November/December 2010 Issue

Civil Cases

Nightingale Home Healthcare Inc. v. Anodyne Therapy, LLC,
2010 WL 4721581 (7th Cir. Nov. 23, 2010)

ABSTRACT
The Court of Appeals for the Seventh Circuit clarified its standard for granting attorneys’ fees for exceptional cases under the Lanham Act.  After surveying the different standards applied by other circuits, the court borrowed from the standard for the abuse-of-process tort and concluded that, if a defendant is the prevailing party, a case is “exceptional” if the plaintiff was guilty of abuse of process in suing, while if a plaintiff is the prevailing party, a case is “exceptional” if the defendant persisted in a meritless defense in order to impose costs on the plaintiff.  Applying this standard, the court affirmed the district court’s award of $72,747 in attorneys’ fees against a plaintiff who pursued a false-representation claim under the Lanham Act for the purpose of extracting a price reduction on defendant’s products.

CASE SUMMARY

FACTS
Plaintiff Nightingale Home Healthcare Inc. (“Nightingale”) brought suit under the Lanham Act and state law for false representations against defendant Anodyne Therapy, LLC (“Anodyne”).  Nightingale’s claim was based on Anodyne’s sales agent’s allegedly false representation that its products, infrared lamps, were approved by the Food and Drug Administration (“FDA”) for treatment of peripheral neuropathy.  The district court had granted summary judgment in favor of Anodyne and found that Nightingale had asserted its claim against Anodyne in order to extract a price reduction on Anodyne’s infrared lamps.  Accordingly, the district court awarded Anodyne $72,747 in attorneys’ fees under the Lanham Act.  Nightingale appealed only the attorneys’ fees award.

ANALYSIS
Under 15 U.S.C. § 1117(a) of the Lanham Act, attorneys’ fees are awarded to the prevailing party only in “exceptional circumstances.”  On appeal, Nightingale contended that the award was not justified because the case was not “exceptional.”  In the alternative, Nightingale argued that the award was excessive due to Anodyne’s failure to separate fees related to its defense against the state-law claims.  Finally, Nightingale argued that Anodyne had “unclean hands” due to withholding requested documents during discovery.

In determining whether the case was “exceptional,” the Seventh Circuit first noted the “surprising lack of agreement among the federal courts of appeals” regarding the meaning of “exceptional case.”  The court proceeded to review the prevailing standards of each circuit.  Illustrating the inconsistency, the court noted that the Fourth, Sixth, Tenth, and D.C. Circuits apply different tests, depending on whether the plaintiff or defendant prevailed, whereas the First, Second, Third, Eighth, Ninth, and Eleventh Circuits do not.  For example, the Second, Fifth, and Eleventh Circuits require either prevailing party to prove its opponent litigated in bad faith or prevailing defendants to prove that the suit was a fraud.  In contrast, the Sixth Circuit requires a prevailing plaintiff to show that the defendant’s infringement was “malicious, fraudulent, willful, or deliberate,” whereas a prevailing defendant must show that the plaintiff’s suit was “oppressive.”

The court opined that the failure to converge on a uniform standard was an illustration of “circuit drift.”   This drift, according to the court, results from heavy caseloads and accumulating circuit precedent inducing courts to rely on their own “circuit” law rather than enforcing a uniform body of federal law.  However, the court noted that the use of vague language and inclusion of escape clauses in the various circuits’ cases prevented determination of whether the diverse standards actually generated different results.

Summarizing the principles underlying an award of attorneys’ fees in Lanham Act cases, the court explained the reasoning for the Lanham Act’s exception to the “American” rule that forbids shifting litigation expenses of the prevailing party to the losing party.  The court cited the public’s interest in maintaining the integrity of trademarks as a measure of quality products.  According to the court, this interest warranted ensuring that plaintiffs receive complete relief for enforcement of their marks against willful infringers, and that defendants have a remedy against unfounded suits.  Practical concerns guide such an award as well.  As almost all cases under the Lanham Act are between competitors, those who pursue cases under the Lanham Act for strategic purposes, namely, to obtain a competitive advantage through mounting litigation costs on a competitor, are the types of suits “rightly adjudged” exceptional and warranting an award of attorneys’ fees.

To determine the Seventh Circuit’s standard, the court analogized to the abuse-of-process tort to characterize the actions of a plaintiff acting as an oppressor and using the litigation process for an improper purpose.  Such behavior by defendants is illustrated where a defendant’s trademark infringement or false advertising is blatant, yet the defendant insists on launching a costly defense.  The court described the actions by both parties as equally heinous:  “Predatory initiation of suit is mirrored in predatory resistance to valid claims.”

The court concluded that a case is “exceptional” under the Lanham Act if a defendant is the prevailing party and the plaintiff was guilty of abuse of process in suing, or if a plaintiff is the prevailing party and the defendant persisted in a meritless defense in order to impose costs on the plaintiff.  Unlike civil-rights cases in which the plaintiff is typically an individual suing a defendant corporation or organization, in Lanham Act cases, the parties tend to be more “symmetrically situated.”  The court noted that they are often both businesses, notwithstanding their differing sizes and resources.  Accordingly, the court found, there is no reason for a general rule favoring one party over the other in Lanham Act cases.

The court noted that while the tort of abuse of process requires an inquiry into the state of mind of the abuser, its application in Lanham Act cases would not require this inquiry.  It would be sufficient for a prevailing party to show that its opponent’s claim or defense was objectively unreasonable such that it was a claim or defense that a rational litigant would only pursue to impose disproportionate costs on its opponent.

In the case before the court, the Seventh Circuit found that Nightingale’s Lanham Act claim had no possible merit.  The district court had found that Nightingale brought its claim to obtain a price reduction from Anodyne, conduct amounting to the pursuit of a frivolous claim in order to obtain an advantage unrelated to obtaining a favorable judgment.  Such conduct constituted an abuse of process, and thus warranted the “exceptional case” finding.  The court further chastised Nightingale for arguing that Anodyne had unclean hands because of its failure to turn over discovery documents, an argument the court found baseless due to the fact that the documents were outside the scope of Nightingale’s requests.  Finally, the court rejected Nightingale’s argument that the district court’s award was excessive because it did not separate attorneys’ fees expended defending against state-law claims, a separation Anodyne showed was impossible.

The court affirmed the district court’s judgment and further granted Anodyne’s motion for appellate fees and costs under Federal Rule of Appellate Procedure 38.

CONCLUSION
Not only does this case clarify the Seventh Circuit’s standard for determining whether a case is an “exceptional case” under the Lanham Act, it highlights the existing wide divergence of standards among other circuits.  Of particular interest is the court’s procedural note, confirming that the prevailing party’s required showing would not expand to an elaborate inquiry into the state of mind of the party against whom the attorneys’ fees were sought.