Tuesday, October 11, 2011

Defendant hits the trifecta, loses copyright, Lanham Act, and design patent claims

Victor Stanley, Inc. v. Creative Pipe, Inc., 2011 WL 4596043 (D. Md.)

Extremely bad behavior drove the court’s (unnecessary) misinterpretation of Dastar.

Plaintiff VSI makes site furnishings such as benches, planters, bike racks, etc. It produces them in America and invests heavily in technology. This investment includes production of technical drawings, including CAD drawings, used in manufacture and sales. The court found that the drawings have substantial economic value. VSI created an online product library containing its CAD drawings, specifications, and product images, accessible by customers, architects, and designers, for specific use in project design and purchasing activities such as presentations and bid documents.

Mark Pappas owns Creative Pipe, Inc., based in California. He tried to design site furnishings in the US but sold only about two dozen. He attempted to get a foothold in the market by falsely claiming to represent VSI. Defendants also copied VSI’s products and sold them under the trade name FUVISTA, which stands for "F--- You Victor Stanley." In the course of the ensuing litigation, defendants engaged in massive spoliation of evidence. This led to a default judgment of liability on the copyright infringement count, as well as an award of attorneys’ fees and costs.

The case proceeded to trial on damages for copyright infringement and on VSI’s claims for unfair competition, false advertising, and patent infringement.

Given defendants’ behavior, the court was not kind on damages. Pappas obtained access to the VSI library by falsely identifying himself and falsely representing his purpose. He copied the drawings and substituted CPI’s name on the drawings for VSI’s. (Why no CMI removal claim?) He then made additional copies and used them in the course of CPI’s business, including them with bids submitted for the sale of Fuvista products and sending them to contractors, largely in China, to produce the products.

Since the drawings weren’t registered before the infringement began, VSI sought damages based on the infringer’s profits. The drawings must be distinguished from the objects they depict, as to which there’s no copyright protection, and that might have mattered in a different case. No one would infringe by reverse engineering a VSI product, though the court commented that there could be “debatable issues” if defendants used, without copying, a VSI drawing to manufacture products. I can’t see what the debatable issues would be, given that the court acknowledged that the products themselves would not be infringing.

Here, defendants downloaded and transmitted the drawings, caused contractors to create derivative works, transmitted the infringing derivative works, made copies of them in bids, and caused foreign contractors to copy the infringing works. (It’s not clear that there’s US infringement in that last one, but again it doesn’t really matter here.)

In recovering profits, the copyright owner must present only proof of the infringer’s gross revenue, and the infringer is required to prove deductible expenses and elements of profit attributable to factors other than the copyrighted work. There’s an obvious baseline question here: should we assume that the sales of the products would have occurred anyway via reverse engineering, meaning that profits from sales of the products themselves are not attributable to the copying, or should we look to what the profits would have been if they didn’t put the products on the market (since the copying was a but-for cause of the sales)?

The court went with the latter: “Profits attributable to the infringement can include profits derived from the sale of products if those sales are attributable to the copyright infringement.” The court found that defendants failed to meet their burden to show that sales of their “VSI-like products” were attributable to something other than copyright infringement. The court didn’t explicitly say that defendants failed to show that they would have reverse engineered if they hadn’t copied, but I think that’s both plausible in this case and the only way to make this analysis work. So nearly $2.4 million in revenue was reasonably related to infringement (and it was likely that the amount was substantially more but unascertainable due to defendants’ spoliation).

The infringer has the burden of showing deductions, and courts are especially dubious when infringement is willful, which it was here. “Pappas knew that the VSI product library contained original works that were owned by VSI, but he deliberately copied them using a false identity, removed the VSI identifiers and replaced them with CPI identifiers. Then he caused the evidence of these actions to be destroyed.” Plaintiff’s expert credibly opined that gross profit should be determined by reducing gross revenue by 51.28% to take into account cost of goods sold and net freight, producing a bit over $1.15 million in gross profit. The court denied defendants’ claimed deductions and also awarded prejudgment interest at 6%, increasing the award by over $200,000.

VSI also brought a state law unfair competition claim against defendants. Defendants argued copyright preemption. But there was an extra element here: deception, as in passing off, so there was no preemption. The court found that VSI proved misappropriation of its IP and goodwill, including “copying and using the drawings to solicit business and manufacture competing products, falsely representing VSI's drawings as CPI's, falsely representing CPI as an equal to VSI in the marketplace, and mimicking VSI's advertising, style, and marketing themes.” VSI also proved harm. In one project, the parties were the only two directly competing bidders, and CPI won the bid “using an altered drawing derived from a copyright protected original drawing that was downloaded without authority from VSI's product library.” Moreover, CPI’s bids for VSI-like products were based on the deceptive claim that the products were made "in house" in the United States, forcing VSI to reduce its prices.

Defendants “engaged in a massive degree of unfair competition directly aimed at VSI.” Aside from the copyright infringement, defendants created the false impression that CPI “was comparable to VSI as an American manufacturer of quality site furnishings, with 50 employees, a unique powder coating process and facilities, and made all its goods ‘in house.’ In fact, CPI had four employees, no manufacturing facility, had products manufactured in China, and removed the country of origin labels.” This unfair competition increased its profits.

The court awarded VSI defendants’ profits attributable to unfair competition—the sale of VSI-like products. Thus the court awarded the same amount as for the copyright infringement claims. Punitive damages are available under Maryland law only for actual malice. Actual malice must be proven by clear and convincing evidence. This standard was satisfied here, making it one of the rare cases in which a state-law claim is actually worth something over and above a Lanham Act claim. Defendants’ acts were deliberate, with wrongful motives and ill will specifically directed at VSI, evidence of which includes choosing and publicizing the meaning of the name Fuvista, and “ranting and raving” about VSI.

The amount of punitive damages shouldn’t be disproportionate to the defendant’s ability to pay. Under the circumstances, a $500,000 award was appropriate, taking into account the award of enhanced damages on the Lanham Act claim (coming up next). If that enhanced damages award were to be reversed on appeal, the court indicated that it would increase the punitive damages award by the same amount.

There was no legal authority under Maryland law to award attorneys’ fees on this claim.

For the Lanham Act claims, VSI first alleged reverse passing off of its drawings as originating with CPI. This is clearly barred by Dastar, which focuses on the origin of the tangible copies at issue. The tangible copies here (even if only tangible in the sense of being stored in a computer’s memory) are those made by defendants. That’s why they infringed VSI’s copyrights. The court even points out, above, that if defendants had used VSI’s own copies to produce the products this would have been a very different case.

The court, however, bollixed this. “VSI is the source of the technical drawings. The evidence showed, in numerous instances, that Defendants downloaded the drawings [ed. note: that is, copied the drawings, creating their own infringing copies] from the VSI product library, removed the VSI source information and product name from the [copies of the] drawings, replaced the source information [on the copies] with representations that CPI had created the drawings, and replaced the VSI product name [on the copies] with a CPI product name.” Indeed, as described, it seems certain that there were multiple generations of copies before defendants’ copies found their way to someone who might be confused by this.

The court stated that the Fourth Circuit has found reverse passing off liability in “similar circumstances,” which is not true. Universal Furniture International v. Collezione Europa USA, 618 F.3d 417 (4th Cir. 2010), found liability for both copyright infringement and reverse passing off where the defendant removed the competitor's indicia of ownership from the products and displayed them as defendant's own, even though it did not actually sell the displayed products but fulfilled sales with its own manufactured products. Removing the indicia from the physical products displayed to induce sales was reverse passing off (“Collezione had simply removed Universal stickers from some pieces. In some instances, [Universal’s principal] noticed stickers (which he had designed) bearing the name of Universal's manufacturer, Lacquercraft.”). But the copyright infringement stemmed from different acts, in that case reproducing infringing articles—the furniture designs themselves were copyrightable, unlike the situation here.

Universal is thus inapposite. Saying that “VSI's technical drawings were presented to consumers as CPI drawings for CPI products, and consumers were likely to be misled into believing that CPI was the source of the drawings” is to make the mistake the Court rejected in Dastar--treating the source of the expression in the physical object as “origin” for purposes of §43(a)(1)(A). CPI was the source of the particular copies of the drawings it presented to consumers; those copies were therefore infringing copies.

The court then found that consumers were likely to be confused into believing that CPI was “a ‘genuine’ designer and producer of VSI-like products in an ‘in-house’ American production facility. A truthful presentation of the drawing submitted with a CPI bid as a drawing that originated with VSI would have been less effective, if it would have been accepted at all.” This conclusion highlights that the false designation claim is completely unnecessary: as the Court indicated in Dastar, in some circumstances false advertising claims against copying will be viable. The court isn’t even targeting the copying here—it’s the context, including the claims to design in-house, that makes the copying deceptive.

Anyway, the court concluded that defendants obtained customers who otherwise could have bought from VSI “and thus deprived VSI of the benefit of the attendant goodwill and enhanced reputation as the creator of the drawings,” and also caused the lost sale in the instance when the parties had competing bids for the same job.

Disgorgement of profits under the Lanham Act requires consideration of (1) the defendant’s intent to confuse or deceive; (2) whether sales were diverted; (3) the adequacy of other remedies; (4) any unreasonable delay by the plaintiff in asserting its rights; (5) the public interest in making the misconduct unprofitable; and (6) whether it is a case of passing off. So, obviously, disgorgement was justified, in the same amount as above—the profits from copyright infringement plus prejudgment interest.

In addition, the Lanham Act allows an award of up to three times the amount found as actual damages, as long as it’s for the purpose of compensation instead of penalty. Enhancement may be based on willfulness as long as it doesn’t become a penalty (and yet the court’s perfectly happy to recategorize these enhanced damages as punitive damages). Enhancement can help when “imprecise damage calculations fail to do justice, especially where the imprecision results from the defendants' conduct.” This was the case here: given the willful infringement and defendants’ spoliation of evidence, the court awarded enhanced damages of one-half of actual damages. If the punitive damages award above were to be reversed on appeal, the court would add half a million dollars to the enhanced actual damages under the Lanham Act.

This was also an exceptional case entitling VSI to attorneys’ fees.

On to the actually valid false advertising claim: CPI made a number of misrepresentations: (1) It claimed to offer a safety bollard capable of stopping a 15,000 pound vehicle traveling at 50 miles per hour that had been independently crash-tested and found to achieve a Department of State "K-12" rating; (2) it claimed that the Nebelli and Necati benches were ADA-compliant, although there are no ADA requirements, either mandatory or voluntary, that apply to outdoor benches; (3) defendants claimed that CPI products were made by CPI in two United States manufacturing facilities; (4) CPI claimed that all of its work was done in house, and that it had its own state-of-the-art in-house powder coating facility; (5) CPI claimed it developed a method of manufacturing its site furnishings that resulted in unsurpassed strength and integrity.

The court found that one alleged falsehood, that CPI was developing “progressive and functional new designs,” was puffery. Even though its products were bad, past failures weren’t enough to make this claim false: “Reasonable potential purchasers are unlikely to rely on the statement as one of fact rather than opinion and are capable of determining whether the designs they see are progressive or functional despite what the seller boasts. There is insufficient evidence to find this general and subjective statement anything more than non-actionable puffery.” Interestingly, and I think correctly, the framing of this statement suggests that extrinsic evidence could have changed the court’s conclusion in appropriate circumstances; sometimes we need to know more about the relevant consumers before we can be sure what they’d think was a factual claim.

However, “unsurpassed strength and integrity” was capable of being measured and thus not puffery. CPI argued that it made a bald claim, not a “tests prove” claim, and thus VSI was required to prove falsity. Fortunately for VSI (though not for CPI’s clients), VSI introduced testimony that defendants’ products were inferior. A VSI vice president with responsibility for product design and manufacturing testified, for example, that trash receptacle doors must open thousands of times for removal of trash, and CPI used welded hinges with pins that bend over a fairly short period of time causing the doors to go out of alignment. Also, VSI relied on emails from Pappas to a subcontractor describing products rejected by customers, saying they "never should have passed your quality control inspection" and that the problems identified "call into question the quality of all the products you are making for me." There was no rebuttal evidence, and thus the court found the claims about strength and integrity false.

All the actionable statements were material and likely to deceive consumers. For example, VSI received calls from landscape architects “asking if VSI products were ADA-compliant, because they did not want to have to replace products to meet the requirement (even though there is no such standard).” This was an indicator of materiality, as was the importance of meeting a Homeland Security standard for “security bollards that were being placed outside buildings to prevent explosive-laden trucks from crashing into buildings. These are not claims that buyers take lightly.” Also, VSI submitted evidence that some buyers require (not just prefer) American-made products. “Made in America” was material even if it’s just a preference. “The very actions of Pappas to ensure that the ‘Made in China’ labels were removed from CPI's products provide eloquent testimony of the materiality of the misrepresentation as to the origin of the goods.”

Injury: here, the court found that it would be difficult to show that CPI’s sales would generally have gone to VSI, because there are a number of competitors in the market, but it was still likely that some sales would have gone to VSI as a genuine American manufacturer when CPI was awarded bids on the basis of its false origin claims. Also, there was harm to everyone in the market, including VSI, in having respond to “China prices.” Moreover, VSI provided testimony of likely harm to its reputation due to the poor quality of the CPI "knock-offs" that may be mistaken for VSI products. (Whoa! That’s not the same claim at all, and would be a §43(a)(1)(A) claim.) Anyway, VSI had been harmed by sales diversion and lessened goodwill.

VSI sought only injunctive relief, not damages, on its false advertising claims. (Note that the damages to VSI here are likely to be different from the damages based on the copying/knock-offs, though disgorgement of profits would still seem available.) VSI demonstrated irreparable injury to its reputation and goodwill, and the other factors also favored injunctive relief. VSI also got attorneys’ fees on the false advertising claim.
VSI patent and Nebelli bench
But wait, there’s more: design patent infringement. This is determined using the ordinary observer test. “[I]f an ordinary observer, familiar with prior art designs, giving the degree of attention normally given by a purchaser, would be deceived into believing that the Defendants' benches are the same as VSI's design, there is infringement.” Minor differences don’t prevent an infringement finding; the focus is on the overall design impression.

The court, considering the relevant prior art cited to it, found that the Nebelli bench infringed VSI’s patent. The prior art, the Chipman patent, has front and back legs oriented differently from those of VSI’s patented bench, and its seat projects beyond the end of the arm rest, creating a different overal impression. parties' benches and prior art benchThe minor differences in the Nebelli bench end frame and the patented bench were not enough to allow an ordinary observer familiar with the prior art to easily distinguish them.
VSI and Necati benches
However, the Necati bench was not substantially the same as the patented bench. VSI argued that the additions were trivial, but the court found that an ordinary purchaser using a reasonable degree of care would distinguish between them without much effort: “The overall effect of the design with the oval below the seat, while certainly taking advantage of the graceful curves designed into the Patent design, creates a different and distinctive look that would not confuse the ordinary observer. Each of the individual ornamental elements may be almost identical in isolation, but the overall impression is aesthetically different.” Infringement exists only if the ordinary observer would take one product to be the other, and a site furnishings purchaser was not likely to be deceived into buying the Necati bench thinking it to be VSI’s bench. Indeed, Pappas was awarded a design patent for the Necati bench, indicating that the examiner reached the same conclusion.

VSI could recover defendants’ profits from the infringement, which the court set at a bit over $35,000, plus prejudgment interest. Like the state-law unfair competition award and the Lanham Act palming off award, this award was included within, and therefore duplicative of, the profits award for copyright infringement. VSI also got an injunction against further infringement of the Nebelli bench. VSI doesn’t license its designs; it sells the resulting products and relies on designs to distinguish itself as a leader.

VSI was also entitled to attorneys’ fees; for patent infringement, the standard is (1) clear and convincing evidence that the case is exceptional, and (2) a judicial determination that a fee award is appropriate. Litigation misconduct alone can make a case exceptional, as it was here. “Defendants' obstructive behavior delayed this litigation, drove up the costs for VSI, and needlessly taxed the Court's resources.” Various factors go into an appropriateness determination, including deliberate infringement; most of them weighed in favor of a fee award, such as “deliberate use of a false identity to download and then hand trace the VSI design.” On the other hand, the case was close enough to require an actual trial, and the court held one bench noninfringing. On balance, the court decided to award fees on the design patent claim.

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