Procter & Gamble Co. v. Amway Corp.

• Decision Date: 17 January 2002
• Docket Number: No. 00-20127.,00-20127.
• Citation: 280 F.3d 519
• Court: U.S. Court of Appeals — Fifth Circuit
• Parties: The PROCTER & GAMBLE COMPANY; The Procter & Gamble Distributing Company, Plaintiffs-Appellants-Cross-Appellees, v. AMWAY CORPORATION, et al., Defendants, The Amway Distributors Association Council, Defendant-Appellee-Cross-Appellant, Ja-Ri Corporation, Defendant-Appellee, and Internet Services Corporation, Movant-Appellee-Cross-Appellant.

280 F.3d 519

The PROCTER & GAMBLE COMPANY; The Procter & Gamble Distributing Company, Plaintiffs-Appellants-Cross-Appellees, v. AMWAY CORPORATION, et al., Defendants The Amway Distributors Association Council, Defendant-Appellee-Cross-Appellant Ja-Ri Corporation, Defendant-Appellee, and Internet Services Corporation, Movant-Appellee-Cross-Appellant.

No. 00-20127.

United States Court of Appeals, Fifth Circuit.

January 17, 2002.

COPYRIGHT MATERIAL OMITTED

Arthur R. Miller (argued), Harvard University School of Law, Cambridge, MA, John E. Jevicky, Dinsmore & Shohl, Stanley M. Chesley, Fay E. Stilz, Paul Michael DeMarco, Waite, Schneider, Bayless & Chesley, Joseph P. Suarez, The Procter & Gamble Co., Legal Div., Wilbert B. Markovits, Markovits & Greiwe, Cincinnati, OH, Michael T. Gallagher, Gallagher, Lewis, Downey & Kim, Richard A. Sheehy, Sheehy, Serpe & Ware, Houston TX, for Plaintiffs-Appellants-Cross-Appellees.

William J. Abraham, Rick Joseph Abraham (argued), Abraham Law Offices, Columbus, OH, Edward B. McDonough, Jr., Mark Stephen Dube, McDonough & Associates, Houston, TX, for the Amway Distributors Ass'n Council and Internet Services Corp.

Robert L. DeJong (argued), Miller, Canfield, Paddock & Stone, Grand Rapids, MI, for Ja-Ri Corp.

Appeals from the United States District Court for the Southern District of Texas.

Before JOLLY, SMITH and BENAVIDES, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

The Procter & Gamble Co. ("P&G") appeals the award of attorneys' fees and costs to Ja-Ri Corporation ("Ja-Ri"), the Amway Distributors Association Council ("ADAC"), and Internet Services Corporation ("Internet") under 28 U.S.C. § 1927 and 15 U.S.C. § 1117(a). Concluding that the district court committed several errors, we vacate and remand.

I.

P&G manufactures and distributes numerous household products. Since the late 1970's and early 1980's, rumors of links to Satanism have circulated throughout the United States. A common version alleges that P&G's president admitted to worshiping Satan on a television talk show and that a portion of P&G's profits goes to the church of Satan. The rumor has circulated in the form of voicemail messages and printed fliers.

P&G alleges that Amway and its distributors started or spread the rumor in the 1980's and began spreading it again in the mid-1990's. Rather than suing Amway in the 1980's, P&G worked with Amway's corporate headquarters to stop the rumor. In 1995, however, the rumor resurfaced when Randy Haugen, an Amway Distributor, forwarded it to other Amway distributors via an internal telephone messaging system. Haugen served on the ADAC and was a very successful Amway distributor with a network of distributors throughout Utah, Nevada, Texas, Mexico, and Canada.

The rumor spread rapidly. Some distributors printed fliers containing the rumor and circulated them to consumers. P&G offered evidence that the number of Satanism rumors increased substantially in the states in which the majority of Haugen's distributors live.

Within days of learning that the rumor was false, Haugen sent out a short retraction on the voice messaging system. Shortly thereafter, an Amway representative contacted Haugen and delivered a copy of a P&G "truth kit," which explains that the rumor is false. Using the kit, Haugen sent out a second and more detailed retraction, but the rumor continued to spread for some time.

Amway's distributors make money both from selling Amway products to the general public and from recruiting other distributors. Newly recruited distributors become "down-line" distributors who earn commissions for the "upline" distributors who recruited them. More senior and profitable distributors sell their products predominately to downline distributors rather than to consumers. There is high turnover among the more junior distributors. The most elite and profitable distributors rely on the sale of motivational tools rather than Amway products to earn large profits.

P&G alleged that this structure constitutes an illegal pyramid scheme and gave upline distributors a possible motive to repeat the rumor to the downline distributors because it might affect the ability to recruit distributors and sell Amway products. The relationship of Amway distribution network to Ja-Ri, ADAC, and Internet remains a bit murky, but P&G unearthed evidence that the four entities have close ties.

II.

In 1995, P&G filed a federal suit in Utah, alleging that Haugen, Freedom Associates, Inc., and Freedom Tools, Inc., circulated the Satanism rumor; P&G later joined Amway, Randy Walker, and Walker International Network as defendants. In 1996, P&G filed a second amended complaint alleging defamation, common law unfair competition, violations of the Utah Truth in Advertising Act, tortious interference, negligent supervision, and violations of the Lanham Act § 43(a), 15 U.S.C. § 1125(a), and vicarious liability. P&G then filed a third amended complaint alleging that Amway is an illegal pyramid and alleging fraud and product disparagement; the district court dismissed that complaint in 1997. Later in 1997, P&G filed a fourth amended complaint to assert fraud and disparagement claims, which the Utah court denied as untimely.¹

On the day after the dismissal in Utah, P&G sued Haugen, Amway, ADAC, Ja-Ri, Internet, and other parties in Texas federal court, alleging that the defendants had (1) spread the Satanism rumor, (2) disparaged P&G's Crest toothpaste, and (3) harmed P&G's sales by luring people into Amway's illegal pyramid scheme as distributors. The complaint asserted various causes of action, including common law fraud, violations of the Lanham Act § 43(a), violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 28 U.S.C. § 1962(c)-(d), and violations of the Texas Business and Commerce Code § 16.29.

The Texas district court granted Amway's FED. R. CIV. P. 12(b)(6) motion dismissing the RICO claim because P&G had not alleged reliance on Amway's alleged predicate acts of mail and wire fraud. The court held that P&G lacked standing to bring its § 43(a) claim based on Amway's illegal pyramid scheme and that the statute of limitations had expired for the fraud claim. This dismissal eliminated Internet as a party to the suit, because P&G had asserted only the Lanham Act illegal pyramid scheme against Internet.

The remaining claims and parties went to trial. At the close of P&G's case, Amway moved for judgment as a matter of law ("j.m.l."). The court granted j.m.l. and dismissed the § 43(a) claim against Amway, Walker, and Haugen based on the res judicata effect of the Utah final judgment. The Texas court dismissed the § 43(a) claim for disparagement against the remaining defendants because the First Amendment requires, and the plaintiffs had failed to present, evidence of "actual malice." The court also dismissed the Texas Business and Commerce Code § 16.29 claim and all remaining claims. P&G appealed the decision on the merits.

The district court then issued three orders imposing sanctions on P&G by shifting attorneys' fees and costs. It granted sanctions to Ja-Ri in the form of all attorneys' fees expended after April 1999 (the "Ja-Ri sanctions order"), citing § 1927 as its authority for shifting fees. The court granted a fees motion in favor of ADAC, citing its authority under § 1927 and 15 U.S.C. § 1117 (the "ADAC sanctions order"). The court granted Internet's motion for all attorney's fees under §§ 1117 and 1927 (the "Internet sanctions order"). P&G brought the instant appeal to challenge the sanctions orders.

In Procter & Gamble Co. v. Amway Corp. ("P&G I"), 242 F.3d 539, cert. denied, ___ U.S. ___, 122 S.Ct. 329, 151 L.Ed.2d 243 (2001), we affirmed the decision on the merits in part, reversed in part, and vacated. (1) We reversed the rule 12(b)(6) dismissal of the RICO claims based on the predicate acts of mail and wire fraud in spreading the Satanism rumor. We affirmed the dismissal of the RICO claims based on the illegal pyramid scheme. Id. at 564-65. (2) We affirmed the summary judgment dismissing the Lanham Act illegal pyramid claims because P&G lacked standing. Id. at 562-63. (3) We reversed the j.m.l. that the Utah judgment has res judicata effect, because the Tenth Circuit had reversed and remanded on the Lanham Act claim. We refused to give the Utah court's decision on vicarious liability preclusive effect as to the Lanham Act claims. Id. at 546. (4) We reversed the j.m.l. on the Lanham Act disparagement claim, concluding that the First Amendment does not require proof of "actual malice." Id. at 546-59. (5) We reversed the dismissal of the product disparagement claims under the Lanham Act and Texas Business and Commerce Code § 16.29. Id. at 565-66. (6) We upheld the dismissal of the common law fraud claims as barred by the statute of limitations. Id. at 566-67. (7) We upheld the dismissal of the alter ego, single business enterprise, and vicarious liability claims against Ja-Ri and ADAC.

The only claims currently before the district court relate to spreading the Satanism and Crest toothpaste rumors. The district court still must decide whether Amway and its distributors fraudulently spread the Satanism rumor and violated RICO, unlawfully disparaged P&G products under the Lanham Act, or unlawfully disparaged P&G products under Texas Business and Commerce Code § 16.29. P&G has never identified evidence that Ja-Ri, ADAC, or Internet spread the Satanism or Crest toothpaste rumor. In P&G I, we affirmed the decision that Ja-Ri and ADAC could not face alter ego, single business enterprise, or vicarious liability for the actions of Amway or downline distributors. 242 F.3d at 559-60. We may safely assume that none of the claims currently pending before the district court relates to Ja-Ri, ADAC, or Internet.

III.

P&G argues that the district court lacked jurisdiction to enter sanctions, because P&G already had appealed the final decision on the merits. Perfecting...