Thursday, February 12, 2009

Adidas’ $305 Million Trademark Infringement Jury Verdict Not Exceptional Enough to Merit Attorney Fees

On February 6, 2009, the court involved in the “epic” adidas v. Payless trademark infringement lawsuit that in July of last year resulted in a jury verdict of $305 million (although later reduced by the court to $65 million) has decided that the case is not exceptional enough to award attorney’s fees. See adidas America, Inc. et al v. Payless ShoeSource, Inc., 2009 U.S. Dist. LEXIS 9482 (D. Or. Feb. 6, 2009). For excellent background on the decisions last year, see Michael Atkins’ Seattle Trademark Lawyer blog post here.

adidas sought $ 6,574,493.40 in attorney fees, arguing that the jury's finding that Payless acted willfully or in bad faith as well as the jury’s award of punitive damages for acting with malice or in wanton and reckless disregard for adidas' rights merited a finding that this case was an “exceptional case” for purposes of 15 U.S.C. §1117(a)(3) which provides that “The court in exceptional cases may award reasonable attorney fees to the prevailing party.”

The court noted that in the Ninth Circuit, "A trademark case is exceptional where the district court finds that the defendant acted maliciously, fraudulently, deliberately, or willfully." Earthquake Sound Corp. v. Bumper Industries, 352 F.3d 1210, 1216 (9th Cir. 2003); and furthermore, attorney fees awards are "never automatic and may be limited by equitable considerations." Rolex Watch, U.S.A., Inc. v. Michel Co., 179 F.3d 704, 711 (9th Cir. 1999

While the court found the question to be a close one, the court ultimately concluded that the case was not an exceptional case supporting an award of attorney fees. One factor was very case specific arising from a prior settlement agreement between the parties:

I first note that Payless sold the infringing shoes for three years believing that Judges Jelderks' and Haggerty's opinions allowed the sales under the 1994 settlement agreement. This is balanced by the fact that Payless did not stop selling the shoes after the Ninth Circuit reversed those rulings. The Ninth Circuit, however, only stated that adidas could prosecute these claims. The court did not give any opinion on whether the shoes infringed the trademark. Thus, Payless could have prevailed at trial.

The court further noted that there was no evidence of point-of-sale confusion, the infringing shoes all had two or four stripes rather than the three stripes from adidas' trademark, there was substantial evidence of companies other than Payless selling two and four stripe shoes for years, and there was no evidence that adidas lost any sales because of the infringement (the court noted that the jury’s damages award, while substantial, “was based on more theoretical types of damage than lost sales.”).

The court also declined to award $1,362,380.94 in other nontaxable expenses (telecommunications expenses, postage, messenger charges, travel, online research, mediation fees, and expert witness fees), for which the court has discretion to award as reasonable attorney fees in exceptional cases. See Mathis v. Spears, 857 F.2d 749, 758 (Fed. Cir. 1988).

The court’s decision then goes through the remaining $383,226.49 sought by adidas in costs that are taxable under 28 U.S.C. §1920 and ultimately awards $380,596.84 (the difference being a pro hace vice fee for one attorney that the court found was not reasonably necessary to the case and about 2,245.00 in delivery costs, which are not taxable under §1920. Smith v. Tenet Healthsystem SL, Inc., 436 F.3d 879, 889 (8th Cir. 2006)).

Finally, the court also declined to award adidas prejudgment interest of $ 10,445,154.12 on the award of actual damages and $ 6,712,823.98 on the award of profits. First, adidas’ post-judgment motion for prejudgment interest (governed by Federal Rule of Civil Procedure 59(e)) was apparently filed one week late and thus untimely such that the court could not award prejudgment interest. Second, the court added that even if he could have awarded prejudgment interest, it would have declined to do so for the same reasons why the court did not consider this case an exceptional case and because such prejudgment interest is not necessary to make adidas whole from this infringement.

So let this be a lesson to those plaintiff’s attorneys who so confidently inform their clients that they can recover attorney’s fees for a defendant’s infringement based on the idea that such infringement is “exceptional” -- think again. Of course, one wonders if the court would have thought differently had a much smaller, but still significant judgment (e.g., $5 million) been awarded by the jury.

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