IP Law Daily, TRADEMARK—6th Cir.: Former Max Rack licensee escapes enhanced damages and attorney fees, (Jul 15, 2022)

By Cheryl Beise, J.D.

District court erred by awarding attorney fees and doubling a jury’s disgorged profits award.

The federal district court in Columbus, Ohio abused its discretion by awarding attorney fees and doubling a jury’s award of disgorged profits in favor of Max Rack, Inc., for a former licensee’s holdover use of the “Max Rack” mark on exercise equipment, the U.S. Court of Appeals in Cincinnati has ruled. The court’s doubling of Core Health & Fitness, LLC’s disgorged profits for failure to disclose cost-related evidence that did not harm Max Rack amounted to an improper “penalty” prohibited by 15 U.S.C. § 1117(a). An award of attorney fees under the Lanham Act was not warranted because there was no evidence that the case was in any exceptional. The appeals court, however, affirmed the district court’s vacatur of the jury’s award of $1 million in compensatory damages on the ground that Max Rack failed to demonstrate injury or actual consumer confusion (Max Rack, Inc. v. Core Health & Fitness, LLC, July 14, 2022, Murphy, E.).

Steve Skilken, the owner of Max Rack, Inc., invented a piece of free-weight gym equipment that he named the “Max Rack.” For years, Max Rack sold Max Rack machines through a licensing agreement with Core Health & Fitness, LLC. When Max Rack’s last patent expired, however, Core Health decided to compete against Max Rack by selling an identical machine under a new name—the “Freedom Rack.” In October 2016, Max Rack sued Core Health, asserting claims for trademark infringement and unfair competition under the Lanham Act and related claims under Ohio’s Deceptive Trade Practices Act (for passing off goods, causing likelihood of confusion as to source, and causing likelihood of confusion as to affiliation).

A jury found for Max Rack on all claims and awarded $1 million in damages and $250,000 in Core Health’s profits. The district court upheld the jury’s liability finding, doubled its profits award to $500,000 because of Core Health’s conduct during discovery, and awarded attorney fees of $381,808.32 to Max Rack. But the court overturned Max Rack’s damages award. After trial, Core Health moved for judgment as a matter of law or, in the alternative, for a new trial. On May 5, 2020, the court granted in part and denied in part the motion, affirming the jury’s award of disgorged profits. However, the court vacated the jury’s award of $1 million in compensatory damages on the ground that Max Rack failed to demonstrate actual consumer confusion. Max Rack moved for reconsideration based on the Supreme Court’s intervening decision in Romag Fasteners, Inc. v. Fossil, Inc., 140 S. Ct. 1492 (2020). In Romag, the Supreme Court held that, while the mens rea of an infringing party is an important consideration in awarding disgorged profits in Lanham Act cases, willful infringement is not a required element. Max Rack asserted that the Supreme Court’s logic could be extrapolated to mean that actual consumer confusion is not a required element for an award of damages under the Lanham Act. The district court disagreed and denied the motion.

Both sides appealed. The Sixth Circuit identified six issues on appeal: (1) Did Max Rack present sufficient evidence that Core Health violated the law? (2) Is Core Health entitled to a new trial? (3) Should the district court have vacated the jury’s profits award? (4) Did the court properly double that profits award? (5) Did the district court mistakenly vacate the jury’s damages award? (6) And did it wrongly grant attorney’s fees to Max Rack?

Core Health liability. Core Health began by arguing that the district court should have granted it judgment as a matter of law under Federal Rule of Civil Procedure 50 because no reasonable jury could have found it liable for trademark infringement and unfair competition under the Lanham Act or Ohio law.

Unlike the usual trademark infringement case involving confusing use of similar marks, this case involved Core Health’s unauthorized use of the “Max Rack” mark after expiration of the parties’ license agreement. Trademark infringement exists if a holdover licensee continues to use a licensor’s mark on its goods without authorization. Max Rack presented two theories of liability: (1) that Core Health sold some Max Racks without authorization, and (2) that Core Health used the Max Rack mark when selling Freedom Racks to confuse consumers into thinking that the Freedom Rack was affiliated with the Max Rack brand.

The Sixth Circuit determined that the jury reasonably could have found that Core Health violated the licensing agreement by selling up to 271 Max Racks without authorization. Core Health admitted that it sold 24 Max Racks outside the six-month window that the agreement gave it to liquidate inventory. In fact, Core Health paid Max Rack its profits on these units right before trial. In addition, despite scant evidence, the jury reasonably could have found that Core Health began manufacturing 238 additional Max Racks after the agreement expired. Again before trial, Max Rack paid the standard royalty for the 238 machines (all with interest).

According to the appellate court, the district court relied on “three pieces of relatively insubstantial evidence” to find that Core Health used the “Max Rack” name to sell Freedom Racks. Nevertheless, the Sixth Circuit agreed that Core Health’s own continued uses of the Max Rack mark, even if the uses were accidental and inadvertent, could have created a likelihood of confusion when considered collectively.

Denial of new trial. Core Health next argued that the district court at least should have granted it a new trial under Rule 59. But the district court properly exercised its discretion by denying Core Health’s new-trial request, the appeals court found. The district court’s decision to vacate the jury’s $1 million damages award did not provide a bases for a new trial either.

Jury’s profits award. Core Health argued that the district court wrongly refused to overturn the jury’s $250,000 award to Max Rack for Core Health’s profits. But this sum had a reasonable basis in the evidence when read against the Lanham Act’s burden-shifting approach to proving profits, the Sixth Circuit explained.

Doubling of jury’s profits award. Core Health next contended the district court erred by doubling the jury’s profits award to $500,000. The Sixth Circuit agreed, finding that the court “abused its discretion because its justification for this enhancement rested on a misunderstanding of the governing burden-shifting law.”

The Lanham Act provides: “If the court shall find that the amount of the recovery based on profits is either inadequate or excessive the court may in its discretion enter judgment for such sum as the court shall find to be just, according to the circumstances of the case.” 15 U.S.C. § 1117(a). However, the Act imposes a clear limit on this discretionary power: “Such sum . . . shall constitute compensation and not a penalty.” Id.

The reason the district court gave for doubling the profits award was that Core Health failed to disclose the data relating to its costs associated with the profits. “This logic got things backward under the Lanham Act,” the Sixth Circuit said. The district court already had granted Max Rack’s motion to exclude any nondisclosed evidence from trial as a sanction. The nondisclosure of the cost evidence did not harm Max Rack. The cost data only could have been used to offset and reduce the damage award. Accordingly, the district court’s doubling of the profits award amounted to a “penalty” prohibited by Section 1117(a).

Jury’s damages award. Max Rack argued that the district court erred by overturning the jury’s $1 million damages award. Reviewing the court’s decision de novo, the appellate court agreed that Max Rack failed to establish any recoverable damages.

Under Max Rack’s first theory, Core Health sold some 271 Max Racks without authorization. Before trial, however, Core Health paid Max Rack the profits Core Health earned on 24 of the units and its standard royalty for 238 more (all with interest). Max Rack did not claim that this payment failed to adequately remedy any marketplace injury. That left only the 9 machines that the jury could have found were sold to consumers as “Max Racks” but shipped as “Freedom Racks.” “Although Core Health did not pay Max Rack for these sales, Max Rack’s profits award would have remedied any harm from them,” the Sixth Circuit observed. “A further award would have amounted to a double recovery.”

Max Rack’s damages claim fared no better on it second infringement theory: that Core Health sold an unknown number of Freedom Racks by keeping “Max Rack” references on its website. Max Rack all but conceded that it lacked evidence of actual consumer confusion from Core Health’s minor uses of the Max Rack name, which Sixth Circuit precedent requires. Max Rack contended that Sixth Circuit should eliminate any categorical actual-confusion requirement for proving marketplace damages for trademark infringement because the Supreme Court in Romag recently did away with a similar categorical rule. The court declined the invitation to decide how Romag affects the traditional actual-confusion prerequisite for marketplace damages. “Even if we treated actual confusion as an ‘important’ factor,” Max Rack provided no evidence to show that Core Health’s stray references to “Max Rack” caused it harm. “No matter the governing legal standard, Max Rack’s speculation of harm would not suffice to justify a damages award,” the court said.

Attorney fee award. Lastly, Core Health challenged the award of $381,808.32 in attorney fees to Max Rack. The Lanham Act provides that a court “in exceptional cases may award reasonable attorney fees to the prevailing party.” 15 U.S.C. § 1117(a). The use of the word “exceptional” limits the district court’s discretion by reserving attorney’s fees for “rare” or “unusual” cases. The district court is to decide under the totality of the circumstances whether the case before it has the “rare” qualities that distinguish it from a typical case.

Even applying a deferential standard, the Sixth Circuit found that the district court abused its discretion in awarding attorney fees because “nothing about this case looks unusual.” Max Rack did not have a noticeably stronger “litigating position.” The evidence for its first theory (that Core Health’s post-agreement Max Rack sales violated the agreement) was “thin.” Max Rack’s second theory rested on isolated and likely accidental references to Max Rack’s mark on Core Health’s website. These collective references barely established a likelihood of confusion, and Max Rack suffered no damages from them. Core Health also did not litigate this case in an “unreasonable manner.” Although Core Health failed to turn over its cost data, that discovery shortcoming largely harmed Core Health, not Max Rack, and the district court did not mention this issue when awarding fees.

The district court relied on precedent that it read as creating a bright-line rule permitting fees if a defendant’s intentional infringement continued after the plaintiff sued. But such a rigid rule conflicts with the Supreme Court’s more flexible totality-of-the-circumstances approach set forth in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. 545, 553–54 (2014). None of the cases cited by the district court mentioned Octane.

Summary. The Sixth Circuit affirmed the district court’s denial of Core Health’s motion for judgment as a matter of law or for a new trial. It also affirmed the $250,000 profits award and the court’s rejection of the $1 million damages award. But the court reversed the court’s decision to double the profits award and its decision to grant Max Rack attorney fees. The case was remanded for entry of a new judgment consistent with the appellate court’s opinion.

The Case is No. 20-3598.

Attorneys: Matthew James (Schonauer Law LLC) for Max Rack, Inc. C. Dennis Loomis (Buchalter Nemer) for Core Health & Fitness, LLC.

Companies: Max Rack, Inc.; Core Health & Fitness, LLC

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