Abuse of Process Leads to Lanham Act 'Exceptional Case' Finding in Seventh Circuit

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After a detailed review of Lanham Act “exceptional case” jurisprudence in U.S. circuit courts, Judge Richard A. Posner of the U.S. Court of Appeals for the Seventh Circuit ruled Nov. 23 that abuse of process is the underlying principle for the finding and the consequent award of attorneys' fees to the prevailing party (Nightingale Home Healthcare Inc. v. Anodyne Therapy LLC, 7th Cir., No. 10-2327, 11/23/10).

Citing a “surprising lack of agreement” among the circuits and a “semantic jungle” in many of the divergent standards, the court set its own standard as the plaintiff's use of the litigation for an improper purpose or the defendant's persistence without an adequate defense and only so as to impose costs on its opponent.

The court affirmed a district court's award of attorneys' fees to the defendant in the instant case after finding that the plaintiff made the claim solely in an attempt to force the defendant to supply products at a lower price.

District Court Finds 'Exceptional Case.'

Nightingale Home Healthcare Inc. purchased several infrared lamps from Anodyne Therapy LLC at a price of $6,000 per lamp. The U.S. Food and Drug Administration had approved the lamps, but not specifically for the purpose employed by Nightingale, for the treatment of peripheral neuropathy.

Nightingale filed a Lanham Act claim of false representation against Anodyne, charging that the Anodyne sales representative claimed that the FDA approval was for that purpose.

Judge Sarah Evans Barker of the U.S. District Court for the Southern District of Indiana granted summary judgment in favor of Anodyne. She further found that Nightingale had made the claim in an attempt to coerce a price reduction from Anodyne. Per the Lanham Act's provision allowing that “The court in exceptional cases may award reasonable attorney fees to the prevailing party,” 15 U.S.C. §1117(a), she awarded $72,747 to Anodyne.

Nightingale appealed the award but not the summary judgment.

A Tour of the Circuits.

Judge Richard A. Posner devoted more than half the text of the opinion to a comparison of circuit law on the determination of an exceptional case under the Lanham Act. Below are his quotes or characterizations from determinative precedents in each circuit other than the Seventh:

First. “[W]illfulness short of bad faith or fraud will suffice when equitable considerations justify an award and the district court supportably finds the case exceptional.” Tamko Roofing Products Inc. v. Ideal Roofing Co., 282 F.3d 23, 32, 61 USPQ2d 1865 (1st Cir. 2002) (64 PTCJ 286, 7/19/02).

Second. The prevailing party must prove that their opponent litigated in bad faith, or, when the defendant is the prevailing party, that the suit was a fraud. Patsy's Brand Inc. v. I.O.B. Realty Inc., 317 F.3d 209, 221-22 (2d Cir. 2003) (65 PTCJ 610, 4/25/03).

Third. “[C]ulpable conduct on the part of the losing party” is required but “comes in a variety of forms and may vary depending on the circumstances of a particular case.” SecuraComm Consulting Inc. v. Securacom Inc, F.3d 273, 280, 55 USPQ2d 1820 224 (3d Cir. 2000) (60 PTCJ 377, 9/1/00).

Fourth. A prevailing plaintiff is entitled to an award of attorneys' fees if the defendant's trademark infringement was willful or in bad faith, while a prevailing defendant “can qualify for an award of attorney fees upon a showing of something less than bad faith by the plaintiff,” such as “economic coercion, groundless arguments, and failure to cite controlling law.” Retail Services Inc. v. Freebies Publishing, 364 F.3d 535, 550, 70 USPQ2d 1603 (4th Cir. 2004) (67 PTCJ 593, 4/23/04).

Fifth. Same as the Second Circuit, plus, if the defendant is the prevailing party, the court may “consider the merits and substance of the civil action when examining the plaintiffs' good or bad faith.” Procter & Gamble Co. v. Amway Corp., 280 F.3d 519, 527-28, 61 USPQ2d 1385 (5th Cir. 2002) (63 PTCJ 289, 2/1/02).

Sixth. In the case of a prevailing plaintiff, whether the defendant's infringement of the plaintiff's trademark was “malicious, fraudulent, willful, or deliberate,” and in the case of a prevailing defendant whether the plaintiff's suit was “oppressive.” Eagles Ltd. v. American Eagle Foundation, 356 F.3d 724, 728, 69 USPQ2d 1681 (6th Cir. 2004) (67 PTCJ 300, 2/6/04).

Eighth. “[B]ad faith is not a prerequisite” to an award. Hartman v. Hallmark Cards Inc., 833 F.2d 117, 123, 4 USPQ2d 1864 (8th Cir. 1987).

Ninth. “[A] finding that the losing party has acted in bad faith may provide evidence that the case is exceptional” but “other exceptional circumstances may [also] warrant a fee award.” Stephen W. Boney Inc. v. Boney Services Inc., 127 F.3d 821, 827, 44 USPQ2d 1225 (9th Cir. 1997). Also if “the defendant acted maliciously, fraudulently, deliberately, or willfully” or the plaintiff's case was “groundless, unreasonable, vexatious, or pursued in bad faith.” Love v. Associated Newspapers Ltd., 611 F.3d 601, 615, 95 USPQ2d 1855 (9th Cir. 2010) (80 PTCJ 375, 7/23/10).

Tenth. A prevailing plaintiff has to prove that the defendant acted in bad faith, while the prevailing defendant need only show “(1) . . . lack of any foundation [of the lawsuit], (2) the plaintiff's bad faith in bringing the suit, (3) the unusually vexatious and oppressive manner in which it is prosecuted, or (4) perhaps for other reasons as well.” National Association of Professional Baseball Leagues Inc. v. Very Minor Leagues Inc., 223 F.3d 1143, 1147, 55 USPQ2d 1628 (10th Cir. 2000) (60 PTCJ 283, 8/4/00).

Eleventh. Same as the Second Circuit. Lipscher v. LRP Publications Inc., 266 F.3d 1305, 1320, 60 USPQ2d 1468 (11th Cir. 2001) (62 PTCJ 538, 10/12/01).

D.C.. Same as the Fourth Circuit. Reader's Digest Association Inc. v. Conservative Digest Inc., 821 F.2d 800, 808-09 (D.C. Cir. 1987).

 

As to the Seventh Circuit, Posner cited as its precedent Door Systems Inc. v. Pro-Line Door Systems Inc., 126 F.3d 1028, 1031, 44 USPQ2d 1376 (7th Cir. 1997). But he noted modifications to its own doctrine in later cases that looked for “oppressive conduct.”

“It is surprising to find so many different standards for awarding attorneys' fees in Lanham Act cases,” Posner said. “The failure to converge may be an illustration of 'circuit drift': the heavy caseloads and large accumulations of precedent in each circuit induce courts of appeals to rely on their own 'circuit law,' as if each circuit were a separate jurisdiction rather than all being part of a single national judiciary enforcing a uniform body of federal law.”

Posner made no mention of the jurisprudence on the meaning of “exceptional case” in the U.S. Court of Appeals for the Federal Circuit, though that issue arises frequently in that court's cases. The Federal Circuit has addressed requests for attorneys' fees with a parallel view to patent law, per 35 U.S.C. §285, which is phrased exactly as the sentence at issue with respect to the Lanham Act.

In Brooks Furniture Manufacturing Inc. v. Dutailier International Inc, for example, the court concluded that exceptionality may be based on a finding of “material inappropriate conduct related to the matter in litigation“ or upon a finding that the litigation was “brought in subjective bad faith” and was “objectively baseless.” 393 F.3d 1378, 73 USPQ2d 1457 (Fed. Cir. 2005) (69 PTCJ 251, 1/14/05)

Seventh Circuit to Rely on Abuse of Process.

To determine the Seventh Circuit's standard, Posner looked at why Congress chose to make the exception in the Lanham Act to “the 'American' rule that forbids shifting the litigation expenses of the prevailing part to the loser.”

He focused on the practical concern for “the potential for businesses to use Lanham Act litigation for strategic purposes--not to obtain a judgment or defeat a claim but to obtain a competitive advantage independent of the outcome of the case by piling litigation costs on a competitor.”

After providing examples of such improper strategic purposes, he said, “When the plaintiff is the oppressor, the concept of abuse of process provides a helpful characterization of his conduct. Unlike malicious prosecution, which involves filing a baseless suit to harass or intimidate an antagonist, abuse of process is the use of the litigation process for an improper purpose, whether or not the claim is colorable.”

Though abuse of process is not used to describe behavior by defendants, Posner said, the concept is similar. “If a defendant's trademark infringement or false advertising is blatant, his insistence on mounting a costly defense is the same misconduct as a plaintiff's bringing a case (frivolous or not) not in order to obtain a favorable judgment but instead to burden the defendant with costs likely to drive it out of the market. Predatory initiation of suit is mirrored in predatory resistance to valid claims.”

He thus defined the court's new standard as follows:  

We conclude that a case under the Lanham Act is “exceptional,” in the sense of warranting an award of reasonable attorneys' fees to the winning party, if the losing party was the plaintiff and was guilty of abuse of process in suing, or if the losing party was the defendant and had no defense yet persisted in the trademark infringement or false advertising for which he was being sued, in order to impose costs on his opponent. 

 

 

 

Finally, he addressed “a procedural issue.” An inquiry into the state of mind of the alleged process abuser is required to succeed in a lawsuit based on the abuse of process tort, but he said, for Lanham Act purposes, “It should be enough to justify the award if the party seeking it can show that his opponent's claim or defense was objectively unreasonable--was a claim or defense that a rational litigant would pursue only because it would impose disproportionate costs on his opponent--in other words only because it was extortionate in character if not necessarily in provable intention.”

Abuse of Process in Instant Case.

In the instant case, Posner noted first that Nightingale's Lanham Act claim “had no possible merit” and then came to the same conclusion as the district court as to the finding that Nightingale was simply looking for a lower price.

“To bring a frivolous claim in order to obtain an advantage unrelated to obtaining a favorable judgment is to commit an abuse of process,” he said.

He further chastised Nightingale for continuing its frivolous litigation tactics on appeal, since the company charged Anodyne with “unclean hands” for failing to provide documents that were, in fact, not within Nightingale's discovery demands.

Posner also refused Nightingale's request to distinguish attorneys' fees related to state law claims as opposed to Lanham Act claims, since “Anodyne showed that the work that its lawyers had performed in defending against the Lanham Act claim could not be separated from their work in defending against the other claims, and Nightingale presented no rebuttal.”

Therefore, he not only affirmed the district court's award, but also granted costs to Anodyne for appellate fees and costs under Fed. R. App. P. 38.

Judges Michael S. Kanne and Ilana Diamond Rovner joined the opinion.

Jennifer S. Milligan, an attorney for Nightingale in Carmel, Ind., represented the company. Robert E. Johnson of Gray Robinson, Tampa, Fla., and Michael A. Wukmer of Ice Miller, Indianapolis, represented Anodyne.

By Tony Dutra