Lanham Act and ACPA damages not dischargeable in bankruptcy

In re Butler (Skydive Arizona, Inc. v. Butler), Bkcy. No. 11–40930, No. 11–4037, 2013 WL 5591922 (N.D. Ca. Sept. 9, 2013)

Here, the debtor was unable to discharge his liability for violation of ACPA, trademark infringement, and false advertising, because of the collateral estoppel effect of judge and jury findings in the underling cause of action.  The judge granted summary judgment on the false advertising claim, while the jury found Butler (and other defendants) liable for trademark infringement and cybersquatting.  The jury found, by clear and convincing evidence, that the infringement and false advertising were willful.  The district court awarded attorneys’ fees, emphasizing the defendants’ “seeming disregard for the people they harmed or the reputation they sullied….” and that exceptionality can come from willfulness, which the jury had found.  While the Ninth Circuit reversed the district court’s punitive doubling of the jury’s award of actual damages, it did not touch the underlying factual findings.  Plaintiff’s proof of claim in the bankruptcy case was therefore diminished but still in the multimillion-dollar range.

Exceptions to discharge are construed narrowly, but debts incurred by “willful and malicious injury by the debtor to another entity or to the property of another entity” are nondischargeable.  The question was the collateral estoppel effect of the earlier proceedings.  ACPA violations require both bad faith and an absence of safe harbor protection for a reasonable belief in fair/lawful use.  Thus, a finding of liability for cybersquatting requires an intent to cause harm and constitutes “willful and malicious injury,” and the debtor was collaterally estopped from asserting dischargeability.

The court reasoned similarly on the trademark infringement and false advertising claims, though intent is not a required element on those.  The jury specifically found that the trademark infringement was willful; though the verdict by itself didn’t specify whether the acts themselves were willful or they were willfully done with intent to cause harm, “intentional infringement is tantamount to intentional injury under bankruptcy law” because “the intent to infringe and the intent to deprive the mark’s owner of the value and benefit of his property are opposite sides of the same coin.”   Also, even in the absence of record evidence on the defendant’s intent to cause harm, the trial court’s additional findings on the need for attorney’s fees answered the question. 

The trial court’s finding took the damages award, as well as the fee award, into the nondischargeable category.  

The same logic applied to the false advertisng claims: the jury found willfulness and injury is an element of false advertising (note that it isn’t for trademark, apparently!).  “Therefore, a defendant could not willfully commit false advertising without intending to cause harm.”  The trial court found that defendants falsely claimed to own skydiving centers in various locations where they didn’t and unfairly used plaintiff’s photos on their own website. Combined with the court’s finding of exceptionality, this was enough for collateral estoppel to kick in.
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