On July 3, 2012, in Fishman Transducers, Inc. v. Paul, the US Court of Appeals for the First Circuit ruled that the preponderance of evidence is the appropriate standard for proving willfulness in trademark infringement and false advertising cases under the Lanham Act. The court also affirmed the district court's denial of damages based on the defendants' profits where the violations were not willful and the plaintiff's and defendants' products were not directly competitive.
On July 3, 2012, in Fishman Transducers, Inc. v. Paul, the US Court of Appeals for the First Circuit affirmed the district court's post-trial decision that the defendant's trademark infringement and false advertising violations under the Lanham Act were not willful. In a matter of first impression, the court also held that the preponderance of the evidence is the appropriate standard to prove willfulness in infringement actions. The court rejected an award of single damages to the plaintiff because plaintiff failed to prove causation and amount. Because the parties were not directly competing and the infringement was not willful, the court also upheld the district court's denial of damages based on the defendant's profits. This decision is notable in extending a circuit split on the proper evidentiary standard for proving willfulness in Lanham Act violations.Close speedread
The key issues before the US Court of Appeals for the First Circuit in Fishman Transducers, Inc. v. Paul were whether:
The appropriate standard for proving willfulness in Lanham Act trademark infringement and false advertising cases is preponderance of the evidence or, as the district court judge instructed the jury, clear and convincing evidence.
The district court mishandled the central issue of willfulness in its jury instructions and in responding to two jury questions.
The district court judge erred in excluding certain testimony on the issue of damages.
The district court judge erred in denying damages based on the defendants' profits.
Fishman develops and manufactures acoustic equipment that attaches to musical instruments for sound amplification. The product at issue in this case is a product known as a guitar pickup. Stephen Paul is a musician who performs under the name Esteban. HSN Interactive is an online retailer, and its sister company sells products on the Home Shopping Network television channel (together, HSN).
In 2001, Paul and his company, Daystar Productions, collaborated with HSN to market and sell Esteban guitar packages. In 2006, the parties began representing that Esteban guitars included Fishman pickups. Specifically:
Starting in the second quarter of 2006, HSN's website listed a Fishman pickup as one of the guitars' specifications.
In October 2006, on the HSN channel, Paul began to laud Fishman pickups and emphasize that the guitars included them.
Several months after the TV advertising began, Fishman contacted HSN and Daystar demanding that they cease claiming in the broadcasts and on the website that the guitars had Fishman pickups. HSN complied. Fishman also sued Paul, HSN and Daystar in the US District Court for the District of Massachusetts for, among other claims, trademark infringement and false advertising under the Lanham Act.
During the trial, the defendants did not seriously deny infringing the Fishman trademark and falsely advertising that the guitars contained Fishman pickups, and much of the testimony focused on whether the violations were willful. The jury found trademark infringement and false advertising in violation of the Lanham Act but that neither violation was willful. In a post-trial decision, the judge did not order disgorgement of profits because the violations were not willful and because of conventional equitable balancing. Fishman appealed.
The First Circuit affirmed the district court's decision, finding that:
Preponderance of the evidence, not clear and convincing evidence, is the correct standard for proving willfulness in Lanham Act trademark infringement and false advertising cases.
The district court had erred in its instructions to the jury, and responses to the jury's questions, on willfulness, but that the errors did not affect the outcome.
The district court did not abuse its discretion in excluding certain testimony on damages by Fishman and his expert.
Where the parties did not directly compete, the district court judge did not wrongly reject damages based on the defendants' profits.
On appeal, Paul argued that the district court's errors on jury instructions impaired the jury's finding on whether the violations were willful. Specifically, Paul asserted among other things that the district court erred in:
Instructing the jury that the plaintiff must prove willfulness by clear and convincing evidence.
Failing to provide clear instructions that it could find willfulness based on objective recklessness.
As a matter of first impression, the First Circuit held that preponderance of the evidence is the appropriate standard for proving willfulness. The relevant sections of the Lanham Act do not prescribe a burden of proof. Noting that there is a circuit split on whether a heightened standard of proof applies to willfulness in Lanham Act cases, the court found that Supreme Court decisions in other contexts support application of the preponderance of the evidence standard where the statutory language does not provide a higher standard.
The First Circuit also agreed that the jury instructions did not clearly state that the jury could find the defendants' violations willful based on a finding of objective recklessness and may have been confusing. In federal civil litigation, willfulness may be shown by conduct deemed objectively reckless measured against standards of reasonable behavior.
Even though the court agreed that the jury instructions were mistaken on the burden of proof and potentially confusing on recklessness, it found that neither was harmful to Fishman because even applying the proper evidentiary standard and with a clear understanding of willfulness, the evidence was insufficient to justify a finding of willfulness.
The court held that the district court did not abuse its discretion by excluding the testimony on damages by Fishman's expert (Britven) and founder. In trademark infringement cases, single damages can be awarded without finding willfulness. However, proving causation and amount are very difficult unless the two products directly compete. Specifically, the court found that Britven's report was merely a basis for jury speculation, and that the district court properly excluded his testimony, because:
showed a decline in sales from 2006 to 2007, but by not providing sales data for a longer period did not did not address the possibility that the decline was merely an ordinary year-to-year fluctuation; and
lacked any information about Fishman's profit margins or any financial information other than revenues that a jury could use to estimate lost profits.
Britven did not provide any information to support a conclusion that Esteban's infringement was related to a decline in Fishman's customers' retail sales.
The court identified types of evidence that Fishman might have introduced to demonstrate lost profits, including:
Customers' direct testimony.
Market research surveys.
Competitors' sales data.
The First Circuit also held that the district court correctly denied damages based on the defendants' profits because Fishman pickups and Esteban guitars do not directly compete and the Lanham Act violations were not found willful. The court noted that case law supports an award based on the defendant's profits when there is direct competition between the parties, but found that direct competition did not exist where the plaintiff's product is not a substitute for, but a potential component of the defendants' product.
This case is notable for the First Circuit's decision to apply the preponderance of the evidence standard to prove willfulness in infringement actions. It also highlights the difficulty of proving causation and amount for damages in a trademark infringement case, particularly where the plaintiff and defendant do not directly compete. Specifically, counsel for trademark owners should take note of the types of evidence the First Circuit suggested could reasonably enable a jury to estimate damages.