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Court Affirms Finding of Unfair Competition but Vacates Damages Award

01-1392
September 30, 2002
Sukduang, Sanya

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Last Month at the Federal Circuit - October 2002

Judges: Linn (author), Gajarsa, and Dyk

In Thompson v. Haynes, No. 01-1392 (Fed. Cir. Sept. 30, 2002), the Federal Circuit affirmed the district court’s holding that Earl Thompson had violated section 43(a) of the Lanham Act, the Oklahoma Deceptive Trade Practices Act (“DTPA”), and the common law of unfair competition. The Court also affirmed the district court’s issuance of a permanent injunction against Thompson and its refusal to correct the inventorship of U.S. Patent No. 5,284,298 (“the ‘298 patent”). Although affirming an award of profits, the Federal Circuit vacated and remanded the district court’s decision to treble the award.

In 1992, Earl Thompson and Fluid Controls Inc. (“Fluid Controls”) entered into an agreement to develop and file a patent application directed to a fluid-conducting swivel. Pursuant to the agreement, Thompson and Henry Haynes, Fluid Controls’s president, were named as coinventors on the application and, if issued, royalties were to be paid to each of the “patent owners.” The ‘298 patent subsequently issued on February 8, 1994.

For a time, Thompson served as a distributor of Fluid Controls’s patented swivels. Disputes between the two parties arose, however, and Fluid Controls stopped paying royalties to Thompson. Shortly thereafter, Thompson began manufacturing and selling his own swivels to Fluid Controls’s customers, and obtained U.S. Patent No. 5,331,308 (“the ‘308 patent”) directed to his own swivel device. Fluid Controls became aware of Thompson’s activities when one of Thompson’s customers contacted Fluid Controls to complain about problems with the swivels. After inspecting the swivel, Fluid Controls discovered that Thompson had switched his swivels for those of Fluid Controls. Thereafter, Fluid Controls sent letters to its existing customers warning them of Thompson’s unlicensed manufacture and sale of swivels that infringed the ‘298 patent.

Thompson sued Fluid Controls in the U.S. District Court for the Northern District of Oklahoma for DJ of noninfringement of the ‘298 patent, recovery for unpaid royalties, an injunction against interference with business relations, damages for unfair business practices, correction of inventorship of the ‘298 patent to remove Haynes as a coinventor, rescission of the agreement assigning the ‘298 patent to Fluid Controls, and Fluid Controls’s infringement of the ‘298 patent based on Thompson’s theory that he is the sole inventor and holds all rights to the patent. Fluid Controls counterclaimed for infringement of the ‘298 patent, correction of inventorship of the ‘298 patent to remove Thompson as a coinventor, unjust enrichment, violations of the Lanham Act and Oklahoma’s unfair competition law, and DJ of invalidity of the ‘308 patent.

After a bench trial, the district court held that Thompson was entitled to an award of unpaid royalties. The court also held, however, that Thompson’s conduct was in violation of the Lanham Act, Oklahoma’s DTPA, and the common law relating to unfair competition. The court concluded that Fluid Controls was entitled to profits and damages based on lost sales and a corrective advertising campaign, all of which were trebled due to Thompson’s willful violations. The court also entered a permanent injunction against Thompson and refused to correct the inventorship of the ‘298 patent.

On appeal, the Federal Circuit, applying regional circuit law, affirmed the district court’s determination that Thompson had violated section 43(a) of the Lanham Act. The Court agreed with the district court’s finding that Thompson’s substitution of his own “SW-343-D” swivels for Fluid Controls’s “SW-343” swivels, which were similar in name and design, without informing customers of the switch, was intentionally misleading, led to actual confusion, and resulted in injury to Fluid Controls. According to the Court, these facts support the district court’s conclusion that Thompson had violated section 43(a) of the Lanham Act.

The Federal Circuit also held that the district court had not erred in concluding that Thompson “passed off” his own swivels to customers as if they were Fluid Controls’s, in violation of Oklahoma’s DTPA; and that, in violation of the common law of unfair practice, Thompson deceived customers exercising “ordinary intelligence and observation in business matters” into believing that his swivels were actually those of Fluid Controls.

The Court affirmed the district court’s award of profits to Fluid Controls, but reversed its determination to treble the amount. According to the Court, 15 U.S.C. § 1117(a), which governs damages for violation of section 43(a) of the Lanham Act, treats “profits” separately from “damages” and only allows for the trebling of a “damages” award. Thus, while the district court’s award of profits was correct, the trebling of the award was in error.

The Federal Circuit also held that the district court had erred in awarding and trebling damages based on lost sales and actual damages accrued by Fluid Controls for its corrective advertising campaign. The Court agreed with Thompson that Fluid Controls’s proof that it had actually been damaged by Thompson’s actions was based on mere speculation and, thus, the district court’s award of lost sales was unsupported. Further, the law of the Tenth Circuit permits the award of damages for advertising campaigns only when the advertising of the party engaging in unfair competition causes marketplace confusion. Because the district court had found that Thompson’s advertising was not a source of marketplace confusion, its award of damages for Fluid Controls’s corrective advertising was in error.

The Court affirmed the permanent injunction entered against Thompson as it properly covered Thompson’s conduct underlying the basis for unfair competition. The Court also affirmed the district court’s refusal to correct the inventorship of the ‘298 patent, as neither party presented arguments sufficient to establish that the district court’s holding was in error. The Court, however, declined to consider the issue of attorneys’ fees because the district court had yet to render its final decision on the issue.