Bringing a false advertising claim with unclean hands leads to fee award

Certified Nutraceuticals, Inc. v. Avicenna Nutraceutical, LLC, 2018 WL 5840042, No. 16-cv-02810-BEN-BGS (S.D. Cal. Nov. 7, 2018)

The court awarded roughly $170,000 in fees in this Lanham Act false advertising case because the plaintiff engaged in the same conduct (falsely claiming that its product was patented) as its competitor in the market for collagen products, and still sued the competitor. The court previously granted summary judgment based on unclean hands; the briefing “brought to light filings by Certified that seemingly misrepresented the status” of one patent, leading the court to impose sanctions against Certified, its CEO, and its counsel.  (Basically, when Avicenna showed that Certified’s patent hadn’t issued before it advertised its “patented” status, Certified claimed that it was referring to another patent, but years before it had been enjoined from exercising that patent.)

Under Octane Fitness the exceptionality inquiry for fees requires a court to consider “factors, including frivolousness, motivation, objective reasonableness (both in the factual and legal components of the case) and the need in particular circumstances to advance considerations of compensation and deterrence.”

Frivolousness/unreasonability: “prior to filing its lawsuit, Certified knew or should have known that its unclean hands barred its Lanham Act claim and that it did not suffer any injury, barring its two state law claims.”  As for the California state law claims, Certified could only identify two customers it “lost” as a result of Avicenna’s statements, and those two customers’ decisions weren’t based on Avicenna’s false statements but on the customers’ beliefs in Avicenna’s product’s superior quality and consistency.  Even under more stringent older standards, there was no reasonable basis for bringing these claims.  Nor would the court refuse to award fees because Certified got Avicenna to stop making patent-related claims, in that Avicenna’s misrepresentation of its product as “patented” happened only twice, and Avicenna corrected both instances prior to Certified filing its lawsuit.

Objective reasonableness of litigation: the sanctions order provided the court’s basis for finding that litigation was conducted in an objectively unreasonable manner. Moreover, Certified’s decision to file a similar case in the district while the present case was pending additionally demonstrated objective unreasonability; that case was voluntarily dismissed after a motion to dismiss indicated that Certified didn’t own the second patent.

Deterrence: Certified has a history of litigation, including the lawsuit just mentioned (which targeted nearly a dozen competitors) and a case in which  the California Court of Appeal affirmed a sanctions award of $34,000 against Certified’s principal for advancing frivolous arguments in a lawsuit against another competitor. Certified also filed a second lawsuit alleging similar false advertising claims against Avicenna, but had yet to serve Avicenna with the lawsuit.  The court found that this conduct was relevant both for the Octane Fitness totality of the circumstances test and for the deterrence factor. Also, Certified failed to comply with the sanctions order by filing a notice that the sanctions were paid within three days of payment, which had been part of the order.  “To say the least, Certified’s brazen litigation tactics and utter disregard for this Court’s own order suggest a lack of respect for the rule of law that should be deterred.”

Avicenna could only recover for fees related to its work on the Lanham Act claim, not the two state law claims, but the claims here were “so inextricably intertwined that even an estimated adjustment [for the state law claims] would be meaningless.” They relied on the same factual allegations and had many of the same elements.