§ 1927 Sanctions: Recklessness Alone Insufficient — Argument Not Frivolous If Issue Unresolved and Out-of-Circuit Precedent Supports It — Failure to Withdraw Claim & Opposing Dismissal Once Aware of Baselessness Is Sanctionable

Stone Creek, Inc. v Omnia Italian Design, Inc., 2017 U.S. App. LEXIS 12393 (9th Cir. July 11, 2017):

 

This appeal, set in the high-stakes world of furniture sales, runs the gamut of trademark infringement issues. The facts are somewhat unusual: the alleged infringer, leather furniture manufacturer Omnia Italian Design, Inc. ("Omnia"), admits that it blatantly copied and began selling the same goods branded with the mark of its (now ex) business partner, retail furniture company Stone Creek, Inc. ("Stone Creek").

The first question we confront [*3]  is whether Omnia's use of Stone Creek's mark was likely to cause confusion. Placing an identical mark on identical goods creates a strong likelihood of confusion, especially when the mark is fanciful. Because Stone Creek also sells in overlapping marketing channels and the law dictates that other factors heighten the likelihood that consumers will be confused as to the origin of the furniture, we reverse the district court's contrary determination.

We also reject Omnia's invocation of a common-law defense--known as the Tea Rose-Rectanus doctrine--that protects use of a mark in a remote geographic area when the use is in good faith. Omnia's knowledge of Stone Creek's prior use defeats any claim of good faith. Finally, we confirm that a 1999 amendment to the trademark statutes does not sweep away our precedent requiring that a plaintiff prove willfulness to justify an award of the defendant's profits. A remand is necessary to determine whether Stone Creek can make that showing here.

***

IV. Sanctions Orders

The district court, relying on 28 U.S.C. § 1927, twice sanctioned Stone Creek's attorneys. Section 1927 permits sanctions against an attorney who "multiplies the proceedings in any case unreasonably and vexatiously" and tailors the amount awarded to the costs and fees "reasonably incurred because of such conduct." Without more, reckless, but nonfrivolous, filings may not be sanctioned. B.K.B. v. Maui Police Dep't, 276 F.3d 1091, 1107 (9th Cir. 2002). The district court's first sanctions order runs afoul of that rule, but the second order falls well within the court's discretion. [*35]  See Pac. Harbor Capital, Inc. v. Carnival Air Lines, Inc., 210 F.3d 1112, 1117 (9th Cir. 2000) (reviewing for abuse of discretion).

The court sanctioned Stone Creek's attorneys for filing a summary judgment motion on willfulness, reasoning that summary judgment was not an appropriate vehicle for Stone Creek to request a legal ruling that willfulness is not required for a disgorgement of profits. The court stated that it could not rule on willfulness until it had ruled on infringement and held that Stone Creek's arguments were frivolous on the merits because Fifty-Six Hope forecloses Stone Creek's argument that, after the 1999 amendment, a showing of willfulness is not necessary for disgorgement.

On the latter point, the district court was incorrect as a matter of law. Fifty-Six Hope does not address the effect of the 1999 amendment on the continuing vitality of the willfulness requirement. 778 F.3d at 1073-74. Although the 1999 amendment is referenced in a citation, there is no analysis or determination about the import of the amendment. Id. at 1073. Instead, the court in Fifty-Six Hope took willfulness as a given and did not need to go further because willfulness was adequately established as a factual matter. Id. at 1074. Importantly, at the time that Stone Creek filed its motion, the interplay between the amendment [*36]  and the prior version of the statute remained an open question. This point is underscored in the Ninth Circuit's Model Jury Instructions: "The Ninth Circuit has not addressed . . . whether willfulness remained a prerequisite to disgorgement of a defendant's profits as a result of the Trademark Amendments Act of 1999." Manual of Model Civil Jury Instructions for the Ninth Circuit 15.29 cmt. (2017).

Although we ultimately disagree with Stone Creek on the merits of this issue, its arguments were not frivolous. The unsettled nature of the question in our circuit provided Stone Creek with a legitimate basis to ask the district court for a legal ruling--namely, to determine whether to present evidence of willfulness and Omnia's profits, in addition to Stone Creek's damages, at trial. The unresolved legal issue, combined with the fact that another circuit had accepted the argument that the 1999 amendment did away with the willfulness requirement, see Banjo Buddies, 399 F.3d at 175, legitimizes Stone Creek's arguments. See W. Sys., Inc. v. Ulloa, 958 F.2d 864, 873-74 (9th Cir. 1992). We reverse the sanctions order related to the willfulness issue.

On the other hand, the court's second sanctions order reflects a discretionary judgment adequately grounded in the law and record. The court sanctioned Stone Creek for [*37]  not earlier dropping its actual damages claim when it intended to pursue only Omnia's profits. As the court described, Stone Creek had no evidence to support an actual damages claim and, with the knowledge that "its actual damages claim was meritless," Stone Creek failed to withdraw the claim and opposed Omnia's motion to strike the claim.

It is true that actual damages and defendant's profits are two distinct and well-recognized remedies available to the plaintiff. 15 U.S.C. § 1117(a)(1)-(2); 5 McCarthy, supra, § 30:57. The district court's order does not offend that principle. The court did not question Stone Creek's right to pursue actual damages as an appropriate avenue of recovery; instead, the court determined that Stone Creek had not actually done so.

As the district court explained, while Stone Creek's expert finally determined that proving actual damages would be "too difficult," Stone Creek never provided any analysis from its expert on actual damages or identified what information it was seeking during discovery to shed light on the issue. Stone Creek's expert acknowledged in his deposition that he had not been asked to perform a damages analysis or calculation. With the actual damages claim still on the table, Omnia was [*38]  forced to expend time and resources defending against the claim by, for example, taking depositions and having its expert prepare a report. When confronted with Omnia's motion to strike the actual damages claim before trial, Stone Creek opposed that effort even though it could point to no evidence to support the claim. The district court acted within its discretion in concluding that Stone Creek's attorneys "unreasonably and vexatiously" "multiplie[d] the proceedings" and awarding Omnia the resulting attorneys' fees.

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