Quickly confessed error saves defendants from disgorgement/willfulness finding

Fishman Transducers, Inc. v. Paul, --- F.3d ----, 2012 WL 2542879 (1^st Cir.)

Fishman, which makes acoustic equipment that amplifies the sound of individual musical instruments, sued HSN Interactive LLC, musician Stephen Paul and his company Daystar Productions for trademark infringement and false advertising.   A Fishman guitar “pickup” often includes “both a transducer and a preamplifier or equalizer, although the term can also refer to only the transducer. The Fishman transducer is a small device usually installed inside the guitar where it is not immediately visible.”  HSN sells products on its website and on the Home Shopping Network TV channel.  In 2006, it sold about 70,000 “Esteban” guitars that it inaccurately identified as containing Fishman pickups.  Esteban is Paul’s performance name; Paul and Daystar collaborated with HSN since 2001 to sell Esteban guitar packages, which usually include a guitar with a pickup as well as accessories such as a strap, case, amplifier and instructional videos.  Starting in 2006, “Paul lauded Fishman pickups, emphasized that the guitars included them and boasted that a Fishman pickup alone would sell for as much as the full HSN package,” while the HSN website listed a Fishman pickup as a specification of the guitars.

Several months after the TV ads began, Fishman demanded that HSN and Daystar stop making such claims; HSN complied.  Fishman also sued.  The district court denied Fishman’s claim for trademark counterfeiting and ruled that the parties weren’t in direct competition.  It also ruled key evidence on damages inadmissible. 

During trial, the defendants didn’t seriously deny infringement/false advertising, but focused on willfulness.  The guitars at issue had been made in China by Force Limited, which initially used Belcat pickups but in 2006 started using another Belcat pickup that Belcat told Force was a Fishman or “Fishman-type.”  Force then told HSN that the guitars had Fishman pickups and HSN passed that information on to Paul.  Though there was some question about whether the pickups used Fishman technology—Fishman both competed with and sold to Belcat—defendants ultimately conceded that they used the mark without authorization.  The jury found infringement/false advertising, but found that neither was willful.  The judge, relying on that finding and on balancing the equities, declined to order disgorgement of profits.

Fishman appealed.  Though the relevant damages provision doesn’t speak of willfulness, courts have used the concept in determining the remedies for ordinary infringement.  Damages can be awarded without any special showing of scienter or equitable factors, but the cases usually require willfulness in order to multiply damages or recover defendant’s profits.  Because of the evidentiary rulings, Fishman needed disgorgement of profits.

Fishman argued that the jury’s finding was cast into doubt by errors in the jury instructions and in the court’s answers to the jury’s questions during deliberations.  The court of appeals found that any errors were harmless.

Willfulness in civil cases “requires a conscious awareness of wrongdoing by the defendant or at least conduct deemed ‘objectively reckless’ measured against standards of reasonable behavior.”  The district court’s instructions were that the jury should consider “whether the defendants knew or should have known about the mark and that it belonged to the plaintiff; second, that the defendants knew or should have known that their own conduct was infringing the plaintiff's mark; and third, and importantly, the defendants intentionally sold products in connection with the infringing mark with the knowledge that it infringed.  An act that is done willfully is done voluntarily and intentionally as opposed to by mistake or accident.”  The court of appeals agreed that this instruction failed to make clear that objective recklessness would suffice.

The instructions also required proof of willfulness by clear and convincing evidence.  The modern trend is to require only a preponderance absent a statutory instruction or constitutional issue, so the court of appeals followed that trend and held that the instructions also erred in that regard; preponderance is the standard from now on.

Finally, Fishman argued that the district judge responded wrongly to the jury’s question “whether a failure to act can constitute willfulness”; “to this the judge gave the jury the reporter's transcript of the oral instruction on willfulness (which contained a confusing mis-transcription to which neither side objected after review).”  Fishman argued that the answer should have been “yes,” but the judge could rightly have regarded this as oversimplified.  The second question was, “Is HSN responsible for their own published document on the worldwide web when they are aware of its incorrect information?”  The judge explained that HSN was responsible for the content of its own website, but not for something it didn’t control, for willfulness purposes.  “This was reasonable enough given evidence that Fishman concedes that HSN sent warning letters to third party sites later selling the Esteban guitars with the erroneous claims to Fishman products.”

Ultimately, though the jury instructions had the wrong burden of proof and were potentially confusing on recklessness, this was harmless because the evidence was insufficient to find willfulness even under the correct standards.  Force, the actual maker, orally represented that it had a Fishman-type pickup and its product specification sheet said that the guitars had Fishman pickups.  HSN relayed this to Paul.  “Nothing indicates that defendants were any more than negligent in passing on that representation.”  There was no evidence of actual knowledge or recklessness in failing to learn the truth, and HSN promptly corrected the error when informed of it.

The worst fact was that Paul said on air that he’d personally selected Fishman’s products for the guitars; he admitted this wasn’t true.  Plus, he praised the Fishman pickups in far more lofty terms than Force did, e.g., saying they were “top of the line.”  But that didn’t suggest he knew, or was reckless in failing to find out, that HSN was mistaken or that Force was lying when they said the pickups were Fishman pickups.  (I wonder how Paul would do under the FTC endorsement standard.)

The court then turned to the damage award.  Regular damages can be awarded without willfulness, but such awards are comparatively rare in trademark cases “primarily, it appears, because of the difficulty of proving them.”  Proving causation and amount are “very difficult” in the absence of direct competition.  Sales diversion is a good theory, but Fishman doesn’t sell guitars to consumers; it sells pickups to other guitar makers who compete with Esteban, or to consumers directly.  Thus, Fishman would need to show that the use of the Fishman name diverted sales from sellers who purchased competing guitars with Fishman components, reducing Fishman’s sales.  But the district judge rejected Fishman’s expert on this point, since he didn’t provide a proper range of damages or data from which a jury could make an intelligent damages estimate.  The judge also excluded the damages testimony of Fishman’s founder.  The court of appeals upheld these judgment calls; they weren’t abuses of discretion.  Even together, the proffered testimony wouldn’t allow a reasonable jury to assess damages.  “Damage experts customarily provide the jury some means, even if the premises and line of extrapolation are open to debate, to make a reasonable estimate. That task, quite difficult where the products are not substitutes, was not done in this instance.”  The expert would have testified that Fishman’s projected revenues fell short by nearly $1.5 million, but he didn’t address the possibility that this was ordinary year-to-year fluctuation, or offer any information about the reasons that Fishman’s customers reported declining retail sales.  Nor did he explain how Esteban’s sales were connected to the decline, or even provide any basis for estimating lost profits rather than revenues.  Possible facts that would have filled the gap but that weren’t offered include: “direct testimony from customers, market research surveys of guitar purchasers as to their reasons for purchases, or sales data for Fishman's competitors that might show that Fishman's sales decline was unique or unusual rather than part of broader industry wide conditions.  These are often difficult, time-consuming and expensive efforts; but without them, [the expert’s] report was merely a basis for jury speculation and his testimony was properly excluded.”

Fishman then argued that the court erred in finding the parties not to be in direct competition, such that defendant’s sales “almost automatically” mean lost sales for plaintiff, “so the issue of causation almost vanishes from the case.”  (The difference between trademark and false advertising rears its head again!)  Also, if the parties compete, “defendant's profits may be presumptively similar to what plaintiff would have earned on the sale.”  Plus, if profits are the measure of recovery, plaintiff must only prove defendant’s sales and defendant bears the burden of proving deductions.  “So, if direct competition had been established, the evidence tendered of Esteban's revenues might have been sufficient.”  But direct competition requires a “substantial degree of equivalence and substitutability, and a pickup is not a substitute for a guitar but merely a potential ingredient, and is even less of a substitute for a package that included additional materials. So while HSN's violations could damage Fishman sales, no plausible one-to-one equivalent exists here as the number of sales diverted or the profits transferred.”

The court also properly rejected the state-law claim because the Massachusetts statutes requires actions that occur primarily and substantially within the state, but the HSN ads weren’t particularly targeted to Massachusetts customers, and no more than a “small portion” of HSN's guitar sales occurred within Massachusetts.  The fact that Fishman is based in the state was relevant, but the direct impact of the deception was on customers all over the country.  When wrongdoing isn’t focused on the state, the statute isn’t triggered.