No Shelter for Willful Infringement of Distributor’s Trademarks
The US Court of Appeals for the Seventh Circuit affirmed a district court’s finding of trademark infringement and award of damages against a manufacturer of storm shelters and its owner, and went a step further by ordering the district court to also award the plaintiff reasonable attorneys’ fees. 4SEMO.com Inc. v. Southern Illinois Storm Shelters, Inc. et al., Case Nos. 18-1998, 19-2095 (7th Cir. Oct. 7, 2019) (Sykes, J).
Southern Illinois Storm Shelters (SISS) manufactures storm shelters. 4SEMO.com Inc. is a home-remodeling firm that purchased storm shelters from SISS and installed them for 4SEMO’s customers. In 2005, 4SEMO secured from SISS an exclusive right to sell SISS-manufactured storm shelters in parts of Missouri and Arkansas. 4SEMO created a trademark, LIFE SAFER STORM SHELTERS, and a logo to market and sell the storm shelters:
In 2006, SISS sought a license from 4SEMO to use the LIFE SAVER STORM SHELTERS marks to market its storm shelters in other geographical areas. 4SEMO granted an oral license with certain conditions, which SISS proceeded to ignore for many years. Discovery revealed that SISS’s intent all along was to use 4SEMO’s trademarks for nationwide sales without abiding by the oral license until 4SEMO discovered the infringement, and to then offer to purchase the marks.
When 4SEMO learned of SISS’s years of infringement, SISS attempted to execute its plan, but negotiations broke down. In 2013 SISS sued 4SEMO for trademark infringement, alleging that SISS had used the LIFE SAVER STORM SHELTERS mark for years before 4SEMO began to use the mark. 4SEMO counterclaimed for trademark infringement, breach of contract, civil conspiracy and other claims.
After SISS’s claims were proved baseless and dismissed via summary judgment, the district court held a bench trial on 4SEMO’s counterclaims and found in favor of 4SEMO. Turning to damages, the judge found that 4SEMO’s expert proved that SISS had approximately $17.4 million in revenues from its decade of infringing sales. Because SISS had not challenged 4SEMO’s expert’s calculations and had affirmatively waived its right to prove its costs, the district court awarded the entire $17.4 million of infringing revenues to 4SEMO. The court declined, however, to award 4SEMO its attorneys’ fees under 15 USC § 1117(a). Both parties appealed.
On appeal, SISS offered two novel legal theories. First, it argued that 4SEMO’s LIFE SAVER STORM SHELTERS logo was illegal because it violated a federal criminal statute, 18 USC § 706, that reserved the emblem of a red Greek cross on a white ground exclusively for the American Red Cross. The Seventh Circuit disposed of this theory, holding that 4SEMO’s logo, which featured a red cross with large yellow lettering, on a black background, sufficiently distinguished the mark from the American Red Cross logo. Second, citing Professor McCarthy’s treatise, SISS argued that in “the absence of an agreement defining ownership [there is a] rebuttable presumption that the manufacturer of [the] goods is the owner of the trademark of those goods.” SISS argued that because it was the manufacturer of the storm shelters, it was presumed to own the marks used to promote this product. The Seventh Circuit noted that this argument was waived because it was first raised on appeal, and found that the argument also failed because the “initial ownership” of the LIFE SAVER marks was not in dispute. The district court had found—and SISS did not dispute on appeal—that 4SEMO had first created and adopted the marks. Thus, Professor McCarthy’s rebuttable presumption and corresponding factors were not relevant to the situation.
The Seventh Circuit affirmed the award of SISS’s entire revenues as disgorged profits, holding that SISS had effectively conceded 4SEMO’s expert’s calculations and waived its right to prove any deductions. The Court found no error in the district court’s holding that SISS, its corporate owner (Ingoldsby Excavating) and that company’s owner (Bob Ingoldsby) were jointly and severally liable for these damages. The Court noted the district court’s factual findings that Bob Ingoldsby failed to maintain any corporate formalities in terms of his companies. The Seventh Circuit then took the matter a step further. Noting the district court’s factual finding that SISS and its owner’s infringement was “willful, egregious,  intentional” and “malicious,” the Seventh Circuit held that the district court’s refusal to find this to be an “exceptional case” deserving of an award of attorneys’ fees was an abuse of discretion. The Seventh Circuit reversed the denial of attorneys’ fees and remanded the case for entry of a reasonable fee award.
Practice Note: While it is rare for an appellate court to find that a district court abused its discretion in denying attorneys’ fees under § 1117, that is exactly what happened here. The Seventh Circuit explained that the factual findings that SISS’s conduct was “willful,” “egregious,” “intentional” and “malicious” mandated a finding that the case was exceptional under Octane Fitness v. ICON Health & Fitness. Defendants in the Seventh Circuit should take care to strongly contest any factual findings of willfulness or maliciousness, or risk a similar result.