Ty Inc. v. Softbelly's, Inc.

• Decision Date: 22 February 2008
• Docket Number: No. 07-1782.,No. 07-1793.,No. 07-1452.,No. 07-1519.,No. 07-2401.,07-1452.,07-1519.,07-1782.,07-1793.,07-2401.
• Citation: 517 F.3d 494
• Parties: TY INC., Plaintiff-Appellee, Cross-Appellant, v. SOFTBELLY'S, INC., et al., Defendants-Appellants, Cross-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

517 F.3d 494

TY INC., Plaintiff-Appellee, Cross-Appellant, v. SOFTBELLY'S, INC., et al., Defendants-Appellants, Cross-Appellees.

No. 07-1452.

No. 07-1519.

No. 07-1782.

No. 07-1793.

No. 07-2401.

United States Court of Appeals, Seventh Circuit.

Argued January 14, 2008.

Decided February 22, 2008.

James P. White (argued), Louise T. Walsh, Welsh & Katz, Chicago, IL, for Plaintiff-Appellee/Cross-Appellant.

Andrew M. Hale (argued), Rock Fusco, Chicago, IL, for Defendants-Appellants/Cross-Appellees.

Before POSNER, KANNE, and WILLIAMS, Circuit Judges.

POSNER, Circuit Judge.

Ty Inc., the manufacturer of "Beanie Babies," years ago brought this suit for trademark infringement under the Lanham Act against Softbelly's, Inc., and some other defendants that need not be discussed separately. Softbelly's manufactures a product that looks and feels very much like "Beanie Babies," which it calls "Screenie Beanies." They differ from Ty's product mainly in having chamois bellies and being sold to the public through computer stores for wiping computer screens: hence the chamois.

The case was tried to a jury back in 2002, but rather than allow it to render a verdict the judge entered judgment for Ty as a matter of law. Later he entered a final judgment awarding Ty both injunctive relief and $713,000 in damages. Softbelly's moved under Fed.R.Civ.P. 60(b)(3) to vacate the judgment in favor of Ty on the ground that Ty Warner, the owner of Ty Inc., had tampered with a prospective witness for Softbelly's. The judge denied the motion.

We reversed. 353 F.3d 528 (7th Cir. 2003). We ruled that Softbelly's was entitled to a new trial on liability because the judge had erroneously excluded potentially important evidence that "Beanies" or "Beanie Babies" had become a generic mark and because he should not have taken the issue of likelihood of confusion from the jury, but that if Ty again prevailed it would be entitled to the $713,000 in damages awarded at the first trial. We also directed the district court to conduct an evidentiary hearing on the charge of witness tampering.

On remand, the case was retried (a different judge presiding). The jury found trademark infringement. The judge entered an injunction forbidding Softbelly's "to sell plush products in connection with the trademarks `Screenie Beanies' and/or `The Screenie Beanies Collection,' and/or any other trademark confusingly similar to Ty's BEANIE BABIES®, THE BEANIE BABIES COLLECTIONS®, and/or BEANIE(S) TRADEMARKS™." But the judge awarded Ty no damages, holding that forfeiture of the $713,000 in damages to which Ty would otherwise have been entitled by virtue of our ruling in the first appeal was the right sanction for what she found to have been Warner's improper conduct toward the prospective witness. But she awarded Ty the attorneys' fees that it had incurred in proving Softbelly's' trademark infringement, on the ground that the infringement had been willful.

Softbelly's has appealed, seeking yet another new trial on liability and asking that the award of attorneys' fees be vacated. Ty has cross-appealed, seeking vacation of the sanction and thus restoration of the $713,000 in damages that the district judge ordered forfeited. But Ty does not object to our subtracting $78,000 from the restored damages, that being the amount of attorneys' fees that Softbelly's incurred in litigating the issue of Warner's misconduct. Ty had asked for $315,000 in prejudgment interest on the damages award, and so contends that the sanction is really more than $1 million. We need not decide whether, if the sanction should be vacated, Ty is entitled to that interest, an issue that the district judge did not reach and that the parties have not briefed.

The sanctions issue is unconnected to the trademark issues, and as it is the most difficult issue in the case, we address it first. At the first trial, Softbelly's planned to call as one of its witnesses Harold Nizamian, a competitor of Ty for whom Ty Warner had worked before forming his own business. Nizamian was prepared to testify that as early as 1988, before Ty began selling "Beanie Babies," the word, "beanie" was being used in the trade names of other manufacturers of plush beanbag animals and indeed that the word had become generic, and so could not be a trademark. On the Friday before the Monday on which the trial began, Softbelly's' lawyer deposed Ty Warner and in the course of the deposition revealed that Nizamian would be testifying that "beanies" was a generic term. On Monday, when the lawyer called Nizamian to schedule his testimony, Nizamian said that Warner had telephoned him and that he was no longer willing to testify.

At the trial, Softbelly's lawyer asked Warner whether he had told Nizamian not to testify. Ty objected and the judge sustained the objection. We ruled that this was error, as was the judge's subsequent action in denying without a hearing Softbelly's' motion to vacate the judgment in favor of Ty on the ground of fraud. In support of the motion Softbelly's had submitted the transcript of a post-trial deposition at which Nizamian had testified that Warner had told him that if he testified at the trial it would cost Warner "a tremendous amount of money" and cause "a lot of problems" since Warner "was involved in the Softbelly's case and ... if my statement got into the case ... it would be very damaging to him." Nizamian added that his relation to Ty was "delicate" because he and Warner had recently discussed the possibility of doing business together and "I realized after speaking to Ty that it was a very important matter to him, and even though I didn't understand all of the particulars, I felt if he felt that strongly about it ... maybe it would be best if I did not go." Nizamian did not say that Warner had threatened him, but "because of the seriousness in his voice and' the importance to him, . I figured I'd just rather not get involved."

Testifying at the hearing on remand, Warner admitted that he had telephoned Nizamian in order to inquire whether he was going to testify but flatly denied Nizamian's version of the conversation. The district judge deemed Warner's testimony "incredible and false," said that he had lied under oath, and concluded that he had engaged in witness tampering. But on reconsideration she decided that she was "not prepared to find that Warner committed perjury. Nevertheless, it [i.e., she, the district court] adheres to the view that Warner was not credible and does not attribute his lack of credibility to memory lapse. As such, this finding, while still consistent with bad faith, may not be alone sufficient to support a conclusion of bad faith" (footnote omitted). We are uncertain what this means. The judge added that she had not found "that Warner `corruptly' persuaded Nizamian not to testify" and so she would not deem him guilty of witness tampering. Nevertheless she ruled that his "sanctionable misconduct" warranted the sanction of forfeiture of damages that she had imposed when she had thought him guilty of perjury and witness tampering. "Although Warner's actions were not criminal or quasi-criminal in nature, they interfered with Softbelly's ability to present its defense and thereby impaired an honest and true airing of the real facts."

This ruling was made before the retrial, at which, though Nizamian was present and willing to testify for Softbelly's, Softbelly's lawyer decided not to call him. The lawyer mistakenly believed that the jury was certain to find that Ty had not proved likelihood of confusion and therefore would lose regardless of how the issue of genericness, about which Nizamian would have testified, was resolved.

Ty's primary challenge to the sanction is that because it was punitive, its appropriateness had to be proved by clear and convincing evidence and not, as the judge thought, by a mere preponderance of the evidence. Indeed it was punitive. Softbelly's does not contend that it suffered any harm as a result of Warner's conversation with Nizamian other than having to pay the attorney's fees that it incurred in order to litigate the sanction issue. It does not argue that had he testified in the first trial the outcome would have been different. In this regard its failure to call him at the second trial and its abandonment of the defense that "Beanie Babies" is generic are telling.

Trying improperly to influence a witness is fraud on the court and on the opposing party, and the conventional rule, routinely invoked in cases in which a judgment is sought to be set aside under Fed. R.Civ.P. 60(b)(3) (that is, on the basis of "fraud ..., misrepresentation, or misconduct of an adverse party"), e.g., Lonsdorf v. Seefeldt, 47 F.3d 893, 897 (7th Cir.1995); Greiner v. City of Champlin, 152 F.3d 787, 789 (8th Cir.1998); Smith v. Reddy, 101 F.3d 351, 353 (4th Cir.1996); Rozier v. Ford Motor Co., 573 F.2d 1332, 1339 (5th Cir.1978), is that fraud must be proved by clear and convincing evidence. But those cases are not compelling precedents in this case.

Rule 60(b)(3) is the lineal descendant of the equity rule that a court may alter or annul, because of fraud or undue influence, a written instruments (such as a contract or patent — but also a court's own judgment, see Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238, 244-45, 64 S.Ct. 997, 88 L.Ed. 1250 (1944)) only if the fraud or undue influence is proved by clear and convincing evidence. Herman & MacLean v. Huddleston, 459 U.S. 388 n. 27, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983); United States v. Maxwell Land-Grant Co., 121 U.S. 325, 381, 7 S.Ct. 1015, 30 L.Ed. 949 (1887). Rule 60(b)(3) is not applicable to this case, which does not involve the setting aside of a judgment. But some cases hold that any substantial sanction for misconduct in litigation must be proved by clear and convincing evidence. The principal case in this circuit is Maynard v. Nygren, 332 F.3d 462, 468 (7th Cir.2003). But it involved ...