Lanham Act willfulness satisfies Bankruptcy Act willful/malicious standard

In re Better Than Logs, Inc., 631 B.R. 670, No. 20-20160-BPH (D. Mont. Jun. 11, 2021)

A rare bankruptcy/false advertising interaction. Creditor Everlog sued BTL for patent infringement and false advertising; BTL ultimately defaulted and Everlog was awared nearly $1 million in damages, of which almost $180,000 was allocated as disgorgement for false designation of origin/false advertising, on the theory that BTL falsely described its products as manufactured in Montana when, in fact, the concrete “blanks” used in BTL’s products were poured in China.

BTL then entered bankruptcy and listed the Everlog judgment as disputed. Everlog’s proof of claim was for over $1.2 million, including the judgment, post-judgment interest, and projected damages from BTL’s alleged continuing infringement of its patent.

Of relevance here, Everlog argued that the false advertising damages were nondischargeable in bankruptcy. Everlog relied on the finding of the district court that BTL acted “willfully” in falsely describing its products as manufactured in Montana and awarding Everlog $117,116 in disgorged profits accordingly. The creditor has the burden of showing nondischargeability by a preponderance of the evidence; the relevant exception is § 523(a)(6), which excepts from discharge any debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.” This exception applies only where the debtor intends the consequences of their act, not simply the act itself, and both willfulness and maliciousness is required.

BTL argued that summary judgment was inappropriate because the district court didn’t consider whether the false advertising was “malicious.” Because this was a default judgment, the court here looked to both the district court’s order and the material allegations of the complaint.

In the Ninth Circuit, the “willful injury” requirement is satisfied only if “the debtor has a subjective motive to inflict injury or when the debtor believes the injury is substantially certain to result from his own conduct.” Lanham Act false advertising requires injury or likely injury. [Does false designation of origin require injury as an element of the cause of action? If it’s a trademark claim, it does not.]

And “[a]n award of disgorged profits based upon false advertising or false designation of origin is appropriate only upon a showing that the defendant’s violation was willful.” NB: No longer true under Romag!

“Willfulness” under the Lanham Act “requires a connection between a defendant’s awareness of its competitors and its actions at those competitors’ expense.” “Only deliberate conduct will satisfy this standard; mere negligence will not.” The willfulness holding was a finding that BTL acted deliberately when it falsely advertised its products, and that BTL was aware of Everlog and acted in a manner that was detrimental to it, causing Everlog injury. “At a minimum, BTL was substantially certain its conduct would result in injury to Everlog.” Thus, issue preclusion applied to willfulness.

“Naliciousness” under § 523(a)(6) requires: 1) a wrongful act; 2) done intentionally; 3) which necessarily causes injury; and 4) is done without just cause or excuse. Prior case law establishes that “a debtor’s decision to act in violation of a law despite knowing the legal way to conduct business satisfied the malice prong.” The undisputed facts here led to the same conclusion. The district court found that BTL looked into the “Made in USA” standards and chose to market its products as manufactured in Montana, despite the fact that they were partially manufactured in China. The willfulness finding also satisfied elements (2) and (3). BTL argued that it researched and worked with the State of Montana to verify its products qualified for the “Made in Montana” designation. But it relied on testimony that the district court considered and rejected. Thus malice was also subject to issue preclusion.

Was this issue actually litigated, though? “[A] default judgment is generally not entitled to [issue preclusion] because there is no actual litigation of the issues.” Here, the “actual litigation” requirement was satisfied on these facts because BTL initially actively participated in the prior litigation for over a year but eventually abandoned its efforts. “[A]ll that remained at the time Everlog moved for entry of BTL’s default were two final pretrial conferences and the trial itself.”