October 21, 2014

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October 21, 2014

October 20, 2014

Discovery of Accused Contributory and Vicarious Infringer’s Tax Returns and General Financial Information Denied for Lack of Assertion of Theory to Recover its Profits

Introduction

With a recent order that issued from the Southern District of Georgia, Savannah Division, Coach, Inc. and Coach Services, Inc. (collectively “Coach”) continue to add to the body of case law from Georgia federal courts on trademark and copyright issues.[1]   

On December 19, 2012, in an order by U.S. Magistrate Judge G.R. Smith, the Southern District of Georgia denied Coach’s motion to compel discovery of tax returns and general financial information from defendant Hubert Keller, Inc. (“HKI”), whom Coach had accused of contributory trademark infringement and vicarious copyright infringement.  In so doing, Judge Smith explored damages principles and raised a practical, and unanswered, question on how a trademark or copyright claimant could recover profits against an accused contributory or vicarious infringer.

Background Facts

The court’s order describes HKI as a Savannah-based flea market operator.[2]  Asserting claims for contributory trademark infringement and vicarious copyright infringement, Coach alleged that, upon information and belief, HKI “‘willfully and knowingly encouraged and permitted the sale of Infringing Product [(handbags, watches, jewelry, etc.)] to occur at The Flea Market.’”[3]

Coach served document requests on HKI, seeking HKI’s tax returns for 2009 through 2011, as well as HKI’s financial statements.[4]  HKI’s counsel objected to those requests on the grounds that they were “‘overly broad, not relevant, and not reasonably calculated to lead to the discovery of admissible evidence in this matter.’”[5]

Later, Coach served a notice of a Rule 30(b)(6) deposition[6] of HKI.  Topics recited in that notice included “‘(K) Financial information relating to the flea market; and (L) Financial information relating to the sales of merchandise by tenants known to have sold counterfeit merchandise.’”[7]  Prior to the deposition, the parties’ attorneys conferred with one another in attempt to resolve a dispute concerning discovery of HKI’s tax returns and general financial information.  The court summarized the position of HKI’s counsel during those discussions as follows:

HKI, after all, engaged in no sale of any goods, but merely rented stall space.  So even as a contributory infringer, its financials would show no useful information because at best Coach “was entitled to an award of an infringer’s profits related to the sale of infringing items.”[8]

The deposition of HKI proceeded, but when Coach’s counsel asked HKI’s testifying representative about the disputed information, HKI’s counsel instructed her not to answer, on the basis of irrelevancy.[9]  HKI asserted that “it reasonably believed that this issue had been resolved prior to that deposition,” as neither counsel were able to locate any authorities to alter their positions by that time.[10]  Coach’s counsel, claimed HKI, “‘admitted that he had never seen a case addressing the calculation of profits in the secondary infringement context.’”[11]  HKI did not, however, move for a protective order to preclude inquiry into the disputed information.[12]

Coach filed two motions.  One motion sought to compel discovery of HKI’s “tax returns and financial information for 2009-2011,” as well as to re-depose HKI on those topics.  The other sought sanctions under Fed.R.Civ.P. 37 for Coach’s motion and re-deposition expenses.[13]

The Court’s Denial of Coach’s Motions

“There is no dispute that tax returns and private financial data enjoy some protection,” began the court, “and most courts require a clear and compelling showing to justify disclosure.”[14]  The court then asked a practical question:

The crux of the instant discovery dispute is whether Coach’s discovery quest goes too far by demanding sensitive financial data to ultimately prove ill-gotten profits damages.  As further discussed below, trademark and copyright victims may sue both direct infringers and, as alleged here, contributory infringers. And if they may also pursue statutory or actual (wrongful profits) damages from them, then how is that done?  Because if there is no way to[] prove actual, profit-based damages from a contributory infringer, then it is reasonable to prevent discovery efforts on that score.  Hence, it is necessary to explore briefly the operational dynamics of infringement damages.[15]

Judge Smith first explored direct infringement damages principles, observing that Congress provided for the option to recover statutory damages in trademark counterfeiting cases “‘because evidence of a defendant’s profits in such cases is almost impossible to ascertain.’”[16]  Judge Smith then explained that in trademark infringement cases, one may elect to recover the accused infringer’s profits, in which case the trademark owner bears the burden to establish the defendant’s gross sales of the accused product, and the defendant then has the burden to refute the claimed amount of sales “and/or proffer costs that should be deducted from the gross sales.”[17]  “Also,” noted the court, “‘[i]f a defendant shows that its sales were unrelated to the infringement, then the plaintiff is not entitled to a recovery of those profits.’”[18]  Judge Smith summarized his exploration of direct infringement damages principles as follows:

The case law generally shows, then, that “[i]f General Motors were to steal your copyright and put it in a sales brochure, you could not just put a copy of General Motors' corporate  income tax return in the record and rest your case for an award of infringer's profits.  Taylor v. Meirick, 712 F.2d 1112, 1122 (7th Cir. 1983).”  Put another way, claimants must use a method to sort and sift wrongful profit from underlying costs and unrelated sales.[19]

Next, Judge Smith discussed the specific context of the case before it, namely, secondary liability theories of trademark and copyright infringement:

Here Coach pursues HKI only as a contributory infringer. But what method will Coach use to collect non-statutory (sales-based profits) damages from HKI?  It fails to say.  It does correctly point out that flea marketers can Contribute to such infringement by facilitating (supplying a vendor stall and looking the other way) the sale of counterfeit goods.  It also reasons that, in the discovery stage, it must be free to pursue information on contributory infringement damages even if ultimately it cannot prove same at trial -- and it need not elect which form of damages it wants now.  And, since HKI has admitted it has no electronic accounting data, the only source of its profits is likely to be its tax returns.

As the plaintiff it is Coach’s burden to show how it can recover for actionable wrongs committed.  It fails to show how it can recover profit-based damages, and thus how HKI's tax returns will yield it information to that end.  . . . Coach may be right in stating that infringement plaintiffs may elect between the two forms of damages, but it has yet to explainhow that is realistically done in a case like this, much less how HKI's tax returns will assist Coach in proving actual (sales/profit-based) damages.  No doubt a lax flea market over time can attract more and more counterfeiting vendors and thus more rental fees.  But sifting the flecks of “counterfeit income” from the rental stream would be, on its face, at best a speculative mirage. Coach is thus left with this question: How can it possibly prove anything but statutory damages (i.e., a profit-based form of damages) even if it is armed with the knowledge that HKI, for example, took in $500,000 of rental income and claimed a $100,000 profit?  Again, even a direct-infringement plaintiff must initially prove an infringing defendant's sales before the burden shifts to the defendant to prove deductible costs. Coach can’t even do that here, because the only thing HKI sold is rental space. Coach's direct infringer cases are easily distinguishable.[20]

Judge Smith remarked that Coach was free to invoke the option of a statutory damages remedy, but that “[o]therwise, it is not entitled to HKI’s tax returns and financials on these grounds.”[21]

Nor did Coach’s claim for enhanced damages under the Lanham Act, or for punitive damages under Georgia law, justify the discovery sought, concluded the court, because “[a]n enhanced damages award may be obtained without proving net worth or analyzing profits,” and because Coach did not make an evidentiary showing that it had a factual basis for claiming punitive damages.[22]

Finally, as to Coach’s motion for sanctions, the court acknowledged that “generally all blocking [of deposition questions] except as to privilege must be pre-authorized by way of motion for protective order or (less preferably) by stopping a deposition to seek a ruling.”[23]  However, given counsel’s efforts to confer with one another before the deposition, the failure of either party to cite any additional authorities to sway their positions at that time, and the lack of any suggestion of unprofessionalism, the court denied Coach’s motion.

The decision is Coach, Inc. and Coach Services, Inc. v. Hubert Keller, Inc., No. CV411-285, 2012 U.S. Dist. LEXIS 183632 (S.D. Ga. Dec. 19, 2012) (Smith, M.J.).  The case is assigned to U.S. District Judge B. Avant Edenfield.


[1] We covered a prior decision involving Coach, and a complaint filed by Coach, in other litigation. See, respectively, in our blog entries of November 12, 2012 and October 31, 2012.

[2] Coach, Inc. and Coach Services, Inc. v. Hubert Keller, Inc., No. CV411-285, 2012 U.S. Dist. LEXIS 183632, at *2 (S.D. Ga. Dec. 19, 2012).

[3] Id.

[4] Id., 2012 U.S. Dist. LEXIS 183632, at *3 & *4.

[5] Id. at *3.

[6] “[Federal] Rule [of Civil Procedure] 30(b)(6) governs deposition notices directed to organizations. The deposition notice ‘must describe with reasonable particularity the matters for examination.’ Fed.R.Civ.P. 30(b)(6).  In response, the organization must designate one or more persons to testify on its behalf as to those matters. Id.  ‘The persons designated must testify about information known or reasonably available to the organization.’ Id.”  Continental Cas. Co. v. First Fin. Employee Leasing, Inc., 716 F.Supp.2d 1176, 1189 (M.D. Fla. 2010).

[7] Coach, 2012 U.S. Dist. LEXIS 183632, at *3.

[8] Id. at *4.

[9] Id. at *6 & *19.

[10] Id. at *6.

[11] Id. at *5.

[12] Id. at *6.

[13] Id. at *1.

[14] Id. at *8 & n.6 (citing cases).

[15] Id. at *9-*10 (footnotes omitted; italics in original).

[16] Id. at *12 (citation omitted; italics added by court) (quoting legislative history).

[17] Id. (citing Wesco Mfg., Inc. v. Tropical Attractions of Palm Beach, Inc., 833 F.2d 1484, 1488 (11th Cir. 1987)).

[18] Id. (quoting Flowers Bakeries Brands, Inc. v. Interstate Bakeries Corp., 2010 U.S. Dist. LEXIS 6601, 2010 WL 2662720, at *12 (N.D. Ga.  June 30, 2010)).

[19] Id. at *14-*15 (other citations omitted).

[20] Id. at *15-*16 (italics in original).

[21] Id. at *17.  The prayer for relief in Coach's complaint includes a request for statutory damages under the Lanham Act.

[22] Id. at *17-*18.

[23] Id. at *19 (citing authorities).

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