Friday, December 10, 2021

Disgorgement in a noncomparative false advertising case: doctrinal drift?

Watkins Inc. v. McCormick & Co., 2021 WL 5810487, NO. 15-2688(DSD/BRT) (D. Minn. Dec. 7, 2021)

It’s very interesting to me that, even as the TMA made injunctive relief much easier to get in Lanham Act cases, courts also seem to be presuming that disgorgement of profits is a standard remedy. Is there some “IP Institute” for judges that is replicating the successes of the Law & Econ institutes for judges in convincing them of what the law is?

Anyway, Watkins alleged that McCormick deceived consumers about the price of its black pepper and diverted sales from Watkins’s competing products. When Walmart tested Watkins’ products, they competed primarliy against McCormick’s pepper, sold beside it. Walmart was concerned about Watkins’ higher price, but Watkins believed it was responding to commodity price spikes and that everyone else would also increase prices. McCormick, however, allegedly responded by reducing the volume of black pepper in its tins but keeping the tins the same size—shrinking the contents of its small tin from two ounces to 1.5 ounces, its medium tin from four ounces to three ounces, and its large tin from eight ounces to six ounces. This allowed McCormick to advertise what seemed like an attractive lower price and charge more. E.g., McCormick’s small tin sold for an average retail price of $2.10 while Watkins’s small tin had an average retail price of $3.17. McCormick’s per-ounce price, however, was $1.40 while Watkins’s was $1.58 per ounce, a smaller gap. The McCormick medium tin was priced at $3.22 while Watkins’s was $4.11, but McCormick’s per-ounce cost was $1.07 while Watkins’s was $1.03.

Walmart dropped Watkins’s black pepper due to poor sales numbers. Watkins sued McCormick under the Lanham Act and coordinate state law.

McCormick argued that Watkins’s expert testimony on damages should be excluded and thus that Watkins hadn’t established injury or causation for any of the forms of relief it seeks. The court disagreed.

The Watkins expert calculated Watkins’s lost profits during the Walmart test; the profits Watkins would have realized between 2015 and 2020 if the test had been successful and Walmart had expanded the distribution of Watkins’s black pepper to 3,000 stores; and McCormick’s profits from its reduced-volume tins. As to the first, Watkins’s and Walmart’s sales projections provided a reasonable basis for determining lost profits, and as for the second, it was fine to use Watkins’s vanilla extract, a similar product from the consumer’s perspective, to project lost profits (subject of course to cross examination).

Disgorgement: McCormick argued that Watkins failed to submit any evidence on whether its profits were attributable to its allegedly deceptive packaging. But the court accepted Watkins’s argument that “once it established that it suffered injury in fact, it need not prove attribution or diversion of sales in order to bring a disgorgement claim.” As soon as Watkins shows statutory standing, “the burden shifts to McCormick to prove that any of those sales were not due to the allegedly unfair competitive practices.” Thus, for disgorgement of profits, a plaintiff need only show the defendant’s “sales of the allegedly falsely advertised products,” after which the burden shifts to the defendant to prove “any costs or deductions.” This contrasts to damages, which require proof of a causal link between plaintiff’s injury and defendant’s conduct.

Here's the language that caught my eye: “Disgorgement imposes a lower burden than money damages and injunctive relief because it serves a different purpose. Disgorgement, an equitable remedy, targets the wrongdoer and seeks to deter improper conduct and prevent unjust enrichment. To achieve these purposes, any plaintiff with standing may seek to eliminate defendant’s ill-gotten gains by pursuing disgorgement of its profits” (emphasis added). In some sense, this is just a matter of emphasis: the principles of equity are still present, albeit in a footnote later, and to “seek” profits is not definitely to get them. But framing matters, and I have a distinct sense that the framing is turning, with none of the caveats about deliberateness of the false advertising or requiring false comparative advertising before considering a profits award that I have come to expect.

With that out of the way, Watkins showed enough evidence of injury to survive summary judgment.

For money damages, a plaintiff “must prove both actual damages and a causal link between defendant’s violation and those damages.” However, a plaintiff need only prove “the fact of damage with certainty, it need not prove the amount of damage with certainty.” The causation requirement ensures that “[a]ny award of damages ... serve[s] as compensation, not a penalty.”

Watkins argued that its consumer survey (presented by an expert) established injury by showing 1: that McCormick’s reduced-volume tins likely deceived consumers; and 2) that the deception was material to consumer buying decisions. The findings of deception and materiality in the consumer survey “create a triable issue as to whether Watkins suffered injury.” Its evidence showed that McCormick was its primary competitor in Walmart. And its damages expert provided support for the claim that it was damaged during the Walmart test. But what about causation?  Again, a factual dispute: even the alternate explanation, that the black pepper was priced too high, was likely “exacerbated” by McCormick’s conduct.

Disgorgement: The court rejected McCormick’s argument that “a plaintiff seeking disgorgement under the Lanham Act must establish that the profits were diverted from the plaintiff’s own sales” and that “the profits are attributable to the false advertising.”

In contrast to other cases (compare, e.g.,, Inc. v. Edriver Inc., 653 F.3d 820 (9th Cir. 2011) (noncomparative advertising doesn’t justify disgorgement without some evidence of monetary harm causation), the court here found that “the Lanham Act requires neither proof of diversion nor attribution for disgorgement of profits.… The Lanham Act then permits a defendant to deduct profits that it can prove were not earned due to its violative conduct.” Plus, plaintiff windfalls would be avoided by the bar on double recovery and by the principles of equity.

1 comment:

Giulio said...

Another relevant point might be that the Lanham Act limits all monetary awards to "compensation and not a penalty." It could be that, in framing the issue, courts are implicitly assuming an injury which suffices for statutory standing also suffices to show some type of causation (i.e. an injury that requires compensation). I tend to think the necessary injury for causation is quite different from statutory standing. And in any case, it's unclear to me why all plaintiffs with standing "may seek to eliminate [a] defendant’s ill-gotten gains" without some concrete evidence showing a compensable harm they've suffered. Otherwise, an injunction is probably adequate to address the statutory injury that allows the cause of action.

Also, the "lower burden" language is flat wrong, at least in practice. Perhaps the court was referring to the fact that, in many circuits, disgorgement technically doesn't require causation (query whether the "compensation not a penalty" clause really allows that practice). In my experience, very few (if any) courts actually disgorge profits without some proof of causation. The bigger concern I encounter is when there's at least some evidence of compensable harm, courts then open the remedial floodgates without tailoring relief. The PODS case out of Florida several years ago comes to mind. The Wal-Mart/backyard BBQ case also comes to mind, though the award there was wiped out on appeal and I believe the parties have since settled.