no disgorgement under state law when false advertising wasn’t shown to result in sales

Republic Technologies (NA), LLC v. BBK Tobacco & Foods,
LLP, 2023 WL 3004625, No. 16 C 03401 (N.D. Ill. Apr. 19, 2023)

. A jury found that defendant HBI engaged in unfair competition
and violated the Illinois Uniform Deceptive Trade Practices Act (IUDTPA” in its
packaging and promotional activities for its RAW Organic Hemp branded tobacco
rolling paper products. Here, the court mostly denied a renewed motion for
disgorgement, prejudgment interest, and attorneys’ fees.

Republic alleged that HBI, its competitor in the tobacco
rolling paper industry, engaged in false advertising under the Lanham Act,
unfair competition, and violations of the IUDTPA. HBI counterclaimed that
Republic infringed its copyrights and trade dress. The jury ruled for HBI on
one of its copyright infringement counterclaims and one of its trade dress
claims against Republic and awarded HBI $979,620 in lost profits and $40,000 in
statutory damages. The jury found that HBI did not engage in false advertising
under the Lanham Act, but that HBI had engaged in unfair competition under
Illinois common law and violated the IUDTPA. There was no special verdict form.

Because the jury was instructed not to consider the question
of damages as to the unfair competition and IUDTPA claims (and plaintiffs
cannot seek monetary damages under that statute), Republic was not awarded any
monetary damages. The false advertising claims were based on statements (1)
that HBI’s rolling paper is “made in Alcoy, Spain, the birthplace of rolling
paper;” (2) that HBI’s RAW “Organic Hemp” papers are the “World’s Only” or
“World’s First” organic hemp rolling papers; (3) that HBI contributes its funds
or sales to a charitable entity called the “RAW Foundation;” (4) that HBI’s
rolling papers are made with “natural hemp gum;” (5) that RAW rolling papers
are “100% wind powered;” and (6) that OCB Organic Hemp papers (Republic’s
products) are knock-offs, “RAWnabees,” copies, or fake versions of RAW. The
court granted an injunction focusing on the Alcoy claims, which were false.

Here, the court declined to order disgorgement of “every
cent of profit from HBI’s RAW brand during that time period—over $34 million.” Disgorgement
is unavailable under the IUDTPA, which provides only for injunctive relief, and
if the violation was willful, attorneys’ fees. But IUDTPA remedies are
additional to any other remedies available against the same conduct under the
common law. “And here, the jury also found that HBI committed common law unfair
competition, which may carry with it the right to disgorgement, though the
parties have not cited, and this Court could not find, an example in Illinois
in the last 75 years.”

Assuming that disgorgement was available, the court looked to
the Restatement (Third) of Unfair Competition for guidance. That worthy
document deems disgorgement appropriate only when (1) “the actor engaged in the
conduct with the intention of causing confusion or deception,” and (2) “the
award of profits is not prohibited by statute and is otherwise appropriate” in
light of all of the factors of the case.

The court was primarily guided by the absence of proof that
the false statements were a substantial factor in producing sales. The court’s
previous finding that the falsehoods “are likely to cause consumers to choose
HBI’s products over Republic’s products” were directed at “likely” future harm
to Republic, not actual proof of causation of HBI’s past profits. Republic
could have provided survey data or consumer testimony, but did not.

Republic mainly pointed to the testimony of HBI’s own
witnesses that the purpose and effect of the “RAW Foundation” promotion and
charitable giving campaigns was to drive more sales, increase brand awareness,
and enhance brand loyalty. “But though there was no official ‘Raw Foundation’
entity, HBI did indeed donate moneys to charities and conduct charitable
events.” Also, a company’s belief that its advertising is important and profitable
“is not evidence that the advertising actually had that effect.” (Once again,
courts in false advertising cases refuse to make the plaintiff-favorable
inferences that are standard in TM cases, here about intent.)

As for the parties’ competing damages experts, HBI’s expert
admitted that he did not review any consumer data or have any background in
understanding consumer behavior, while Republic’s expert also admitted that he
did not know “how much of HBI’s profits are attributable to the challenged
statements;” did not “have any basis for adjusting [his] profit opinion to account
for the fact that the jury might accept some of the statements, but not all of
them, as false advertising;” and did not “have any basis for an opinion that
any of the challenged advertisements actually increased HBI’s profits.”  This lack of evidence that the wrongful
conduct was a “substantial factor” in producing sales was “fatal” to an award
of disgorgement.

The other factors listed by the Restatement didn’t change
anything (the adequacy of other remedies; the public interest in
deterrence/disgorgement; degree of fault; any delay in suing; any related
plaintiff misconduct).  The court
specifically noted the risk of a windfall to Republic, given that there are 22
hemp-based competitor rolling paper products, “all of whom may have suffered
sales losses because of HBI’s misleading statements.” Deterrence was
sufficiently served because it cost HBI money to bring itself into compliance
with the injunction by removing numerous marketing statements from all
packaging, marketing, and promotional materials for upwards of 600 items. Nor
was Republic a completely innocent party in the matter, given that the jury
found that it willfully infringed HBI’s trade dress and copyright.

However, the court did award some attorneys’ fees under
IUDTPA, which are available “if the court finds that [defendant] has willfully
engaged in a deceptive trade practice.” Willful conduct is defined as conduct
that is “voluntary and intentional, but not necessarily malicious.” HBI acted
with willfulness as to the Alcoy statements. “[W]hen HBI—a full year after
trial—claimed that any problems with its Alcoy statements could be solved by
essentially rearranging the punctuation of its previous statements, this Court
found that it was ‘an attempt to mislead.’” Thus, Republic’s reasonable
attorneys’ fees as to that issue would be awarded.

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