Total forfeiture held to be excessive sanction for misconduct

In Ty Inc v Softbelly's Inc (Cases 07-1452, 1519, 1782, 1793 and 2401, February 22 2008), the US Court of Appeals for the Seventh Circuit has reversed a district court decision in which the lower court held that the plaintiff had forfeited its entire damages award due to litigation misconduct.

Ty Inc is the manufacturer of the stuffed 'Beanie Babies' toys. Ty sued Softbelly's Inc for trademark infringement under the Lanham Act for manufacturing products called 'Screenie Beanies' (bean-stuffed animals with a chamois belly for wiping computer screens). Following a trial, Ty obtained a judgment as a matter of law and was awarded $713,000 in damages and an injunction. Softbelly's appealed, arguing that Ty Warner, the owner of Ty, had tampered with a witness who was to testify that 'beanie' was a generic term for a bean- stuffed product. The Seventh Circuit ordered that the case be retried.

In the second trial, the jury found for Ty on the trademark infringement issue and the court entered an injunction prohibiting Softbelly's from using any term confusingly similar to 'Beanie Babies' to market screen-cleaning products. However, the district court awarded Ty no damages, based on its view of Ty's litigation behaviour during the initial trial, even though Softbelly's did not call the witness that Ty allegedly tampered with at the original trial. Both Ty and Softbelly's appealed.

On appeal, Softbelly's sought yet another new trial on liability and an order vacating the district court's award of attorneys' fees to Ty based on the trial court's finding that Softbelly's infringement was wilful. Ty sought to have the $713,000 damages award restored.

The Seventh Circuit found that the Eighth Amendment limits the severity of the sanctions that a court may impose for litigation misconduct. It held that the district court had imposed a sanction amounting to nine times the amount necessary to compensate Softbelly's for any misconduct by Ty, "even though no harm was done by the misconduct beyond imposing a litigation expense on the opposing party that the misbehaving party is ready to make good". The court found that:

• Softbelly's could be fully compensated by an award of the attorneys' fees incurred in litigating the sanctions issues; and
  
  
• forcing Ty to surrender its entire damages award was excessive.

Turning to the trademark infringement issues, the court determined that since many 'Screenie Beanies' looked nearly identical to 'Beanie Babies', there was a high likelihood that consumers would believe that Softbelly's products were manufactured by Ty. In the court's view, the fact that Softbelly's abandoned its argument that 'Beanie' is a generic term made this a simple case in which a seller attached "a popular trademark to a product that is nearly identical to the trademarked one". The court also found that the evidence supported the finding that Softbelly's infringement was wilful.

Mark R Anderson, McDermott Will & Emery LLP, Chicago