppressive," and that "whether the plaintiff's suit was oppressive" turned on whether the suit "was something that might be described not just as a losing suit but as a suit that had elements of an abuse of process, whether or not it had all the elements of the tort." But for a prevailing defendant, “the focus would be on whether the defendant had lacked a solid justification for the defense or had put the plaintiff to an unreasonable expense in suing." Later cases stated that the standard for a prevailing defendant required conduct that "lacked merit, had elements of an abuse of process claim, and plaintiff's conduct in the litigation unreasonably increased the cost of defending against the suit”; that oppressive conduct by defendants included not only willful infringement of the plaintiff's trademark but also "vexatious litigation conduct"; and that a finding that a suit was oppressive could be "based solely on the weakness" of the plaintiff's claims or the plaintiff's "vexatious litigation conduct." Upshot: "vexatious litigation conduct" by any losing party can justify a fee award.

Judge Posner concluded that “the heavy caseloads and large accumulations of precedent in each circuit induce courts of appeals to rely on their own ‘circuit law,’ as if each circuit were a separate jurisdiction rather than all being part of a single national judiciary enforcing a uniform body of federal law. But whether the difference in standards generates actual differences in result is unclear because the opinions avoid commitment by using vague words and explicit escape clauses …. To decide whether the standards differ more than semantically would require a close study of the facts of each case.”

Starting from first principles: why does the Lanham Act make a narrow exception to the American rule against cost-shifting? The legislative history speaks of the public interest in the integrity of marks and the need for a complete remedy in cases where the conduct is malicious, fraudulent, deliberate, and willful. Plus, the patent and copyright statutes allow fee awards, and “trademark law protects an analogous form of intellectual property.”

More practically, businesses may use Lanham Act suits for strategic purposes, to obtain competitive advantages regardless of case outcomes. Almost all cases under the Act are between competitors. (This is not true of trademark infringement cases; Barton Beebe’s results in noncounterfeiting/licensing cases show that 30% involve a court finding that the proximity of the goods/services factor favors the plaintiff, and some of that 70% didn’t involve actual competitors. Most trademark cases may be between competitors, but I’d hardly call that “almost all.” I don’t think this is fatal to Posner’s point, not just because direct competitors are the majority but also because there are reasons I’d call “anticompetitive” in a general sense for trademark owners to litigate against non-direct competitors.)

The Seventh Circuit has expressed concern about anticompetitive TM litigation before. See, e.g., Peaceable Planet, Inc. v. Ty, Inc., 362 F.3d 986, 987 (7th Cir. 2004); Mead Johnson & Co. v. Abbott Laboratories, 201 F.3d 883, 888 (7th Cir. 2000) ("Trademark suits, like much other commercial litigation, often are characterized by firms' desire to heap costs on their rivals, imposing marketplace losses out of proportion to the legal merits."). (This is why I’ve long waited for a general hostility to claims against businesses occasioned by a particular variety of conservatism in the federal courts to turn into suspicion not just of false advertising claims, but also of TM claims, though the “property” idea has usually proved fairly resistant to this move.) Anticompetitive behavior can even occur on the defense side: “a large firm sued for trademark infringement by a small one might mount a scorched-earth defense to a meritorious claim in the hope of imposing prohibitive litigation costs on the plaintiff.”

Anticompetitive lawsuits are the ones “rightly adjudged ‘exceptional’; for in a battle of equals each contestant can bear his own litigation costs without impairing competition.” On the plaintiff’s side, “the concept of abuse of process provides a helpful characterization of his conduct.” The key is not whether the suit itself is baseless, but whether the plaintiff is using the litigation process for an improper purpose, regardless of whether the claim is colorable. Similarly, “[i]f a defendant's trademark infringement or false advertising is blatant, his insistence on mounting a costly defense is the same misconduct as a plaintiff's bringing a case (frivolous or not) not in order to obtain a favorable judgment but instead to burden the defendant with costs likely to drive it out of the market. Predatory initiation of suit is mirrored in predatory resistance to valid claims.” Thus, a case is exceptional “if the losing party was the plaintiff and was guilty of abuse of process in suing, or if the losing party was the defendant and had no defense yet persisted in the trademark infringement or false advertising for which he was being sued, in order to impose costs on his opponent.”

Judge Posner reasoned that this test accounts for most of the case outcomes, except for those that make it easier for prevailing defendants to recover fees than prevailing plaintiffs. The usual rule, “notably in civil rights cases, is the reverse: a prevailing plaintiff is presumptively entitled to an award of attorneys' fees, while a prevailing defendant is entitled to such an award only if the plaintiff's suit was frivolous.” But those are generally individual-plaintiff and corporate-defendant cases, meaning asymmetric resources. By contrast, “[p]laintiffs and defendants in Lanham Act cases usually are symmetrically situated: they are businesses. … Disparity in size will often be relevant in evaluating the legitimacy of the suit or defense, but it is as likely to favor the defendant as the plaintiff.”

Judge Posner then addressed a puzzle: One of the inherent powers of a federal court is to assess attorneys’ fees when a party “has acted in bad faith, vexatiously, wantonly, or for oppressive reasons.” So why would Congress bother to include a fee-shifting provision? Because in Fleischmann Distilling Corp. v. Maier Brewing Co., 386 U.S. 714, 719-20 (1967), the Supreme Court rejected the proposition that courts could award fees in cases under the Lanham Act without explicit statutory authorization, given the other intricate remedies prescribed by the law. Thus, Congress 8 years later enacted a fee-shifting provision to provide that authority.

On procedure: abuse of process is a tort. But a fee proceeding shouldn’t be a full tort lawsuit. “[A]n elaborate inquiry into the state of mind of the party from whom reimbursement of attorneys' fees is sought should be avoided. It should be enough to justify the award if the party seeking it can show that his opponent's claim or defense was objectively unreasonable--was a claim or defense that a rational litigant would pursue only because it would impose disproportionate costs on his opponent--in other words only because it was extortionate in character if not necessarily in provable intention.”

Here, there was more. Nightingale, a provider of home healthcare services, bought infrared lamps from Anodyne. It claimed that Anodyne falsely represented that the lamp had been approved by the FDA for treatment of peripheral neuropathy. Instead, the device was FDA-approved, and was intended for the treatment of peripheral neuropathy though not approved for that indication; it (like anything else) could be used off-label in a healthcare provider’s discretion. Nightingale told its patients that the lamp was intended for treating peripheral neuropathy, but not that it had been approved for treating the condition, and when it switched lamp providers on price grounds it continued to make the same claims. Thus, Posner concluded:
Not only had the Lanham Act claim no possible merit (which would not by itself demonstrate an abuse of process), but the district judge found that Nightingale had made the claim in an attempt to coerce a price reduction from Anodyne. Nightingale would have been content to continue buying Anodyne's lamps, as indicated by its purchasing lamps that were subject to the same limited FDA approval and advertising them the same way. The fact that the FDA had not approved Anodyne's lamps for treatment of peripheral neuropathy was thus of no consequence, for neither had it approved for that purpose the lamps that Nightingale bought to replace Anodyne's. To bring a frivolous claim in order to obtain an advantage unrelated to obtaining a favorable judgment is to commit an abuse of process.

Fee award upheld (and noted to include the costs of appeal).

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