Thursday, March 16, 2023

no disgorgement/fees in false advertising case even after Romag remand

Harbor Breeze Corp. v. Newport Landing Sportfishing, Inc., 2023 WL 2504988, No. SACV 17-01613-CJC (DFMx) (C.D. Cal. Mar. 13, 2023)

Previous district court ruling on irreparable harm; previous 9th Cir. opinion remanding for reconsideration of disgorgement and attorneys’ fees after Romag. Despite Romag, the court declines to award disgorgement or fees in this false advertising case.

A jury found that Harbor Breeze proved all elements of liability for false advertising but awarded $0 in damages and profits. Romag rendered incorrect the jury instruction that willfulness was a prerequisite to disgorge profits. On remand, the court held a bench trial.

The parties compete to offer whale-watching and other boat cruises off the coast of the Los Angeles metropolitan area. In 2011, Harbor Breeze sued for unfair competition and false advertising in California state court, alleging a variety of unlawful actions, such as submitting a fake business address in Long Beach, creating misleading website URLs, and posting fake reviews about services. “The jury found that the defendants had engaged in false advertising, and the court enjoined them from specified conduct.”

The state court declined to hold defendants in contempt for ads referencing “Long Beach Departures” and the sufficiency of “a graphic stating ‘All Vessels Depart from Beautiful Newport Beach’ [on] each of [Newport Landing’s] websites” that purportedly could not “be ‘read’ by third-party search engines.” The court found that the two ads were “inadvertent” and “subsequently removed” and that the graphic was adequate to comply with the injunction because it was “conspicuous to consumers viewing Newport Landing’s website.”

Later, Harbor Breeze sued in federal court, alleging Lanham Act, UCL, and FAL violations. Harbor Breeze’s evidence focused on two things: First, location. E.g., a consumer who searched on the internet for “Long Beach whale watching” would be directed to a page on Defendants’ website repeatedly stating the phrase “Long Beach residents and visitors,” suggesting that their cruises departed from Long Beach rather than Newport Beach. Second, prices. Defendants advertised, for example, a “$10 whale watching special” even though a consumer could never get on a whale watching cruise operated by defendants for only $10 because of a $2.50 fuel surcharge and a 2% wharfage fee on top of the $10. There was also evidence that calling these extra charges a “fuel surcharge” or “wharfage fee” was misleading because these fees were a way to get extra revenue, not tied to actual expenses, and defendants didn’t disclose these fees until late in the purchase process.

The court subsequently denied a contempt motion for several purported violations of the injunction. E.g., the mobile site temporarily failed to include disclosures required by the injunction because of “a technical error”—“one errant line of code”—but “the webpage in question was updated ... [to] contain[ ] the required disclosures.” Plaintiffs challenged “advertising that prices start at or are ‘from’ a listed price,” but “[t]he Court [wa]s unwilling to interpret its own Injunction to proscribe” as much.

The bench trial focused on previous trial evidence plus additional evidence mostly about defendants’ conduct since 2022. Plaintiffs’ evidence suggested that defendants continued to include locations like “Long Beach” in the title tags of some webpages, which appeared in organic search results on Google. Defendants also included “supplemental charges,” such as those purportedly for the decrease in passengers and higher fuel costs due to the COVID-19 pandemic for their regular whale-watching cruises. And defendants sold $10 Groupon vouchers that customers could redeem for cruises departing “Before 10am/After 5pm,” although Defendants did not offer departures after 5 p.m., and for approximately one week offered vouchers that customers could redeem only when paying an additional $2 fee. And they used the phrase “Feel the Harbor Breezes” in a pay-per-click advertisement on Google.

Disgorgement is available under the Lanham Act “subject to the principles of equity.” “Two reasons foreclose disgorging profits here—first, Defendants’ profits are not attributable to their misconduct, and second, the equitable considerations, in the Court’s discretion, do not weigh in favor of disgorgement.”

The Lanham Act allows disgorgement of profits attributable to false advertising, not other things. “[A] court may deny recovery of a defendant’s profits if,” for example “they are only remotely or speculatively attributable to the infringement.” A plaintiff must “prove [a] defendant’s sales only,” while a “defendant must prove all elements of cost or deduction claimed.”

But here, evidence connecting false advertising to defendants’ profits was lacking. (Is that the right placement of the burden?) Plaintiffs argued that defendants profited because their false fees came with a set dollar value.

But the Court is not convinced that Defendants would have earned less absent their misconduct. Defendants charged significantly lower prices for their cruises even including their fees. And they ultimately disclosed all fees to consumers before any purchase was completed. It seems more likely than not that consumers would—and did—care more about getting a good deal than where the cruise departs or whether a few dollars get added to the ticket cost.

To be sure, Defendants may have “thought [that their] advertising was important or would generate profits,” but that “is a truism. Companies obviously hope that advertising will be a boon to business. What [the evidence] failed to do,” however, was persuade the Court “that the advertising actually had this effect.” Thus, “there is no basis for inferring that any of the profits received by [Defendants] ... are attributable to” their misconduct.

As for the general equitable principles at play, they include (1) “a defendant’s mental state,” (2) whether sales have been diverted, (3) the adequacy of other remedies, (4) any unreasonable delay by the plaintiff in asserting [the plaintiff’s] rights, (5) the public interest in making the misconduct unprofitable, and (6) whether it is a case of palming off.”

Mental state: defendants were at worst negligent, not willful. One of the individual owners testified that they made changes to their websites and advertisements following the state court litigation and thought they were in compliance. Also, the defendants didn’t intend to mislead on prices, “even if their advertising was, in fact, misleading,” since they ultimately disclosed all fees prior to purchase. [This seems to deny the reality that bait and switch ads work because of consumers’ sunk costs in search; it’s a really bad idea unless tied tightly to what the court sees as the unusually sharp price differential.] “And the evidence on Defendants’ advertising on location showed that Defendants intended to optimize their search engine results, not confuse consumers.”

Although they still advertise “nominal” prices, they also conspicuously state that a supplemental charge applies immediately below the ticket prices and that cruises departed from Newport Beach. And multiple options were available at any given moment at their advertised “from” or “starting at” prices.

Plaintiffs accused defendants of trademark infringement for using the phrase “Feel the Harbor Breezes” in an ad in August 2022. The court was dubious that this was even distinctive or likely to cause confusion if distinctive.  But it was also irrelevant to disgorgement for false advertisng, and was at most negligent. “At some point, the volume and nature of mistakes may justify a finding of willfulness. But that moment has not yet arrived…. To date, Defendants’ sloppiness has been just that—sloppiness.”

Although willfulness is no longer required, Romag agreed that mental state remains “a highly important consideration in determining whether an award of profits is appropriate,” as “[a]n innocent ... violator often stands in very different shoes than an intentional one.” Further, as the Tenth Circuit has said, “an award of profits under the Lanham Act is truly an extraordinary remedy and should be tightly cabined by principles of equity.”

Evidence of sales diversion was also lacking. The jury’s award indicted that it must have found that plaintiffs failed to prove that they suffered any harm, or failed to prove to a reasonable degree of certainty an amount of harm, which would include diverted sales.

Other remedies:  A finding of liability coupled with an award of $0 in damages may “support[ ] a finding that there is no [ ]adequate remedy at law.” Nonetheless, injunctive relief sometimes “provides a complete and adequate remedy,” as when a defendant’s misconduct was not willful. That was the case here.

Plaintiffs didn’t delay bringing their claims, favoring disgorgement.

The public interest in making misconduct unprofitable wasn’t important because the misconduct hadn’t been profitable and an injunction was enough. “Any generalized public interest in minimizing false advertising, moreover, is mitigated by the competing interest of the public in robust competition from a competitor that, candidly, offers lower prices than Plaintiffs.”

This was also not a case of palming off.

Basically the same analysis also doomed a fee shift. Octane Fitness directs courts to consider “frivolousness, motivation, objective unreasonableness (both in the factual and legal components of the case) and the need in particular circumstances to advance considerations of compensation and deterrence.” It was even doubtful whether plaintiffs were “prevailing part[ies]” entitled to fees under the Lanham Act. Regardless, this case wasn’t exceptional in substantive strength or public importance— “stopping misleading advertising about whale watching does not ameliorate a serious public harm.” Eight years of litigation didn’t make the case exceptional. “If anything, it undermines Plaintiffs’ claim of exceptionality, as the litigation has achieved mixed results.” Nor had it been litigated unreasonably. “To be sure, the conduct of all parties in this action has been at times vexing to everyone involved. But there has been no significant ‘failure to comply with court rules, persistent desire to re-litigate issues already decided, advocacy that veered into “gamesmanship,” [or] unreasonable responses to the litigation.’”

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