Fifth Circuit upholds denial of disgorgement despite willfulness & some sales diversion

Retractable Technologies, Incorporated v. Becton Dickinson & Co., --- F.3d ----, 2019 WL 1346002, No. 17-40960 (5th Cir. Mar. 26, 2019)

“A jury found that Becton Dickinson & Co. falsely advertised its products for years. The district court determined that neither disgorgement of profits nor further injunctive relief would be equitable under the circumstances. It did not abuse its discretion.”

Retractable syringes are designed to reduce risk of accidental needlesticks; they compete with other varieties of safety syringes and with “conventional” syringes. They provide significant protection against accidents but their needles prevent use for some hospital and clinical purposes.  RTI and BD compete in the safety syringe market along with two other major safety syringe manufacturers. RTI dominates the retractable syringe sub-market; BD produces retractable syringes, but conventional and non-retractable safety products that account for the bulk of its revenue.

BD falsely advertised the “world’s sharpest needle,” which is important because consumers see needle sharpness as a proxy for patient comfort, and persisted in doing so after its internal tests indicated otherwise. It also falsely promoted its retractable syringes as having seven times less “waste space” than RTI’s product, meaning that the syringes would waste less medicine.  BD’s testing initially supported this claim, but not after 2003.

RTI sued BD for antitrust violations and false advertising under the Lanham Act and won a jury verdict on one of its antitrust claims and all of its Lanham Act false advertising claims. The jury found that RTI was due more than $113.5 million in antitrust damages ($352 million with trebling + attorneys’ fees), but the court of appeals kicked that out because it’s an antitrust case and sent the case back to see if there were Lanham Act damages. RTI had requested disgorgement of BD’s profits and injunctive relief; the district court had concluded that equity favored disgorgement, but that any relevant profits were subsumed by the trebled antitrust damages award. The district court also enjoined BD to cease certain advertising claims for several years, post a notice on its website, notify various entities of the false claims (stayed as to end users pending appeal), and implement a training program for employees and distributors.

The court of appeals specifically approved of some of the district court’s findings on false advertising: “at least some portion of BD’s profits were attributable to the false advertising,” BD intended to confuse or deceive consumers, and RTI did not unreasonably delay in seeking relief. On remand, the district court declined to disgorge profits or reinstate any portion of the vacated injunction.

On injunctive relief, this result was foretold by the remand, which emphasized that, though a further need for injunctive relief was “theoretically possible,” “[a] plaintiff seeking injunctive relief must show a real and immediate threat of future or continuing injury apart from any past injury,” and that any injunction should be “no broader than reasonably necessary to prevent the deception.”  BD took multiple steps to comply with the non-stayed aspects of the injunction for two years before the court of appeals reversed.  It notified “over 750 distributors, over 10,000 employees, and all the major Group Purchasing Organizations, stating that its needle sharpness and waste space claims were inaccurate.” Further, “BD removed the false advertising from its marketing materials ... and posted a notice on its website.” It also implemented a training program for employees and distributors. This was enough, the district court reasonably deemed, to remedy any injury or threat of injury RTI had suffered from the false advertising.

RTI argued that all this still didn’t provide notification to end users, who play a significant role in medical decisions to purchase syringes. But the district court found no “real and immediate threat of future or continuing injury.”

Disgorgement as a remedy requires weighing (1) whether the defendant had the intent to confuse or deceive, (2) whether sales have been diverted, (3) the adequacy of other remedies, (4) any unreasonable delay by the plaintiff in asserting his rights, (5) the public interest in making the misconduct unprofitable, and (6) whether it is a case of palming off.  A district court can consider other factors.  It must also consider whether the defendant’s profits are attributable to the Lanham Act violation. When the plaintiff doesn’t show the defendant benefited from the false advertising, disgorgement isn’t allowed even if the rest of the test favors disgorgement. However, it was the law of the case that “at least some portion of BD’s profits were attributable to the false advertising” and that the “intent to confuse or deceive” and “unreasonable delay” factors favored disgorgement. The public interest also favored disgorgement.

Still, the district court found that the equities weighed against disgorgement because RTI had not shown diversion of sales or palming off and injunctive relief was an adequate remedy.  [Why is palming off weighed separately from intent to confuse or deceive?  They are in essence the same thing, only trademark infringement gets double-counted, even though one might think that materially false advertising was at least as bad as infringement that need not be material to consumers. Along with unjustified trademark exceptionalism, this formulation is a classic instance of a series of considerations turning into a “balancing test,” without much thought about the justifications.]

RTI argued (I think correctly) that palming off is irrelevant in false advertising cases; if it should be included in the balancing test, it’s as a measure of the egregiousness of trademark infringement and not as a reason that false advertising always has a thumb on the scale against disgorgement. The court of appeals wasn’t fully convinced: “If a false advertising plaintiff has otherwise shown concrete harm due to the false advertising, such as diverted sales, a court should not heavily weigh the absence of palming off against disgorgement.” But palming off retains its significance as a way in which RTI could have demonstrated concrete harm, but did not.  [Hunh?  It’s not a trademark case.  RTI also didn’t demonstrate that BD broke in and stole its chattels.  So what?  If there had been palming off without sales diversion--if a trademark plaintiff couldn't produce more or didn't produce the palmed-off things at all--that just goes to the unjust enrichment of the defendant.]  In the absence of sales diversion or palming off, disgorgement “would grant RTI an unjustifiable windfall” and in such cases the plaintiff “faces an uphill battle in obtaining disgorgement.”

RTI argued that the district court should have considered loss of goodwill in lieu of palming off. In principle, that’s right, but RTI’s evidence of lost goodwill and steps taken to combat that lost goodwill was merely speculative, especially given that its market share in the retractable syringe sub-market increased and its sales nearly doubled over the relevant period of false advertising.  (The evidence was that its employees who were worried about loss of goodwill “had to expend effort and energy to go around and try to ... tell people and convince them that it wasn’t true” and “spent a lot of time going to customers and trying to correct the misinformation, a lot of meetings, direct meetings, letter-writing, things like that.”)        

Although sales diversion favored disgorgement, the district court found that it did so only slightly because at least some of BD’s profit from its false advertising may well have come not at RTI’s expense but at the expense of others in the market.  [Note that if you think of disgorgement as a deterrent, it’s not clear why that should matter, at least as long if you think that some of BD’s profit did come at RTI’s expense and as long as there’s no double recovery in another suit by a different competitor.]  This finding was not an abuse of discretion.

First, the jury’s finding of Lanham Act liability did not “conclusively” establish sales diversion.  Injury and actual damages are different.  So are having profits attributable to the false advertising (law of the case) and showing sales diversion (not law of the case). “[I]nternal BD documents suggested that the false advertising allowed BD to command premium pricing and claim increased market share,” but “it was not clear that every dollar BD earned came out of RTI’s pocket,” only that some of the dollars did.

We want to avoid unjustified windfalls to plaintiffs.  The “profits attributable to the false advertising” requirement is one protection against that, but “sales diversion” is separate; these are related but distinct elements.  [I gotta say, it seems to me that the court is requiring the plaintiff to quantify its damages to receive the defendant’s profits, which is not the standard in other situations—one reason I thought we had disgorgement was to deal with the inequitable situation in which we’re sure the plaintiff was harmed, but not sure enough how much it was harmed to award a dollar amount of its damages.  Disgorgement (and injunctions) can make sure that the defendant doesn’t stay better off for having falsely advertised, and the risk of error is appropriately on the false advertiser especially if we’re requiring willfulness.  I can see the justification for the result here as well—it’s largely a matter of preferences/beliefs about deterrence—but what I really don’t like is the special treatment trademark gets.  The statutory language is the same; the reasoning should be the same too.]

Nor did the district court clearly err in finding that RTI offered insufficient proof of diversion. The best evidence of diversion was internal BD correspondence boasting about the commercial impact of its “needle sharpness” and “waste space” claims, and “the trial court was persuaded that this correspondence did not actually prove that RTI’s customers or potential customers chose to purchase from BD instead of RTI as a result of the false advertising…. At least some customers expanded their purchases from RTI after the dates they were allegedly presented with the deceptive waste space comparisons. In contrast, BD had difficulty selling its retractable syringes during the same period.”

These findings were consistent with the court of appeals’ reasons for holding that BD’s false advertising, standing alone, could not ground antitrust liability. The parties’ customers were sophisticated; none testified to being driven by BD’s false claims and several testified that they weren’t. “RTI’s evidence consisted mostly of boastful e-mail exchanges between BD sales representatives recounting what they believed were successful sales pitches, but notably there was no testimony from the customers themselves.”  [Again, fair enough! But if you tried that argument in a trademark case, there’s tons of cases about how courts should presume that bad intent is successful, and that divergence doesn’t make a lot of sense.]

Fundamentally, RTI and BD weren’t the only players in the safety syringe market, so no presumptions about false comparative advertising were appropriate (if they’re even allowed).

The district court also relied on “the adequacy of other remedies” in rejecting disgorgement even as it decided not to reimpose injunctive relief, which RTI pointed out was weird. Still, it was ok to weigh the steps BD had already taken to comply with the injunction as a factor counseling against the need for disgorgement, given the absence of evidence of concrete harm. However, the court cautioned that “[w]e do not necessarily approve of a general rule that, ex ante, injunctive relief is preferable to disgorgement.”

RTI finally argued that the court should value deterrence and avoidance of unjust enrichment more. But those values don’t require disgorgement where it’s not equitable to disgorge profits to a particular plaintiff. There was no abuse of discretion.  And we get another TM comparison! The district court distinguished a previous case approving of disgorgement on deterrence grounds because that case was a trademark case, and trademarks and trade dress are unique “protected property right[s].” RTI argued that the Lanham Act also protects trade reputation and goodwill as property interests. [Note: as a matter of history, RTI is correct that the same property language has been used for all these things; indeed, the classic treatment of the “trademark is property” concept was really always “the property is the underlying goodwill; the trademark is the symbol of the property, which only exists appurtenant to the goodwill of a business.”  It’s only casual shorthand that confused some later courts into thinking there was some sort of property right in the trademark as such.] But the court of appeals doesn’t wade into that because RTI failed to show that its goodwill was harmed in a way that affected potential customers’ decisions, and thus didn’t show harm that “parallels the harm caused a markholder whose mark is used without consent.”

Anyway, BD was not “unscathed” by its violation of the law.  It complied with (most of) the original injunction for nearly two years. And for deterrence, “future would-be false advertisers” should note that a plaintiff who shows harm may be able to get disgorgement.

In closing, the court of appeals put the denial of disgorgement in the larger context of a “meritless” antitrust claim [interesting word—should BD get attorneys’ fees?] made during a time in which RTI nearly doubled its own sales and increased its share of the retractable syringe sub-market to two-thirds. “RTI elected not to test its proof of Lanham Act damages before the jury,” and the court wouldn’t let it wave the flag of the public interest to get BD’s profits now. The public interest would be best vindicated in the marketplace.

Judge Graves dissented; he would have vacated and remanded on the theory that the district court erred in reweighing the diversion factor and in finding insufficient evidence to support disgorgement.  He thought that the prior court of appeals opinion’s treatment of sales diversion related to the amount to disgorge, but fixed the law of the case as to whether sales diversion had happened, merely remanding for assessment of other factors in light of the disappearance of the antitrust award. The district court had clearly already found that “RTI produced evidence that on occasion BD relied on these false advertisements to divert sales from RTI directly” and “[t]his evidence confirms the rational conclusion that some portion of BD’s ill-gotten sales came at RTI’s expense.”

Of the three factors that weren’t law of the case, the public interest factor favored disgorgement. On remand, the district court “improperly weighted the absence of diversion and palming off to the exclusion of other factors.” In light of this reweighing “and the fact that the adequate remedies the district court had previously found no longer exist,” the dissent thought that the district court likewise erred in its reconsideration of the adequacy of other remedies.