even after default, court may constrain recovery in competitive market

KHN Solutions LLC v. Shenzhen City Xuewu Feiping Trading Co., No. C 20-07414 WHA, 2024 WL 4351861 (N.D. Cal. Sept. 30, 2024)

I don’t usually blog default judgments, but this one was interesting. It granted interim relief against Amazon.com, impounding funds and products of defendants. KHN makes blood-alcohol concentration breathalyzers; defendants make competing breathalyzers “popularized by fake reviews and false quality assurances on Amazon.” After difficulties serving the Chinese defendants, the magistrate allowed email service and recommended a default judgment.

The district court asked Amazon to comment, since the recommended injunction would burden it. Amazon proposed revisions, including expanding the injunction to cover products newly identified by three Amazon Standard Identification Numbers, and that Amazon transfer defendants’ allegedly ill-gotten gains only after Amazon covered its fees from all those sales.

The recommended injunction didn’t specify the particular breathalyzers for Amazon to discontinue. Amazon and plaintiffs proposed adding identifiers for three specific models of Rofeer-branded breathalyzers, not just one model. The complaint never stated a specific model name, product number, or web address of the complained-of product(s). The complaint’s allegations about fake reviews and poor breathalyzer test results — even when accepted as true — were untethered from specific models. Amazon did suggest that of the many “Rofeer®-branded breathalyzers” it investigated only “certain” products identified “by Plaintiff,” the “B07ZH6PVD4” and “B08CZBL7YS” products, but neither identifier made it into the proposed text of the injunction, and then they proposed to expand it to a third.

“But how can the Court permanently enjoin the sales of three specific products, when there is only an allegation or evidence supporting at most one product being falsely advertised? Plaintiff was required to plead false advertising with specificity, then prove it.” It only did so with evidence as to B07ZH6PVD4.

This is a false advertising case, not a counterfeiting case. Usually, a false advertising injunction stops false statements about products. The recommended injunction would do more:

It would permanently stop defendants from selling their product (including from unspecified sites besides Amazon’s, where no false statements have been shown). It would even order the shipping of offending breathalyzers to plaintiff. And it would permanently disable the defendants’ purported seller accounts, even though the record does not show that defendants’ sole use of these accounts is for selling falsely advertised items.

That would not be justified as a permanent injunction, though interim relief was appropriate.

As for damages, “the proposed injunction permits double, triple, or even sixteen-fold recovery,” by letting the plaintiff recoup “up to the amount of the Court’s damages award” from Amazon, then from financial institutions and payment processors “not limited to” the fifteen listed in the injunction to get “the amount of the Court’s damages award.” “Plaintiff has not established that defendants even have accounts with all third parties.” There were no provisions to avoid double recovery, and even single recovery would be unsupported.

The recommended damages award “exceeds what the law allows, because it impounds all sales revenue, not just plaintiff’s actual damages or defendants’ profits.” The Lanham Act allows compensation, not punitive damages, as measured either by actual damages or defendant’s profits. The plaintiff bears the burden of proving the “defendant’s gross profits from the infringing activity with reasonable certainty.”

But selling always has costs.

Awarding defendants’ total revenues ignores that reality. Similarly, total sales surpass what plaintiff possibly would have earned but-for the purported misconduct. Selling products almost always involves competing against more than one rival for the sale. Here, there were multiple rivals: Plaintiff compares defendants’ product not only to its own but to third-party “Lifeloc’s FC10 police-grade industry standard breathalyzer.” If plaintiff made fewer sales because of defendants, Lifeloc likely made fewer sales, too. Thus, awarding all of defendants’ revenues (or profits) to plaintiff also ignores this reality. Plaintiff makes no substantive or equitable argument to justify such outsized relief.

District courts have awarded damages in trademark infringement cases in the amount of defendant’s sales where no offsetting costs were proven. But trademark infringement involves more direct harm than defendants “who simply made false statements about their own products.” The recommended award here surpassed “what equity allowed, which is the Lanham Act’s limit.” And there were other problems with the proposed award, including that Amazon omitted dollar amounts from its spreadsheet showing sales “ostensibly for confidentiality reasons.” Because of the lack of detail, there was no way to attribute sales to specific models.

Thus, the court ordered Amazon to cease to deal with the defendants/anyone operating for their benefit; impound any products in Amazon’s control that are at issue in this case, specifically including three ASINs; and impound all revenues in the Amazon accounts of persons or entities that have accrued from selling those products. “Upon the Court’s further order, the impounded funds might be released to defendants or possibly to plaintiff — or to someone else, perhaps even to disappointed purchasers. Same goes for the products. But defendants must show up to make their case.”

The court reasoned that impounding would create a fund to allow damages, once properly determined. Impounding was also intended to “get the immediate attention of defendants and to break the cycle of selling into our country but refusing to appear and to defend, meaning to get the attention of defendants and persuade them to appear and to defend on the merits.” If defendants failed to appear, the court would entertain a renewed motion for default judgment.