Litigating Damages Claims In Lanham Act False Advertising Cases
Alexander Kaplan, Partner, Proskauer Rose LLP: Case law on damages can be tricky/inconsistencies between circuits. What’s recoverable? 1117(a): D’s profits; damages sustained by P; costs of action. Statute doesn’t prevent recovering both profits and damages but getting both is rare. Ad context and market size matter. Comparative ads: advertising that names D’s prooduct and willful literal falsity: reuttable presumption of harm, odds of recovery improve.
TrafficSchool v. Edriver: reasonable to presume that every dollar D makes came from P’s pocket in a comparative ad context. Weight of case law: rebuttable presumption of causation and injury for willful literal falsity in a two-firm market for comparative statements. Second circuit: noncomparative ad but two party market, court allowed presumed damages. Showing injury is separate from showing damages, but you do see presumptions of injury for injunctive relief purposes—has to be considered separately, but some courts mix it up.
Damages calculation should be fair and reasonable approximation of lost profits, SDNY. Wrongdoer bears the risk of error, DC Circuit. P proved damages by showing own internal projections of sales in the DC Alpo case. Disgorgement: 2d Circuit requires willfulness. 9thCircuit does a totality of circumstances analysis; willfulness not required where disgorgement is proxy for P’s lost profits and where parties are direct competitors; it is required if the theory of recovery is unjust enrichment/deterrence. 1st: willfulness not required to get profits from direct competitor; it is from indirect competitor. 3d and 7th: willfulness is only one factor to be considered; disgorgement still available w/out it.
2d Circuit considers: degree of certainty that D benefited from the false advertising; availablilty and adequacy of other remedies; role of D in effectuating wrongdoing; P’s laches/unreasonable delay; P’s unclean hands. 3d: intent to confuse; sales diversion; adequacy of other remedies; unreasonable delay by P; public interest in making misconduct unprofitable.
Lanham Act allows treble damages, for any sum above the amount found as actual damages not exceeding three times; but enhanced damages must constitute compensation, not a penalty. But: Merck case: enhanced damages can serve compensatory purposes when harm difficult to quantify and deterrent purposes when violation was willful. Where appropriate? D received intangible benefits from advertising. P’s relative market loss isn’t accounted for under lost profits; D’s profits allowed it to gain market foothold; P’s lost profits don’t fully capture D’s profits.
Chances of getting attorneys’ fee award overturned on appeal are not good. Some require malice/bad faith for “exceptional” cases; other circuits allow award based on objective de/merits without showing bad faith.
Julia Reytblat, Associate General Counsel, Church & Dwight Co., Inc.
Inside look at damage: What are lost sales/damages? How long has the ad been running? What sales/market share can be quantified? Royalty loss? Brand damage? D’s hat: quite different—point out to court that lost sales may have resulted from a whole slew of factors, not the result of false advertising. Launches of product by P may have cannibalized sales; other competitive launches may have affected whole industry; quality issues with P’s product; has P changed its ad strategy? Has it spent less on ads? Are the products seasonal at all?
Start thinking about docs and witnesses early in the case. Plaintiff may want Nielsen/network data; frequency of bad ads; competitive price tracking; sales figures. Be aware of what’s in your client’s files. Witnesses: finance people: were we offering any discounts etc. that might affect sales?; marketing research: can testify to impact on purchase intent; sales: can give front line perspective—are we losing shelf space? Outside expert may sound more persuasive. Plaintiff may want sales/marketing expert demonstrating products are competitive, explaining impact of advertising, arguing that the falsity drove sales, connecting D’s ads to P’s drop in sales.
Defendant might consider market response model/regression model. This identifies performance drivers through regression. It’s expensive; requires expert with PhD in marketing/finance. Estimates importance of each factor and controls for non-advertising factors that could affect sales; allows isolation of variables. Expensive, but may be worth it if damages exposure is large. (P can use too.)
For disgorgement, P’s burden is quite low: D’s sales only. Every $ must be shown not to be the result of false advertising. Show production, distribution, indirect costs—physical plant, energy costs. D must be ready to allocate costs, produce supporting documents—can even deduct marketing cost of the false ads.
Q: have you seen arguments about sales not attributable to ads?
Reytblat: yes, definitely. Some products’ brand is so strong that people will buy regardless of ad content, repeat/loyal buyers, price. Some categories are very price sensitive.
Q: role of jury?
Kaplan: Expert can be good at persuading jurors of effects. Disgorgement is an equitable remedy so no jury right, though a court could give it to a jury for an advisory opinion/advice on the $ if the court decides disgorgement is appropriate.
Q: counter-advertising costs?
Kaplan: rectifying the false ad need not be the only purpose of counter-advertising, according to one court, so you can recover your counter-advertising costs as damages if rectifying the falsity is one of the main purposes.
Q: should P be forced to spend any award for counter-advertising oncounter-advertising?
Kaplan: has only seen it awarded for past corrective expenses. D should maybe pay for the future counter-advertising itself. (But see the ISO case from D. Mass, which indicates the risks of awarding P the $ but upholds a smallish award for that purpose.)