Ty, Incorporated v. Softbelly's Inc ( 2008 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 07-1452, 07-1519, 07-1782, 07-1793, 07-2401
TY INC.,
Plaintiff-Appellee, Cross-Appellant,
v.
SOFTBELLY’S, INC., et al.,
Defendants-Appellants, Cross-Appellees,
____________
Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 00 C 5230—Joan Humphrey Lefkow, Judge.
____________
ARGUED JANUARY 14, 2008—DECIDED FEBRUARY 22, 2008
____________
Before POSNER, KANNE, and WILLIAMS, Circuit Judges.
POSNER, Circuit Judge. Ty Inc., the manufacturer of
“Beanie Babies,” years ago brought this suit for trade-
mark infringement under the Lanham Act against Soft-
belly’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.
2 Nos. 07-1452, 07-1519, 07-1782, 07-1793, 07-2401
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 judg-
ment 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 Collec-
tion,’ and/or any other trademark confusingly similar
to Ty’s BEANIE BABIES®, THE BEANIE BABIES COL-
LECTION®, and/or BEANIE(S) TRADEMARKS™.” But
the judge awarded Ty no damages, holding that for-
feiture 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
Nos. 07-1452, 07-1519, 07-1782, 07-1793, 07-2401 3
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 dam-
ages, 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 com-
petitor 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.
4 Nos. 07-1452, 07-1519, 07-1782, 07-1793, 07-2401
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 deny-
ing without a hearing Softbelly’s’ motion to vacate the
judgment in favor of Ty on the ground of fraud. In sup-
port of the motion Softbelly’s had submitted the tran-
script 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 possi-
bility 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
Nos. 07-1452, 07-1519, 07-1782, 07-1793, 07-2401 5
memory lapse. As such, this finding, while still con-
sistent 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 suf-
fered 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.
6 Nos. 07-1452, 07-1519, 07-1782, 07-1793, 07-2401
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 miscon-
duct 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 compel-
ling 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 instrument (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 (1944))
only if the fraud or undue influence is proved by clear
and convincing evidence. Herman & McLean v. Huddleston,
459 U.S. 388 n. 27 (1983); United States v. Maxwell Land-
Grant Co., 121 U.S. 325, 381 (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 sub-
stantial 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 Rule 37, and its sound-
ness was questioned in Wade v. Soo Line R.R. Corp., 500 F.3d
559, 561 (7th Cir. 2007), where we pointed out that the
Supreme Court has held that the standard for proving
fraud under federal statutes is that of preponderance of
the evidence rather than clear and convincing evidence.
Herman & McLean v. Huddleston, supra, 459 U.S. at 388-90;
Nos. 07-1452, 07-1519, 07-1782, 07-1793, 07-2401 7
Grogan v. Garner, 498 U.S. 279, 286-91 (1991). Wade sug-
gests that Rule 37 can be compared to a statute—and it is
a “statute” that lacks the special history of Rule 60(b)(3)
that had made clear and convincing evidence the stand-
ard for motions under that rule.
The present case, however, involves not a ruling under
Rule 37 but an exercise of a federal court’s inherent au-
thority to sanction misconduct in litigation before it; and
a number of cases hold that the imposition of such a
sanction (when indeed it is punitive and not merely
compensatory) requires proof by clear and convincing
evidence. See Shepherd v. American Broadcasting Cos., 62
F.3d 1469, 1476-78 (D.C. Cir. 1995), and cases cited there;
also cases cited in Maynard v. Nygren, supra, 332 F.3d at
468. The logic of these holdings is that in the absence of a
statute or rule, the exercise of judicial authority should
be governed by traditional common law or equitable
principles, such as the familiar principle that fraud must
be proved by clear and convincing evidence. E.g., Barr
Rubber Products Co. v. Sun Rubber Co., 425 F.2d 1114, 1120-21
(2d Cir. 1997); Shepherd v. American Broadcasting Cos., supra,
62 F.3d at 1477.
The tripartite division of burdens of proof—preponder-
ance of the evidence, clear and convincing evidence, and
proof beyond a reasonable doubt—has a certain logic. In
an ordinary civil case, in which a prevailing plaintiff
obtains only money, the consequences of error (which is
always a risk in litigation) are symmetric: one party (the
party that should have lost) is unjustly enriched, the
other unjustly impoverished, by the same amount. At the
other extreme, that of a criminal prosecution, the con-
sequences to the contending interests are sharply asymmet-
ric: a person unjustly convicted and sentenced to prison
8 Nos. 07-1452, 07-1519, 07-1782, 07-1793, 07-2401
(or executed) incurs heavy costs of punishment, and the
penal system incurs heavy costs of implementing punish-
ment, whereas the only consequence of acquitting a
guilty person is to reduce, usually rather modestly,
the deterrent and incapacitative effects of the criminal
law. In the intermediate case, that of a civil judgment for
fraud, the consequences of error are slightly asymmetric. A
judgment of fraud injures the defendant’s reputation and
may drive customers away and otherwise impair his ability
to do business, and these costs are not a benefit to the
plaintiff. The plaintiff gains a money judgment; the de-
fendant loses a money judgment but incurs additional
costs besides—therein lies the asymmetry.
But the asymmetry is attenuated when instead of suffer-
ing a judgment for having committed fraud in one’s
business activities, a litigant is sanctioned for fraud in
the litigation itself. The sanction will often be written off
by the larger community containing the defendant’s
peers—if the sanction is even noticed—as a mere battle
scar of litigation. So we are led to doubt that there
is any utility in insisting on proof by clear and con-
vincing evidence in a case such as this, and getting en-
tangled in disputes over whether Warner’s conduct
should be described as fraud and if not whether there
should nevertheless be a category of litigation sanctions
that require a heightened standard of proof.
We need not try to resolve our doubts. For just as the
Constitution, while it has been interpreted to require
proof beyond a reasonable doubt to convict in criminal
case, also imposes (in the Eighth Amendment’s cruel and
unusual punishments clause) limitations on the severity
of punishment, so the permissible level of sanctions
for misconduct in litigation, except when prescribed by
statute or rule, is, even when there is no heightened
Nos. 07-1452, 07-1519, 07-1782, 07-1793, 07-2401 9
burden of proof, limited by notions of proportionality. E.g.,
Allen v. Chicago Transit Authority, 317 F.3d 696, 703 (7th
Cir. 2003); Goss Graphics Systems, Inc. v. DEV Industries, Inc.,
267 F.3d 624, 627 (7th Cir. 2001); Newman v. Metropolitan
Pier & Exposition Authority, 962 F.2d 589 (7th Cir. 1992);
Nick v. Morgan’s Foods, Inc., 270 F.3d 590, 597 (8th Cir. 2001);
Zambrano v. City of Tustin, 885 F.2d 1473, 1480 (9th Cir.
1989). The limit was exceeded in this case. Cf. Barnhill v.
United States, 11 F.3d 1360 (7th Cir. 1993). The district judge
imposed what amounted to a large fine—nine times the
amount necessary to compensate the victim fully (more,
if Ty would be entitled to prejudgment interest on a
damages award)—for what she described as “serious
misconduct,” even though (as in the parallel case of
Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1178-79 (3d
Cir. 1993)) 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
finding of serious misconduct—especially since Ty does
not contest it—stands as a black mark against Ty Warner’s
name, and has cost Ty substantial attorney’s fees in fighting
the sanction, as well as requiring it to cough up the $78,000
in attorney’s fees incurred by Softbelly’s in litigating the
sanctions issue. Ty concedes that Softbelly’s is entitled to
those fees even though Softbelly’s has failed in its quest
for a greater sanction—dismissal of Ty’s suit, as it first
sought, or the $713,000 (or perhaps $1,028,000) forfeiture
imposed by the district judge. Ty started Softbelly’s on
what has proved a wild goose chase, and must bear the
consequences. But it has been punished enough for litiga-
tion misconduct that fortunately did not affect the course
or outcome of the litigation.
We turn now to Softbelly’s’ appeal, where we can be
brief. Softbelly’s argues that a reasonable jury could not
10 Nos. 07-1452, 07-1519, 07-1782, 07-1793, 07-2401
have found trademark infringement and that if there
was infringement it was not willful. But it has abandoned
the only argument that could have saved the day for
it, which is that “Beanies” or “Beanie Babies” is the generic
term for soft, plush objects, in the shape of animals, that
are filled with bean-like materials to make the objects
soft and floppy. If “Beanies” is generic—is, that is,
“beanies”—it cannot be a legally protected trademark, and
then Softbelly’s is free to call its screen cleaners “Screenie
Beanies.” We expressed concern in our previous opinion
that Ty’s competitors might be rendered speechless
unless they could call their soft, plush, bean-filled animal-
cules “beanies,” but the narrowly drawn injunction
should leave plenty of room for Softbelly’s to designate
its product crisply and clearly. As Ty’s lawyer acknowl-
edged at argument, Softbelly’s could call its product a
beanbag screen cleaner or even a screenie bean without
infringement. Softbelly’s itself has added “Cleanie Critter”
to its lexecon, without challenge by Ty.
Softbelly’s’ abandonment of the argument that “Beanies”
is generic leaves this a case in which a seller attaches
a popular trademark to a product that is nearly identical
to the trademarked one. E.g., Attrezzi, LLC v. Maytag Corp.,
436 F.3d 32, 39 (1st Cir. 2006); Kos Pharmaceuticals, Inc. v.
Andrx Corp., 369 F.3d 700, 714 (3d Cir. 2004); Nautilus
Group, Inc. v. ICON Health & Fitness, Inc., 372 F.3d 1330(Fed. Cir. 2004). Many “Screenie Beanies” are identical in
size, shape, and overall appearance to the corresponding
“Beanie Baby” except for the chamois belly, which is
invisible unless the animal is viewed from the bottom. It is
true that the hang tag for “Screenie Beanies” differs from
Ty’s well-known red heart-shaped tag, being round and
not red, but customers might well believe that Ty,
Nos. 07-1452, 07-1519, 07-1782, 07-1793, 07-2401 11
having decided to make a screen cleaner rather than the
conventional “Beanie Baby” toy, had changed the tag’s
appearance.
Softbelly’s points out that “Screenie Beanies” are sold
through different outlets from “Beanie Babies,” are slightly
more expensive, and have, of course, a different use. But
the issue is only whether the designation “Screenie
Beanies” on a nearly identical-looking product is likely
to make a significant number of consumers think that
Softbelly’s product is actually a Ty brand; and the jury
was entitled to answer the question in the affirmative.
This is especially true because an increasing number of
children use a computer at home and might wish to
graduate from playing with “Beanie Babies” to cleaning
their computer screens with the “adult” screen-cleaner
version manufactured (they might well believe) by Ty
and sold under the name “Screenie Beanie.”
Softbelly’s objects to the judge’s having permitted Ty
to present evidence of “Beanie” products that Ty marketed
after “Screenie Beanies” entered the market. Obviously
those products could not be used to show that the “Beanie
Babies” trademark was in use before “Screenie Beanies”
was, but they could be used as evidence of the likelihood
that consumers would be confused about the source of
“Screenie Beanies.” Carnival Brand Seafood Co. v. Carnival
Brands, Inc., 187 F.3d 1307, 1311 n. 4 (11th Cir. 1999). The
greater the variety of products to which “Beanies” or
“Beanie Babies” is attached, the likelier it is that consumers
would assume that a new “Beanie” product that closely
resembled “Beanie Babies” was also made by Ty.
Finally, the judge was on solid ground in finding that
the infringement was willful; Softbelly’s had chosen the
name “Screenie Beanies” and the design of its screen
12 Nos. 07-1452, 07-1519, 07-1782, 07-1793, 07-2401
cleaners with reckless disregard for the likelihood
of consumer confusion. Its attempt to trademark
“Screeniebeanies” had been turned down by the Patent
and Trademark Office on the ground that it was poten-
tially confusing.
To summarize, the grant of the injunction against
Softbelly’s is affirmed, but the case is remanded for the
entry of a damages judgment of $713,000 against Softbelly’s
minus the attorney’s fees incurred by Softbelly’s in the
sanction litigation. Whether the damages judgment
should be augmented by prejudgment interest we leave
to the district judge to decide in the first instance.
AFFIRMED IN PART, REVERSED IN PART,
AND REMANDED WITH DIRECTIONS.
USCA-02-C-0072—2-22-08