Banjo Buddies, Inc. v. Renosky

• Decision Date: 22 February 2005
• Docket Number: No. 03-2107.,No. 03-2038.,03-2038.,03-2107.
• Citation: 399 F.3d 168
• Parties: BANJO BUDDIES, INC. v. Joseph F. RENOSKY, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

399 F.3d 168

BANJO BUDDIES, INC. v. Joseph F. RENOSKY, Appellant.

No. 03-2038.

No. 03-2107.

United States Court of Appeals, Third Circuit.

Argued March 23, 2004.

February 22, 2005.

COPYRIGHT MATERIAL OMITTED

Wayne A. Kablack, (Argued), Simpson, Kablack & Bell, Indiana, John J. Richardson, C. James Zeszutek, Thorp, Reed & Armstrong, Pittsburgh, for Appellant/Cross Appellee.

Todd S. Holbrook, (Argued), Bernstein, Shur, Sawyer & Nelson, Portland, Mark A. Willard, Eckert, Seamans, Cherin & Mellott, Pittsburgh, for Appellee/Cross Appellant.

Before ROTH, AMBRO and CHERTOFF,^* Circuit Judges.

OPINION

ROTH, Circuit Judge.

This appeal requires us to decide whether a showing of willful infringement is a prerequisite to an accounting of a trademark infringer's profits for a violation of section 43(a) of the Lanham Act. We hold that wilfulness is an important equitable factor but not a prerequisite to such an award, noting that our contrary position in SecuraComm Consulting Inc. v. Securacom Inc., 166 F.3d 182, 190 (3d Cir.1999), has been superseded by a 1999 amendment to the Lanham Act. We further affirm the District Court's resolution of several other damages issues, with a single exception explained below.

I. Factual Background and Procedural History

Joseph Renosky was a member of the board of directors of Banjo Buddies, Inc., ("Banjo Buddies" or "BBI") from February 1996 until May 1999. Banjo Buddies' principal product during that time was an extremely successful fishing lure called the Banjo Minnow, which Renosky helped develop.

The Banjo Minnow was principally advertised via "infomercial" broadcast, and was also sold in sporting goods catalogs and sporting goods stores. Tristar Products, Inc., obtained exclusive rights to advertise and sell the Banjo Minnow through all forms of "direct response marketing, ... print media, and retail distribution." BBI received 48% of Tristar's net profits in return. Renosky agreed to provide the manufactured Banjo Minnow lure kit through his corporation, Renosky Lures, Inc., to both Tristar and BBI at $5.20 per kit.¹ Renosky received additional shares of BBI stock in exchange for producing the Banjo Minnow kits at a "fair price." Renosky also executed a non-compete agreement in favor of BBI in exchange for more BBI stock. The Banjo Minnow sold very well for a little over a year, from mid-1996 through mid-1997, but then sales dwindled considerably. BBI introduced several derivative Banjo Minnow products in 1998, but none approached the success of the original.

During the Banjo Minnow's early success in 1996, Renosky presented an idea to the BBI board for a "new and improved" Banjo Minnow called the Bionic Minnow.² The board took no formal action on the proposal, and a month later Renosky advised one of BBI's directors that he would develop the new lure independently. At least two board members urged Renosky against this course of action, but Renosky could not be swayed. He immediately began developing the Bionic Minnow through Renosky Lures and ultimately marketed the new lure via infomercial and other means beginning in February 1999.

After Renosky failed to comply with a "cease and desist" letter, BBI brought suit in the United States District Court for the Western District of Pennsylvania in April 1999. BBI alleged that Renosky violated section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), by developing and marketing the Bionic Minnow in such a way that customers would believe the Bionic Minnow was a Banjo Buddies product. BBI also alleged that Renosky's conduct breached the non-compete contract and Renosky's fiduciary duties as an officer of Banjo Buddies.³

The District Court denied cross-motions for partial summary judgment and held a five-day bench trial in May 2002. In its Findings of Fact and Conclusions of Law issued in November 2002, the court found that Renosky was liable for "false designation of origin" under § 43(a) of the Lanham Act.⁴ The court further found that Renosky breached his fiduciary duty of loyalty to Banjo Buddies by pursuing a corporate opportunity — the Bionic Minnow project — without fully disclosing his actions to the board or forcing the board to accept or reject the project. The court also found that Renosky breached the non-compete agreement by independently developing the Bionic Minnow. Finally, the court found that Renosky breached his fiduciary duty of good faith and fair dealing by overcharging BBI for the Banjo Minnow kits.

The District Court concluded that Renosky should be forced to disgorge the net profits of the Bionic Minnow project under section 35(a) of the Lanham Act, 15 U.S.C. § 1117(a), which provides for such accountings as an equitable remedy for Lanham Act violations. The District Court also concluded that the damages arising from Renosky's usurpation of a corporate opportunity, breach of the non-compete contract, and overcharging for the Banjo Minnow lure kits were too speculative to support any monetary award.

Accordingly, the District Court ordered Renosky to pay to Banjo Buddies the net profits earned by the Bionic Minnow project, and to produce "verified financial records" attesting to this amount. Renosky never produced these records, despite numerous delays and court orders. Renosky did ultimately retain an independent financial analysis (the "Alpern Report"), which the District Court accepted for purposes of establishing the total sales of the Bionic Minnow through November 2002. However, the court rejected that report's conclusion that the Bionic Minnow project suffered a net loss. Accordingly, the court calculated Renosky's profits by multiplying the total sales figure by 16%, based on testimony from Renosky's business manager that Renosky Lures products typically earn a "bottom line" of between 15-17%. The court also determined that Renosky should be forced to disgorge all of the distributions (based on gross sales) made to him as a shareholder in the Bionic Minnow project. The court entered judgment in March 2003 against Renosky in the amount of $1,589,155.

Banjo Buddies moved to alter or amend the District Court's judgment pursuant to Federal Rule of Civil Procedure 59(e), arguing that the court erred by holding that the damages arising from Renosky's overcharges for the Banjo Minnow lure kits were too speculative to support a monetary award. The District Court denied this motion in March 2003.

Renosky and BBI both appeal the District Court's judgment. Renosky asserts that the District Court should not have ordered an accounting of profits because Renosky did not intentionally or willfully confuse or deceive customers. Renosky alternatively argues that the District Court's calculation of those profits was clearly erroneous. Banjo Buddies cross-appeals, contending that the District Court erred by refusing to award damages for Renosky's overcharges rather than make a reasonable estimate of damages based on the available evidence.

II. Jurisdiction and Standards of Review

The District Court had federal question jurisdiction over Banjo Buddies' Lanham Act claim, 28 U.S.C. § 1331, supplemental jurisdiction over the parties' state law claims, 28 U.S.C. § 1367, and diversity jurisdiction over all claims owing to the complete diversity of the parties, 28 U.S.C. § 1332. We have appellate jurisdiction to review the District Court's final judgment. 28 U.S.C. § 1291.

We review the District Court's factual findings under a clearly erroneous standard, but exercise plenary review over the District Court's interpretation of legal questions and its application of the law to the facts. Castrol Inc. v. Pennzoil Co., 987 F.2d 939, 950 (3d Cir.1993). We further review the District Court's award of equitable remedies under section 35(a) of the Lanham Act under an abuse of discretion standard. Gucci America, Inc. v. Daffy's, Inc., 354 F.3d 228, 242 (3rd Cir.2003).

III. Discussion

A. Willfulness Is a Factor, Not a Prerequisite.

Renosky argues that the District Court erred by awarding profits from the Bionic Minnow project to Banjo Buddies under section 35(a) of the Lanham Act because Renosky's violation of section 43(a) of that statute was not willful or intentional. Renosky relies on SecuraComm Consulting, Inc. v. Securacom, Inc., 166 F.3d 182 (3d Cir.1999), in which this court held that "a plaintiff must prove that an infringer acted willfully before the infringer's profits are recoverable" under § 35(a) of the Lanham Act. Id. at 190 (citing George Basch Co. v. Blue Coral, Inc., 968 F.2d 1532, 1537 (2d Cir.1992)). The District Court's findings related to the issue of Renosky's intent are ambiguous and possibly contradictory.⁵ However, we need not decide whether the District Court found or should have found that Renosky acted willfully, because we conclude that SecuraComm's bright-line willfulness requirement has been superseded by statute and that, based on all the relevant equitable factors, the District Court did not abuse its discretion by ordering an accounting of Renosky's profits.

SecuraComm's bright-line rule was the dominant view when SecuraComm was issued in January 1999. See, e.g., Quick Technologies, Inc. v. Sage Group PLC, 313 F.3d 338, 347-48 (5th Cir.2002) (collecting cases, including SecuraComm); George Basch Co., 968 F.2d at 1537; Restatement (Third) of Unfair Competition § 37 (1995); J. Thomas McCarthy, 5 McCarthy on Trademarks and Unfair Competition § 30:62 (4th ed.1996). In August 1999, however, Congress amended § 35. Prior to the amendment, that section provided as follows:

When a violation of any right of the registrant of a mark registered in the Patent and Trademark Office, or a violation under section 43(a) [15 U.S.C. § 1125(a)], shall have been established ... the plaintiff shall be entitled ..., subject to the principles of equity, to recover (1) defendant's profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.

See SecuraComm, 166 F.3d at 186 (quoting ...