Failure to reevaluate at summary judgment leads to fee award in false advertising case

Design Resources, Inc. v. Leather Indus., 2016 WL 5477611, No. 10CV157 (M.D.N.C. Sept. 29, 2016)

After defendants Leather Industries (LIA) and Ashley Furniture prevailed in this false advertising case, they sought a fee award.  The Fourth Circuit applies the Octane Fitness standard in Lanham Act cases: exceptional cases deserving fee awards are those “ ‘that stand[ ] out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.’ ” More specifically, courts consider whether

(1) there is an unusual discrepancy in the merits of the positions taken by the parties, based on the non-prevailing party’s position as either frivolous or objectively unreasonable, (2) the non-prevailing party has litigated the case in an unreasonable manner; or (3) there is otherwise the need in particular circumstances to advance considerations of compensation and deterrence.

Something less than bad faith is required; “[r]elevant considerations include[ing] economic coercion, groundless arguments, and failure to cite controlling law.”

Here, DRI argued that its claims survived early motions and were only dismissed at summary judgment, and thus weren’t frivolous or objectively unreasonable.  LIA argued that DRI should have known that it couldn’t prevail with the evidence gathered during discovery.  Ashley pointed out that, on appeal, the Fourth Circuit described DRI’s literal falsity by necessary implication claim as “confounding,” requiring the court to accept that the ad meant the opposite of what it said.  DRI responded that it failed to prevail because it didn’t show misleadingness, but that didn’t make its claim groundless.  However, “the Lanham Act provides for an award of attorneys’ fees when the conduct of the litigation becomes unreasonable over time.” A plaintiff is thus “obligated to continually assess the strength of its claim throughout the litigation.”

The court found that the case began as an objectively reasonsble claim; DRI could have thought it was a target of Ashley’s ad against suppliers “using leather scraps that are misrepresented as leather.”  However, discovery failed to show literal falsity or misleadingness.  DRI’s own evidence didn’t show any consumer confusion, and that changed the context of the case.  Thus, fees should be awarded “as a result of Plaintiff’s failure to continually assess the substantive strength of its litigation position, particularly by the conclusion of discovery.”

Defendants also argued that DRI litigated the case in a needlessly aggressive way.  However, “conduct triggering relief must go beyond an aggressive litigation strategy.”  But deterrence goals supported a fee award: litigants should know not to pursue their claims “when the claim has fallen apart following discovery due to a lack of supporting evidence.”

Thus, the court awarded fees of $274,036 to Ashley and $250,676 to LIA on the Lanham Act claims, and commented that it would have reached the same result under North Carolina law (for the coordinate state law claims).