Lanham Act willfulness satisfies Bankruptcy Act willful/malicious standard

In re Better Than Logs, Inc., 631 B.R. 670, No. 20-20160-BPH
(D. Mont. Jun. 11, 2021)

A rare bankruptcy/false advertising interaction. Creditor Everlog
sued BTL for patent infringement and false advertising; BTL ultimately
defaulted and Everlog was awared nearly $1 million in damages, of which almost
$180,000 was allocated as disgorgement for false designation of origin/false
advertising, on the theory that BTL falsely described its products as
manufactured in Montana when, in fact, the concrete “blanks” used in BTL’s
products were poured in China.

BTL then entered bankruptcy and listed the Everlog judgment
as disputed. Everlog’s proof of claim was for over $1.2 million, including the
judgment, post-judgment interest, and projected damages from BTL’s alleged
continuing infringement of its patent.

Of relevance here, Everlog argued that the false advertising
damages were nondischargeable in bankruptcy. Everlog relied on the finding of
the district court that BTL acted “willfully” in falsely describing its
products as manufactured in Montana and awarding Everlog $117,116 in disgorged
profits accordingly. The creditor has the burden of showing nondischargeability
by a preponderance of the evidence; the relevant exception is § 523(a)(6), which
excepts from discharge any debt “for willful and malicious injury by the debtor
to another entity or to the property of another entity.” This exception applies
only where the debtor intends the consequences of their act, not simply the act
itself, and both willfulness and maliciousness is required.

BTL argued that summary judgment was inappropriate because
the district court didn’t consider whether the false advertising was “malicious.”
Because this was a default judgment, the court here looked to both the district
court’s order and the material allegations of the complaint.

In the Ninth Circuit, the “willful injury” requirement is
satisfied only if “the debtor has a subjective motive to inflict injury or when
the debtor believes the injury is substantially certain to result from his own
conduct.” Lanham Act false advertising requires injury or likely injury. [Does
false designation of origin require injury as an element of the cause of action?
If it’s a trademark claim, it does not.]

And “[a]n award of disgorged profits based upon false advertising
or false designation of origin is appropriate only upon a showing that the
defendant’s violation was willful.” NB: No longer true under Romag!

“Willfulness” under the Lanham Act “requires a connection
between a defendant’s awareness of its competitors and its actions at those
competitors’ expense.” “Only deliberate conduct will satisfy this standard;
mere negligence will not.” The willfulness holding was a finding that BTL acted
deliberately when it falsely advertised its products, and that BTL was aware of
Everlog and acted in a manner that was detrimental to it, causing Everlog
injury. “At a minimum, BTL was substantially certain its conduct would result
in injury to Everlog.” Thus, issue preclusion applied to willfulness.

“Naliciousness” under § 523(a)(6) requires: 1) a wrongful
act; 2) done intentionally; 3) which necessarily causes injury; and 4) is done
without just cause or excuse. Prior case law establishes that “a debtor’s
decision to act in violation of a law despite knowing the legal way to conduct
business satisfied the malice prong.” The undisputed facts here led to the same
conclusion. The district court found that BTL looked into the “Made in USA”
standards and chose to market its products as manufactured in Montana, despite
the fact that they were partially manufactured in China. The willfulness
finding also satisfied elements (2) and (3). BTL argued that it researched and
worked with the State of Montana to verify its products qualified for the “Made
in Montana” designation. But it relied on testimony that the district court
considered and rejected. Thus malice was also subject to issue preclusion.

Was this issue actually litigated, though? “[A] default
judgment is generally not entitled to [issue preclusion] because there is no actual
litigation of the issues.” Here, the “actual litigation” requirement was
satisfied on these facts because BTL initially actively participated in the
prior litigation for over a year but eventually abandoned its efforts. “[A]ll
that remained at the time Everlog moved for entry of BTL’s default were two
final pretrial conferences and the trial itself.”

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