§ 1927 Sanctions — Recklessness without More Insufficient — Uncertainty Reflected in Circuit’s Model Jury Instructions & Fact Another Circuit Accepted Argument Means It Isn’t Frivolous—Opposing Motion to Strike Claim w/o Basis Sanctionable

Stone Creek, Inc. v. Omnia Italian Design, Inc., 2017 U.S. App. LEXIS 16632 (9th Cir. Aug. 30, 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 [*3]  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 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.

Background

Stone Creek, [*4]  which manufactures furniture and sells directly to customers, has five showrooms in the Phoenix, Arizona area. Around 1990, Stone Creek adopted and began using the STONE CREEK mark:

In 1992, Stone Creek obtained state trademark protection. Twenty years later, in 2012, Stone Creek federally registered its mark. As described in the federal registration, the STONE CREEK mark is a red oval circling the words "Stone Creek" for various types of furniture.

In 2003, Stone Creek met representatives of Omnia--a manufacturer of leather furniture--at a California trade show. Dazzled by Omnia's pitch, Stone Creek agreed to buy Omnia's furniture. The two companies entered into an agreement under which Omnia manufactured leather furniture branded with the STONE CREEK mark. The business relationship stayed strong through 2012, but in 2013, Stone Creek discovered that Omnia had been using the STONE CREEK mark on competing furniture.

Omnia's unauthorized use began in 2008 when Omnia was trying to woo a big client. For many years before that, Omnia had worked with retailer Bon-Ton Stores, Inc. ("Bon-Ton"), but Bon-Ton became a "significant" customer in 2008. Bon-Ton signed on for Omnia to supply Bon-Ton's [*5]  leather furniture. However, Bon-Ton did not want to sell under the Omnia name; instead, Bon-Ton preferred a label that sounded "American." Although Omnia offered multiple options, Bon-Ton opted for STONE CREEK. According to Omnia, part of the allure of selecting the STONE CREEK mark was that marketing materials and a logo were already prepared.

Omnia copied the logo directly from Stone Creek's materials. Omnia's team used old documents with Stone Creek's logo to digitally recreate the identical logo because they could not achieve sharp resolution by scanning. Then Omnia plastered the mark onto a host of items, including binders, leather samples, and color boards for display in Bon-Ton stores. Most relevant here, Omnia designed warranty cards with the STONE CREEK mark, and, from 2008 to 2013, sold leather furniture to Bon-Ton branded with the STONE CREEK mark. Near the end of this period, Stone Creek--still unaware of Omnia's misdoings--obtained its federal trademark registration.

The STONE CREEK-labeled furniture produced by Omnia was shipped to Bon-Ton and sold to customers at Bon-Ton's various furniture galleries in the Midwest.1 Omnia's products reached purchasers living within 200 miles [*6]  of a Bon-Ton gallery, including portions of Illinois, Indiana, Iowa, Michigan, Ohio, Pennsylvania, and Wisconsin. The claimed infringing sales all occurred within that area.

1   We refer to the Midwest for ease of reference. The relevant states covered are Illinois, Michigan, Ohio, Pennsylvania, and Wisconsin.

Stone Creek caught a whiff of what Omnia was doing by 2013. Multiple customers contacted Stone Creek to ask about product options and store locations in the Midwest. Another customer called about a warranty issue with a leather sofa purchased at a Bon-Ton store in Chicago. The warranty card contained the STONE CREEK mark, which led the customer to Stone Creek's website. At that point, Stone Creek's president discovered that the mark was being used on furniture sold on Bon-Ton's website, and Stone Creek asked Omnia if it was selling products with the STONE CREEK mark to other companies.

To its credit, Omnia was candid. In an email from the Vice President of Sales, Omnia unequivocally admitted to selling furniture under the STONE CREEK mark. In a move not recommended when litigation is certainly impending, the email observed: "In this day of internet shopping and surfing, it is unfortunate and probably a nuisance for you that your stores are receiving inquiries regarding these products due to the similar name."

Stone [*7]  Creek filed suit in the District of Arizona, alleging federal and common-law trademark infringement and unfair competition. After a bench trial, the district court held that Omnia did not infringe Stone Creek's trademark because there was no likelihood of confusion.2 The court also ruled at summary judgment that disgorgement of Omnia's profits required a showing of willful infringement, but that determination was never made because Omnia was not found to infringe. During the course of the case, the court sanctioned Stone Creek's attorneys on two occasions for filings related to Omnia's profits and damages.

2   Earlier in the case, the district court rejected Omnia's Tea Rose-Rectanus defense based on Omnia's lack of good faith.

Analysis

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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 [*35]  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. 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 [*36]  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 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, [*37]  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 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 [*38]  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 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.

Conclusion

We reverse the district court's finding that there is no likelihood of confusion and reject the application of the Tea Rose-Rectanus defense. Thus, we hold that Omnia is liable for infringement of the STONE CREEK mark. We affirm the district court's conclusion that willfulness remains a necessary condition for a disgorgement of profits but remand for a determination on whether Omnia had the requisite [*39]  intent. Finally, we reverse the district court's sanctions order with respect to Stone Creek's summary judgment on willfulness but uphold the sanctions order with respect to Stone Creek's continued assertion of the actual damages claim.

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.

Costs on appeal shall be awarded to Stone Creek, Inc.

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