Holdover Trademark Licensee Status Can't Do Heavy Lifting on "Exceptionality"
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The US Court of Appeals for the Sixth Circuit addressed issues of enhanced remedies in a dispute regarding the sale of weightlifting equipment beyond the expiration of a licensing agreement between the involved parties. Pointing to the different standard required to prove a violation and damages, the Court ultimately reduced a trademark infringement award to about a quarter of the amount initially awarded. Max Rack, Inc. v. Core Health & Fitness, LLC, et al., Case No. 20-3598 (6th Cir. July 14, 2022) (Cole, Rogers, Murphy, JJ.)
In 2006, Max Rack exclusively licensed its patents and trademarks relating to weightlifting racks to Star Trac Strength. Core Health subsequently acquired Star Trac and its licensing agreements. The final patent covering the Max Rack equipment expired on November 21, 2015, thereby terminating the licensing agreements between Max Rack and Core Health. The agreements permitted Core Health to sell any remaining Max Rack units for six months following expiration of the license.
Following expiration of the licensing agreements, Max Rack learned that Core Health failed to update web pages, marketing materials and owner's manuals to reflect the termination of Core Health's affiliation with Max Rack. Core Health's failure to scrub references to "Max Rack" extended to third-party sellers' websites advertising Core Health's competing "Freedom Rack" product using the Max Rack name. Core Health also sold 271 more units manufactured as Max Racks after the license expired, 238 of which were sold during the six-month grace period. Of the remaining 33 units, 24 were sold after the six-month window had closed, and nine were alleged to have had their labels changed from Max Rack to Core Health's Freedom Rack. Core Health further failed to pay Max Rack royalties for any of the 271 sales made after the license expired.
Max Rack brought two federal claims under 15 U.S.C. §§ 1114(1)(a) and 1125(a)(1)(A), alleging trademark infringement and unfair competition. Max Rack also brought three claims under Ohio's Deceptive Trade Practices Act, alleging that Core Health passed off the Max Rack as its own machine and caused a likelihood of confusion regarding the source of the machine and regarding Core Health's affiliation with the Max Rack trademark. The jury awarded Max Rack $1 million in damages and $250,000 in Core Health's profits. Ruling on post-trial motions, the district court overturned the $1 million damages award for lack of evidence of any consumer confusion but enhanced the $250,000 award to $500,000 and further awarded Max Rack attorneys' fees. Both parties appealed.
The Sixth Circuit sidestepped the fact-laden analysis to determine whether Core Health's actions created a likelihood of consumer confusion, reasoning that the dispute related to the "holdover licensee." Citing its own precedent and precedent from the Third, Fifth, Seventh and Eleventh Circuits, the Court applied a much more objective standard, finding that unauthorized use of a licensed trademark by a licensee after the license has expired is by itself sufficient to establish a likelihood of confusion in the mind of the consumer.
Although the Sixth Circuit used a bright-line standard to uphold the district court's finding of trademark infringement and an award of Core Health's profits, the Court found that the mere fact that Core Health acted as a holdover licensee was insufficient to support an award of damages or attorneys' fees, or enhancement of the awarded damages. Citing §§ 1114(1)(a) and 1125(a)(1)(A) of the Lanham Act, the Court asserted that principles of equity permit the recovery of a trademark infringer's profits but do not allow a jury to increase a profits award for punitive purposes. In granting a motion in limine, the district court had reasoned that certain of Core Health's discovery failures might have prevented an accurate calculation of infringing profits. The Court pointed to this rationale as setting the stage for an improper punitive profits award. As provided by 15 U.S.C. § 1117(a), the Lanham Act only requires the plaintiff to prove an infringing defendant's total sales, at which point the burden shifts to the defendant to provide its costs or deductions to arrive at a calculated profit amount.
In affirming the district court's reversal of Max Rack's $1 million damages award, the Sixth Circuit reasoned that any damages must flow from confusion in the marketplace, such as lost goodwill or remedial measures that a plaintiff had to employ to eliminate consumer confusion. Citing the Ninth Circuit's 1994 decision in Nintendo v. Dragon Pac. Int'l, the Court further reasoned that if a plaintiff is awarded a defendant's profits, the plaintiff must tie any damages to be recovered "to a distinct harm and cannot seek a double recovery." Proof that a defendant acted as a holdover licensee does not suffice.
As to attorneys' fees, the Sixth Circuit noted that § 1117(a) of the Lanham Act only permits such an award in "exceptional" cases. In reversing the district court's award of attorneys' fees, the Court reasoned that the fact that Core Health's unauthorized sale of Max Rack products was intentional did not trigger an automatic award of legal fees. Rather, the Court asserted that the Supreme Court's totality-of-the-circumstances standard set forth in Octane Fitness v. Icon Health & Fitness should have been applied. The Sixth Circuit concluded that Core Health's conduct in infringing and in litigating the dispute failed to rise to the "exceptional" level required to justify attorneys' fees.
Practice Note: This case serves as a reminder that proving a violation and proving damages often require different inquiries. To paraphrase an idiom, the reward must fit the harm.
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