Friday, July 15, 2022

Likely confusion alone justifies liability but not damages or profits in exercise equipment case

Max Rack, Inc. v. Core Health & Fitness, LLC, 2022 WL 2751685, --- F.4th ----, 2022 WL 2751685 (6th Circuit Jul. 14, 2022)

The court of appeals, over a dissent that would have upheld everything, upholds a jury confusion verdict on fairly thin grounds, and upholds the trial court's rejection of the jury's damage award, but rejects a profits enhancement/attorneys’ fee award to avoid double-counting and reliance on theories that would not be sufficient to uphold the underlying jury verdict. So a lot of interesting discussion of what suffices for a profits and damages award.

Max Rack invented a piece of gym equipment, the Max Rack. For years, Max Rack sold Max Racks through licensing agreements with defendant Core. “When Max Rack’s last patent expired, however, Core Health decided to compete against Max Rack by selling an identical machine under a new name—the ‘Freedom Rack.’” It was produced by the same Chinese manufacturer and was thus substantively identical.

Max Rack alleged two kinds of infringement during this transition: Core allegedly continued to sell “Max Racks” without authorization, and attempted to sell Freedom Racks by using the “Max Rack” name. “A jury agreed, awarding Max Rack $1 million in damages and $250,000 in Core Health’s profits.” The jury also found that the infringement was intentional. The district court upheld the liability finding, doubled the profits award, and granted attorney’s fees to Max Rack. This appeal followed.

Continued manufacture and sale of the Max Racks after the agreement expired was a traditional ex-franchisee situation; the other accused uses basically were failing to purge every reference to the Max Rack from the Core website and user manual even after the transition to the Freedom Rack. For example, there was evidence that “Core Health waited until over a month after the agreement’s expiration to update its website and other marketing materials.” When they did try, they missed some references. (The court appears not to understand that search engines may not be immediately updated, and refers to evidence that a Google search showed “a link to Core Health’s website with a caption underneath the link that used the ‘Max Rack’ name” after the agreement expired. But there were other instances that really were on Core’s website after the relevant period, including a couple as late as trial.)

Although Core had six months to sell off any units it had started making before the expiration date, it sold another 24 later than that, and 9 units whose label it changed to “Freedom Rack” before shipping. It also didn’t pay Max Rack royalties for 238 sales within the six-month period. Before trial, it did pay up for those 271 sales, paying royalties for the 238 and its profits for the remainder, plus interest.

Freedom Rack remains the only machine on the market like the Max Rack; the plaintiff has not licensed another producer.

After trial, the district court denied Core Health’s motion for judgment as a matter of law or for a new trial, upheld the $250,000 profit award and doubled it because of Core Health’s conduct during discovery, awarded Max Rack attorney’s fees, and enjoined Core Health from using the Max Rack mark without acknowledging that it is registered to Max Rack. But it overturned the $1 million in damages because there was no evidence of actual confusion.

Underlying legal violation: The court assumed that the state law matched the federal law in requiring likely confusion, which seems correct, even though the court chided the parties for lumping all the claims together.

This case wasn’t a typical infringement case where multifactor confusion analysis is required. One part was a distinct claim “that a holdover licensee has continued to use a licensor’s mark after their agreement expired,” which follows a “more categorical” rule: “proof of continued, unauthorized use of an original trademark by one whose license to use the trademark had been terminated is sufficient to establish ‘likelihood of confusion.’ ”

The jury could reasonably have found that Core Health violated the licensing agreement by selling Max Racks after that agreement expired. The admitted sales of 24 Max Racks outside the six-month liquidation window were enough for a finding of intentional infringement. [The court doesn’t consider the difference between services and goods here—the franchise cases involve services, not lawfully made goods, which implicate first sale, especially since Core doesn’t seem to have been operating under the Max Rack name.] Payment of the profits on those units reduced Core’s monetary liability, but not the violation. “In addition, the jury reasonably (if just barely) could have found that Core Health began to manufacture Max Racks after the agreement expired in November 2015.”

The district court, however, relied instead on theory two: continued use of “Max Rack” on Core’s site. But the evidence of this was “relatively insubstantial.” First, it was legal error to rely on evidence that a third-party reseller used the Max Rack mark when selling Freedom Racks on its website, given that Max Rack neither asserted a contributory liability theory nor developed evidence for it (indeed, the evidence showed that Core told resellers about the change).

Second, a Google search for “Max Rack” produced a “hit” to an unidentified page on Core Health’s website (see note above) and, third, a stray “Max Rack” reference remained in the Freedom Rack owner’s manual. Though evidence of Core’s continued use of the mark was “close,” it was enough to create a likelihood of confusion for purposes of finding a violation of the Lanham Act, albeit not enough to justify a damage award.  “To prove a violation, Max Rack needed to show only that Core Health’s use of the Max Rack name would likely confuse consumers over whether the Freedom Rack was affiliated with the owner of the Max Rack mark in some way. Max Rack did not need to show actual confusion or past injury.”

And there was no dispute that there was some continued use of the mark, even if accidental, including an outdated photo of a Max Rack with a partially concealed “Max Rack” logo on a black bar. Arguments that these uses were minor and harmless went “more to whether Max Rack established damages than to whether it established a violation.” [Again I ask whether this is consistent with current Article III standing jurisprudence.]

These references could “perpetuate the ‘perception that’ [Core’s] Freedom Racks were affiliated with the Max Rack brand,” given that the goods were the same, the parties were “potential” competitors, and the mark was identical. “Indeed, if we accepted Core Health’s argument that these uses of ‘Max Rack’ did not violate the Lanham Act because they were trivial, Core Health could continue with them indefinitely. Max Rack would remain powerless to stop Core Health from, say, using the picture of a Max Rack to sell its Freedom Racks.”

The court went out of its way to say that plenty of uses of “Max Rack” would have been fine, such as in comparative advertising or in claims that the Freedom Rack was identical to the Max Rack, or even that “Core Health used to make the Max Rack for Max Rack, Inc.” But the actual references weren’t procompetitive, unlike those hypotheticals. [Suppose Core put a disclaimer on each page that said: “Core Health used to make the Max Rack for Max Rack, Inc.” Any remaining references to the Max Rack instead of the Freedom Rack on this page should be disregarded.” Sufficient?] “Whether innocent or not … the references still could have created a likelihood of confusion.”

Under the circumstances, Core was, just barely, not entitled to a new trial. This was so even though the jury was exposed to inflammatory arguments about the parties’ “addendum” agreement that purportedly entitled Max Rack to perpetual royalty payments even after patent expiration. When Core acquired the assets of its predecessor in interest, it concluded—correctly—that this addendum was unenforceable under well-established patent law, and Max Rack didn’t even bother to assert a violation of the addendum in its suit. Nonetheless, at trial, Max Rack brought it up a lot; counsel referred to Core’s noncompliance with this invalid addendum as “fraudulent,” and the jury asked about whether it was enforceable during deliberations. Still, given the high standard for reversing a denial of a new trial, Core failed, especially since the court’s instructions explained that the jury need not consider the addendum’s legality and that Core had correctly interpreted the law. The jury’s damages award was already overturned, and the trial court could reasonably conclude that there was no spillover requiring a fully new trial, especially given that Core admitted that 24 sales post-agreement were infringing.

Profits award: The $250,000 “had a reasonable basis in the evidence when read against the Lanham Act’s burden-shifting approach to proving profits.” Core didn’t challenge the “abstract conclusion that equity allowed for a profits award,” only the sufficiency of the evidence, and the evidence was sufficient. Max Rack had only a modest burden to prove Core’s “sales.” Even considering the issue de novo, there was sufficient evidence.

Core had some points in its favor. Core sells many different weightlifting machines; it “likely” wouldn’t be enough for Max Rack to put in evidence of Core’s total sales to shift the burden. “Instead, a plaintiff likely must show some connection between the identified ‘sales’ and the alleged infringement.” But the court didn’t need to decide whether “stray references” to “Max Rack” on Core Health’s website tainted all Freedom Rack sales and allowed Max Rack to seek Core Health’s profits for those sales, because the profits award could have been tied to Max Rack’s alternative infringement theory: that Core Health sold over 200 Max Racks without authorization; its own figures suggested that it $188,787 in profits on 218 Max Racks sold in 2016. “Max Rack also poked holes in the validity of Core Health’s cost figures, suggesting that its inflated numbers hid its true profits.” Thus, the jury’s award could have rested on the ex-franchisee theory.

However, doubling the award was an abuse of discretion. Congress specifically barred using a profits adjustment as a penalty; it can only be done to compensate, because “a fact finder might sometimes have trouble identifying the precise amount of profits generated by a defendant’s infringement.” It would be improper to rely on a defendant’s bad faith or on discovery violations that didn’t interfere with calculating its profits. Although the district court properly noted that the law bars punitive enforcement, it based the increase on Core’s “evasive discovery conduct” in terms of documenting its product costs. However, the court granted Max Rack’s motion to exclude nondisclosed evidence from trial, preventing Core from showing some of its costs. It was then double-counting to use that conduct to enhance the profits award: that excluded evidence would have benefited Core, not Max Rack, and so the exclusion increased the chances of overcompensation, not undercompensation. Max Rack had no difficulty proving Core’s total sales. There was therefore no compensation-based rationale for doubling the award. Answering the dissent’s objection that maybe the excluded evidence would have shown lower costs and higher profits, the majority notes that “Max Rack itself moved to exclude any further cost evidence…. That decision effectively amounted to a second sanction for Core Health’s failure to produce its cost evidence.” Matters would have been different if Core had refused to turn over sales data.

The court of appeals also affirmed the district court’s decision to vacate the jury’s $1 million damages award. Rejecting Max Rack’s argument that Romag signalled that no bright-line rules should be required in this area, the court reaffirmed the traditional rule that a damage award requires some evidence of actual loss, not just of likely confusion. This can be evidence of lost sales (not available here, since Max Rack had no competing product), lost royalties (not available here since Core paid them before trial), lost goodwill (not available here because the products were always made by the exact same Chinese manufacturer; there was nothing “inferior” about what customers got so they couldn’t have “soured” on Max Rack’s brand), or damage-control costs, e.g. “advertisements clarifying that the owner has no affiliation with the infringer” (none here).

Before awarding marketplace damages like those for lost sales, “courts generally require a plaintiff to show that an infringing mark has actually confused some consumers about the mark’s affiliation with the plaintiff’s good (not just that it is likely to do so). Because juries might have trouble quantifying these losses, this actual-confusion evidence helps ensure that they at least exist.” But damage-control costs wouldn’t require this, nor would royalty-based damages if due, since royalties provide an objective measure of damages.

Under these circumstances, neither of Max Rack’s theories sufficed to recover damages. The royalties/profits from 262 Max Racks sold without authorization were paid before trial, with interest, and the profits award from 9 machines that the jury could have found were sold to consumers as “Max Racks” but shipped as “Freedom Racks” were already paid-for with the profits award; damages would be an impermissible double recovery.

Max Rack’s second theory, that Core Health sold an unknown number of Freedom Racks by keeping “Max Rack” references on its website, failed because there was no evidence of actual consumer confusion from these “minor” uses. Nor was there evidence of other harm to Max Rack, given its failure to produce a competing product. “Max Rack would have made no sales regardless of Core Health’s conduct.” And since the Freedom Rack was identical to the Max Rack, there was no “goodwill” injury that could have resulted from an inferior product’s use of its name.

Romag said that willfulness was only important, not required, for a profit award because such a “categorical requirement” was inconsistent with § 1117(a)’s text.

Max Rack asks us to treat actual confusion in the same way because § 1117(a) does not list actual confusion in the text either. But we need not decide how Romag affects the traditional actual-confusion prerequisite for marketplace damages. Even if we treated actual confusion as an “important” factor, Max Rack identifies nothing to show that Core Health’s stray references to “Max Rack” caused it harm. No matter the governing legal standard, Max Rack’s speculation of harm would not suffice to justify a damages award.

Max Rack argued that other courts have presumed actual confusion (and shifted the burden to a defendant to disprove it) when the defendant has intentionally deceived the public by using a deceptive mark or comparative false advertising. But the jury’s finding of intentional infringement “rests most reasonably on Core Health’s continued sales of Max Racks in violation of the licensing agreement, and Max Rack already received full compensation for those sales. No reasonable jury, by contrast, could have found that Core Health’s few extraneous references to the Max Rack mark in its Freedom Rack advertisements were intentional (rather than accidental).” So the court didn’t decide whether this rule applied either.

Attorneys’ fee award: Also an abuse of discretion because the discovery misconduct didn’t meet the standard for exceptionality under the totality of the circumstances, where “nothing about this case looks unusual.” Max Rack did not have a “noticeably stronger” “litigating position” given Core’s payment of a lot of profits/royalties before trial. Its two infringement theories after those were removed were both “thin” on evidence: “close to the hazy border dividing what a jury can (and cannot) reasonably find.” Likewise, Core didn’t litigate in an unreasonable manner; its discovery failure mostly harmed itself. And Max Rack distorted the litigation with repeated inappropriate references to the addendum. “In short, if this case warranted attorney’s fees, we fail to see what case would not.”

The district court “relied on precedent that it read as creating a bright-line rule permitting fees if a defendant’s intentional infringement continued after the plaintiff sued.” But this was error given Octane Fitness, and, again, the intentional infringement finding “reasonably rested on Core Health’s unauthorized sales of Max Racks,” which “ended well before the trial.”

A dissent would have affirmed the district court in full because it’s theoretically possible that the jury would have revised its estimate of costs downwards with other evidence and because Core should have removed all references to Max Rack earlier.

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