Tuesday, April 25, 2023

no disgorgement under state law when false advertising wasn't shown to result in sales

Republic Technologies (NA), LLC v. BBK Tobacco & Foods, LLP, 2023 WL 3004625, No. 16 C 03401 (N.D. Ill. Apr. 19, 2023)

Previous discussion. A jury found that defendant HBI engaged in unfair competition and violated the Illinois Uniform Deceptive Trade Practices Act (IUDTPA” in its packaging and promotional activities for its RAW Organic Hemp branded tobacco rolling paper products. Here, the court mostly denied a renewed motion for disgorgement, prejudgment interest, and attorneys’ fees.

Republic alleged that HBI, its competitor in the tobacco rolling paper industry, engaged in false advertising under the Lanham Act, unfair competition, and violations of the IUDTPA. HBI counterclaimed that Republic infringed its copyrights and trade dress. The jury ruled for HBI on one of its copyright infringement counterclaims and one of its trade dress claims against Republic and awarded HBI $979,620 in lost profits and $40,000 in statutory damages. The jury found that HBI did not engage in false advertising under the Lanham Act, but that HBI had engaged in unfair competition under Illinois common law and violated the IUDTPA. There was no special verdict form.

Because the jury was instructed not to consider the question of damages as to the unfair competition and IUDTPA claims (and plaintiffs cannot seek monetary damages under that statute), Republic was not awarded any monetary damages. The false advertising claims were based on statements (1) that HBI’s rolling paper is “made in Alcoy, Spain, the birthplace of rolling paper;” (2) that HBI’s RAW “Organic Hemp” papers are the “World’s Only” or “World’s First” organic hemp rolling papers; (3) that HBI contributes its funds or sales to a charitable entity called the “RAW Foundation;” (4) that HBI’s rolling papers are made with “natural hemp gum;” (5) that RAW rolling papers are “100% wind powered;” and (6) that OCB Organic Hemp papers (Republic’s products) are knock-offs, “RAWnabees,” copies, or fake versions of RAW. The court granted an injunction focusing on the Alcoy claims, which were false.

Here, the court declined to order disgorgement of “every cent of profit from HBI’s RAW brand during that time period—over $34 million.” Disgorgement is unavailable under the IUDTPA, which provides only for injunctive relief, and if the violation was willful, attorneys’ fees. But IUDTPA remedies are additional to any other remedies available against the same conduct under the common law. “And here, the jury also found that HBI committed common law unfair competition, which may carry with it the right to disgorgement, though the parties have not cited, and this Court could not find, an example in Illinois in the last 75 years.”

Assuming that disgorgement was available, the court looked to the Restatement (Third) of Unfair Competition for guidance. That worthy document deems disgorgement appropriate only when (1) “the actor engaged in the conduct with the intention of causing confusion or deception,” and (2) “the award of profits is not prohibited by statute and is otherwise appropriate” in light of all of the factors of the case.

The court was primarily guided by the absence of proof that the false statements were a substantial factor in producing sales. The court’s previous finding that the falsehoods “are likely to cause consumers to choose HBI’s products over Republic’s products” were directed at “likely” future harm to Republic, not actual proof of causation of HBI’s past profits. Republic could have provided survey data or consumer testimony, but did not.

Republic mainly pointed to the testimony of HBI’s own witnesses that the purpose and effect of the “RAW Foundation” promotion and charitable giving campaigns was to drive more sales, increase brand awareness, and enhance brand loyalty. “But though there was no official ‘Raw Foundation’ entity, HBI did indeed donate moneys to charities and conduct charitable events.” Also, a company’s belief that its advertising is important and profitable “is not evidence that the advertising actually had that effect.” (Once again, courts in false advertising cases refuse to make the plaintiff-favorable inferences that are standard in TM cases, here about intent.)

As for the parties’ competing damages experts, HBI’s expert admitted that he did not review any consumer data or have any background in understanding consumer behavior, while Republic’s expert also admitted that he did not know “how much of HBI’s profits are attributable to the challenged statements;” did not “have any basis for adjusting [his] profit opinion to account for the fact that the jury might accept some of the statements, but not all of them, as false advertising;” and did not “have any basis for an opinion that any of the challenged advertisements actually increased HBI’s profits.”  This lack of evidence that the wrongful conduct was a “substantial factor” in producing sales was “fatal” to an award of disgorgement.

The other factors listed by the Restatement didn’t change anything (the adequacy of other remedies; the public interest in deterrence/disgorgement; degree of fault; any delay in suing; any related plaintiff misconduct).  The court specifically noted the risk of a windfall to Republic, given that there are 22 hemp-based competitor rolling paper products, “all of whom may have suffered sales losses because of HBI’s misleading statements.” Deterrence was sufficiently served because it cost HBI money to bring itself into compliance with the injunction by removing numerous marketing statements from all packaging, marketing, and promotional materials for upwards of 600 items. Nor was Republic a completely innocent party in the matter, given that the jury found that it willfully infringed HBI’s trade dress and copyright.

However, the court did award some attorneys’ fees under IUDTPA, which are available “if the court finds that [defendant] has willfully engaged in a deceptive trade practice.” Willful conduct is defined as conduct that is “voluntary and intentional, but not necessarily malicious.” HBI acted with willfulness as to the Alcoy statements. “[W]hen HBI—a full year after trial—claimed that any problems with its Alcoy statements could be solved by essentially rearranging the punctuation of its previous statements, this Court found that it was ‘an attempt to mislead.’” Thus, Republic’s reasonable attorneys’ fees as to that issue would be awarded.

1 comment:

KC said...

"The court was primarily guided by the absence of proof that the false statements were a substantial factor in producing sales" is an interesting point (to me, not a lawyer). I do not know how often false statements are made that aren't intended to produce sales, but I can't imagine that it is ever just a harmless mistake or joke.