Kehoe Component Sales Inc. v. Best Lighting Products, Inc. , 2015 FED App. 0177P ( 2015 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 15a0177p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
KEHOE COMPONENT SALES INC., dba Pace ┐
Electronic Products; PACE TECHNOLOGY CO. LTD.; │
ESTATE OF FRANK PATRICK KEHOE, │
│ No. 14-3347
Plaintiffs-Appellants,
│
>
│
v.
│
│
BEST LIGHTING PRODUCTS, INC., │
Defendant-Appellee. │
┘
Appeal from the United States District Court
for the Southern District of Ohio at Columbus.
No. 2:10-cv-00789—Edmund A. Sargus, Jr., Chief District Judge.
Argued: June 18, 2015
Decided and Filed: August 5, 2015
Before: GRIFFIN and DONALD, Circuit Judges; and TARNOW, District Judge.*
_________________
COUNSEL
ARGUED: Ronald G. Hull, UNDERBERG & KESSLER LLP, Rochester, New York, for
Appellants. Gregory P. Barwell, WESP BARWELL, Columbus, Ohio, for Appellee. ON
BRIEF: Ronald G. Hull, UNDERBERG & KESSLER LLP, Rochester, New York, James D.
Colner, SHUMAKER, LOOP & KENDRICK, LLP, Columbus, Ohio, for Appellants. Gregory
P. Barwell, E. Joel Wesp, Quinn Schmiege, WESP BARWELL, Columbus, Ohio, for Appellee.
*
The Honorable Arthur J. Tarnow, Senior United States District Judge for the Eastern District of Michigan,
sitting by designation.
1
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 2
_________________
OPINION
_________________
GRIFFIN, Circuit Judge. This appeal stems from a manufacturer’s decision to copy a
former collaborator’s products and market the cloned products as its own. After Best Lighting
Products, Inc. (“Best”) brought to appellants (collectively, “Pace”) the idea to manufacture
certain specialized lighting products for Best, Pace agreed to do so. But after Pace manufactured
enough units to fill Best’s product orders, Pace used the same molds (or “tooling”) to
manufacture thousands of additional units of exactly the same products. Pace then began selling
these cloned products under its own name to several of Best’s customers, urging them to buy the
identical product directly from Pace rather than from Best. The parties eventually sued each
other, and, after a bench trial, the district court found Pace liable to Best for misappropriation of
trade secrets under Ohio law, “reverse passing off” and false advertising in violation of the
Lanham Act, breach of contract, tortious interference, conversion, and breach of warranties, and
awarded compensatory and punitive damages, attorneys’ fees, and injunctive relief.
Pace appeals. Although we agree with Best that the district court did not err in finding
Pace liable for breach of contract and tortious interference, we agree with Pace that the district
court erred in its resolution of the trade secrets claim, the Lanham Act claims, the conversion
claim, and the warranties claim. We therefore affirm in part, reverse in part, vacate in part, and
remand.
I.
Best designs and markets exit signs and emergency lighting products for commercial
buildings. Since its beginnings in 1987, Best’s modus operandi generally has been to model its
products on other companies’ patented products and then alter the products’ design in order to
make “something unique or different” about them and to produce them at a lower cost than
competitors.
In 2000, Best began purchasing some of the parts for their products from Pace. Soon
afterward, Pace began making fully assembled products for Best, to Best’s specifications.
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 3
Before this time, Pace had never manufactured any emergency lighting products. Because Pace
had never before made these types of products, Best’s founder, Alvin Katz, spent a significant
amount of effort instructing Pace on how to manufacture the tooling necessary to make the
particular products that Best wanted Pace to manufacture.
During the initial years of the companies’ business relationship, there was no contract
prohibiting Pace from competing with Best. As Katz put it, “In my world, if a guy shook hands
and you promised to do something, you did it. . . . [I]s there a piece of paper? No, there was
never a contract. We didn’t do that.”
But Katz soon began to suspect that his confidence in his business partner’s integrity had
been misplaced. In August 2004, Katz emailed Pace’s president complaining that Pace not only
had begun selling products that were identical to the products that it made for Best, but also that
Pace had begun selling them to Best’s established customers. Apparently, Pace was filling
orders for Best and then using the same tooling to manufacture additional units of exactly the
same products. Pace then sold these cloned products as its own, bypassing Best.
The companies’ interactions soon became filled with strife. In 2005, Best complained
that some of the products that had been manufactured for it by Pace were defective. The parties
negotiated an agreement referred to as “the Big Wash” in which Pace transferred to Best
ownership of some of the tooling that was used to manufacture the products in question. In
2006, Best refused to pay for a substantial number of products that Pace had delivered to it, and
Pace stopped shipments to Best.
To resolve the impasse, the parties negotiated a Supply Agreement effective January 10,
2007, and lasting one year. Best agreed to pay its outstanding debt to Pace and to purchase a
minimum of $7 million worth of products from Pace annually, and Pace agreed to a variety of
provisions, including to warrant the quality of the goods, not to “use any tooling owned by Best
other than for the manufacture of products for sale to Best,” to “assign[ ] to Best all designs and
intellectual property . . . for products developed or to be developed at or by Pace for Best,” and
neither to “sell emergency lights or exit signs nor ballasts, nor solicit sales of these items to any
party in North America without Best’s prior written consent.”
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 4
Pace received several purchase orders for cloned products from North American
companies before the Supply Agreement came into effect, and it shipped products to fill these
orders after the agreement came into effect.
Best continued to complain that Pace was manufacturing defective products, and by April
2008, Best told Pace that “we are at a point where we both know we will not be doing any more
business.” Best requested that Pace return the tooling that Best owned, especially to prevent
Pace from “using our tooling to make product for other customers.”
By the time the parties stopped their ongoing commercial relationship, Pace was in
possession of all of the tooling that had been used to manufacture both Best’s products and the
cloned products, and Best owed Pace almost $900,000 for products delivered but not yet paid
for.
In August 2008, Pace filed a diversity action against Best in federal district court,
alleging that Best had breached its contractual obligations by failing to pay for the $900,000
worth of products that Pace had delivered to it. See Kehoe Component Sales, Inc. v. Best
Lighting Prods., Inc., No. 2:08-cv-00752-EAS-TPK, DE 2, PgID 4-5 (S.D. Ohio). Best
requested a setoff of damages for breach of warranty and counterclaimed for breach of contract,
tortious interference, misappropriation of trade secrets, conversion, and fraud. See id. at DE 8,
PgID 30, 37-45.
The parties were still litigating the case two years later in August 2010 when Pace filed a
separate action against Best in Ohio state court, alleging that Best’s counterclaims had it entirely
backward: according to Pace, Best had misappropriated Pace’s trade secrets and Best had
tortiously interfered with Pace’s contracts. Best removed the suit to federal court and responded
in September 2010 not only with the same counterclaims that it had previously alleged in 2008,
but also with many new ones, including several claims under the Lanham Act and for patent
infringement. (These counterclaims were later amended.) The removed case was consolidated
with the parties’ still-pending federal-court litigation.
The parties eventually filed cross-motions for summary judgment, which the district court
granted in part and denied in part. After a bench trial on the remaining claims and
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 5
counterclaims, the district court found that Best had breached its contractual obligations by
failing to pay for the products that Pace had delivered, but that Pace was liable to Best for breach
of warranties, breach of contract, tortious interference, misappropriation of trade secrets,
conversion, and both false designation of origin and false advertising under the Lanham Act.
(Best previously conceded that its patent infringement claims were without merit.) The district
court awarded Best $1,133,697.10 in compensatory damages, $200,000.00 in punitive damages,
and $851,102.85 in attorneys’ fees. The district court also entered an order permanently
enjoining Pace from manufacturing the cloned products in question and from using or
referencing products that “originated with Best” in its marketing materials.
Pace appeals.
II.
The first issue in this appeal is a question of timing: Pace argues that Best’s trade secrets
claims were time-barred by the statute of limitations. The district court disagreed. Its
interpretation of the statute of limitations is a question of law that we review de novo. Peabody
Coal Co. v. Dir., Office of Workers’ Comp. Programs, 718 F.3d 590, 593 (6th Cir. 2013).
Ohio’s Uniform Trade Secrets Act (“OUTSA”)—under which Best’s claims arose—
requires that “[a]n action for misappropriation shall be commenced within four years after the
misappropriation is discovered or by the exercise of reasonable diligence should have been
discovered. For the purposes of this section, a continuing misappropriation constitutes a single
claim.” Ohio Rev. Code § 1333.66. The district court found that “the actual injury that started
the clock came in August of 2004,” when Best’s founder, Alvin Katz, learned that Pace was
selling to Best’s customers products that were facsimiles of Best’s wares and confronted Pace
about it. Best, however, did not file its OUTSA counterclaims against Best until more than four
years later—in October 2008. See Kehoe Component Sales, Inc. v. Best Lighting Prods., Inc.,
No. 2:08-cv-00752-EAS-TPK, DE 8, PgID 41–42 (S.D. Ohio).
Despite the fact that Best filed its OUTSA claims more than four years after learning that
Pace was using Best’s purported trade secret—its “know-how” about the emergency lighting
design and manufacturing process—to compete with Best, the district court concluded that
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 6
Best’s filing was timely because “Pace misappropriated Best’s trade secret with respect to know-
how again”—i.e., after August 2004—“when it brought competing . . . products to bear in the
market on or after January 10, 2007, all with the aid of the know-how conveyed by Mr. Katz.”
In other words, the district court held that Pace’s continued use of the purported trade secret
meant that at least part of its conduct fell within the applicable limitations period.
The district court’s reasoning was incorrect. OUTSA specifically incorporates the
Uniform Trade Secrets Act’s (“UTSA’s”) provision that “a continuing misappropriation
constitutes a single claim.” Ohio Rev. Code § 1333.66. UTSA adopted this approach precisely
to reject the type of reasoning to which the district court subscribed. Prior to UTSA,
jurisdictions were split on whether the limitations period ran only from the initial
misappropriation, or whether it was triggered anew with each act of misappropriation. See
UTSA § 6, cmt. (1985). The difference in the approaches rested on the underlying rationale for
punishing the misappropriation of a trade secret. Jurisdictions that restarted the limitations
period with each act of misappropriation did so on the theory that “a trade secret is in the nature
of property, which is damaged or destroyed by the adverse use.” Monolith Portland Midwest Co.
v. Kaiser Aluminum & Chem. Corp., 407 F.2d 288, 293 (9th Cir. 1969) (explaining Underwater
Storage, Inc. v. U.S. Rubber Co., 371 F.2d 950, 955 (D.C. Cir. 1966)). By contrast, jurisdictions
that ran the limitations period only from the initial act of misappropriation believed that “[i]t is
the relationship between the parties at the time the secret is disclosed that is protected,” and that
“[t]he fabric of the relationship once rent is not torn anew with each added use or disclosure,
although the damage suffered may thereby be aggravated.” Id.
UTSA’s declaration that “a continuing misappropriation constitutes a single claim”
expressly adopts the latter approach and rejects the former. UTSA § 6 & cmt. OUTSA’s
identical provision follows suit. Ohio Rev. Code § 1333.66. Under OUTSA, as we have
observed, “the first discovered (or discoverable) misappropriation of a trade secret commences
the limitation period, placing the focus . . . on the breach of the relationship between the parties
at the time the secret is disclosed.” Stolle Mach. Co., LLC v. RAM Precision Indus., No. 13-
4103, 2015 WL 1137429, at *7 (6th Cir. Mar. 16, 2015) (unpublished) (citation omitted).
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 7
The district court, in concluding that OUTSA’s limitation period was retriggered by
Pace’s continued use of the same trade secret, improperly reverted to a property-based theory of
trade-secret misappropriation, under which each successive use of a trade secret is an additional
wrong. That theory was rejected with the adoption of OUTSA. See Adcor Indus., Inc. v.
Bevcorp, LLC, 252 F. App’x 55, 62 (6th Cir. 2007) (noting that the continuing wrong approach
would render the statute of limitations “meaningless”). OUTSA’s limitations period runs not
from each time that a trade secret is used, but from the first moment of its reasonably
discoverable misappropriation. See Monolith, 407 F.2d at 293. Because the four-year
limitations period began when Best became aware in August 2004 that Pace had misappropriated
its purportedly proprietary knowledge, and because Best does not argue that the limitations
period was otherwise tolled, the district court erred in concluding that Best’s OUTSA claims
were timely filed.
Best fails to mount a persuasive argument to the contrary. Instead of arguing that the
district court made a clearly erroneous factual finding when it found that Katz’s August 2004
email demonstrated Best’s knowledge that Pace had misappropriated its manufacturing “know-
how,” Best asserts that Pace misappropriated new and different trade secrets each time it
manufactured a new knockoff product. But the district court did not agree, and Best fails to
identify what those alleged trade secrets might be, especially considering that “readily
ascertainable” design features of individual products are not trade secrets. Al Minor & Assoc.,
Inc. v. Martin, 881 N.E.2d 850, 853 (Ohio 2008) (quoting Ohio Rev. Code § 1333.61(D)); Valco
Cincinnati, Inc. v. N & D Machining Serv., Inc., 492 N.E.2d 814, 818 (Ohio 1986). As the
district court found, the only arguable “trade secret” that Pace misappropriated was the unitary,
generalized knowledge of the lighting design and manufacturing process that it had learned from
Best. Pace leveraged this knowledge for its own ends as early as August 2004. Thus, to be
timely under OUTSA, Best’s claims should have been filed within four years of when it first
learned that Pace was misusing this information in August 2004. Its October 2008 filing was
two months too late.
Best also attempts to salvage its OUTSA claims by arguing that the district court was
wrong to find that it had been injured in August 2004, asserting that it was injured only in
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 8
2007 when Pace continued to sell competing products to Best’s customers. But that is a
restatement of the district court’s erroneous rationale. Clearly Best was aware that it had been
injured by competing sales as early as August 2004; although the damage possibly grew more
extensive through Pace’s continued use of the knowledge that it had gleaned from Best, Best
knew that Pace was already implementing for its own ends the techniques and information that it
had learned from Best.
Because the district court erred in failing to hold that Best’s OUTSA claims were time-
barred, its finding that Best prevailed on these claims and was due damages on them must be
reversed. We express no opinion on whether Best’s knowledge of the manufacturing techniques
in question qualifies as a protectable trade secret under OUTSA. See Al Minor, 881 N.E.2d at
853 (noting elements).
III.
Next, Pace argues that the district court erred in finding that Pace violated the Lanham
Act’s prohibitions against false designation of origin (the “reverse passing off” claim) and false
advertising. We agree.
A.
The first aspect of Pace’s challenge to the district court’s Lanham Act determination is
whether the district court erred in finding that Best’s claims were timely. “The Lanham Act does
not contain a statute of limitations,” so determining whether a Lanham Act claim is time-barred
depends upon the defendant’s ability to show that the claim is barred by laches. Tandy Corp. v.
Malone & Hyde, Inc., 769 F.2d 362, 365 (6th Cir. 1985). “Laches is the negligent and
unintentional failure to protect one’s rights.” Nartron Corp. v. STMicroelectronics, Inc.,
305 F.3d 397, 408 (6th Cir. 2002) (internal quotation marks omitted). Where there is no dispute
that the laches doctrine applies to a given type of claim, we review a district court’s
determination that laches applies in a particular case only for an abuse of discretion. Bridgeport
Music, Inc. v. Justin Combs Pub., 507 F.3d 470, 493 (6th Cir. 2007); Chirco v. Crosswinds
Communities, Inc., 474 F.3d 227, 231 (6th Cir. 2007).
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 9
Ordinarily, a party asserting laches must show “(1) lack of diligence by the party against
whom the defense is asserted, and (2) prejudice to the party asserting it.” Nartron, 305 F.3d at
408. In the Lanham Act context, we have developed a framework that helps add substance to the
general equitable principles embodied in the doctrine. For claims under the Lanham Act, the
laches period begins to run when the plaintiff has “actual or constructive knowledge of the
alleged infringing activity.” Id. (citation omitted). If the plaintiff has filed its Lanham Act claim
within the time that it would have been required to file in the forum state a state-law claim for
injury to personal property, then the plaintiff’s delay in asserting its rights is presumptively
reasonable. See id. But a delay beyond the analogous limitations period “is presumptively
prejudicial and unreasonable.” Id.; see also Herman Miller, Inc. v. Palazzetti Imports & Exports,
Inc., 270 F.3d 298, 321 (6th Cir. 2001).
In this case, the parties agree that the relevant benchmark is Ohio Rev. Code
§ 2305.10(A)’s two-year limitations period. As Pace observes, Best knew that Pace was selling
cloned products to competitors as early as August 2004. Yet Best did not file its Lanham Act
counterclaims against Pace until more than six years later, in September 2010. Pace therefore
argues that Best’s claims are presumptively barred by the doctrine of laches. See Tandy,
769 F.2d at 365.
Best, on the other hand, stresses that the presumption that arises after the lapse of an
analogous limitations period is not irrebuttable; in the end, the laches analysis depends upon
whether the plaintiff lacked diligence in asserting its claim and whether the defendant was
prejudiced by the plaintiff’s dithering. That is because, “[u]nlike statutes of limitations, laches is
not a mere matter of time; but principally a question of the inequity of permitting the claim to be
enforced.” Ford Motor Co. v. Catalanotte, 342 F.3d 543, 550 (6th Cir. 2003) (internal quotation
marks and ellipsis omitted). And as Best points out, it spent much of the time before the dispute
hit the courts—albeit with substantial periods of inactivity—attempting to negotiate with Pace to
restore the commercial relationship. Generally, “attempts to resolve a dispute without resorting
to a court do not constitute unreasonable delay for determining the applicability of the doctrine
of laches.” Hot Wax, Inc. v. Turtle Wax, Inc., 191 F.3d 813, 823 (7th Cir. 1999) (internal
quotation marks omitted). “A reasonable businessman should be afforded some latitude to assess
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 10
both the impact of another’s use of an allegedly infringing trademark as well as the wisdom of
pursuing litigation on the issue.” Tandy, 769 F.2d at 366.
Although the record does not fully explain why Best failed to file its Lanham Act claims
at the same time or soon after it filed its trade-secrets claims against Pace in October 2008—
waiting almost another two years before finally asserting Lanham Act violations—we do not
need to determine whether the district court’s laches determination was an abuse of its discretion.
Even assuming that the defense of laches does not bar Best’s Lanham Act claims, they are
destined to fail on the merits, as we explain below.
B.
“[O]n an appeal from a judgment entered after a bench trial, we review the district court’s
findings of fact for clear error and its conclusions of law de novo.” Beaven v. U.S. Dep’t of
Justice, 622 F.3d 540, 547 (6th Cir. 2010). The district court concluded as a matter of law that,
on the facts it found, Pace violated the Lanham Act both with respect to false advertising and to
false designation of origin (the “reverse passing off” claim). This was error.
1.
Section 43(a) of the Lanham Act makes liable
[a]ny person who, on or in connection with any goods or services, or any
container for goods, uses in commerce any word, term, name, symbol, or device,
or any combination thereof, or any false designation of origin, false or misleading
description of fact, or false or misleading representation of fact, which—
(A) is likely to cause confusion, or to cause mistake, or to deceive as to the
affiliation, connection, or association of such person with another person, or as to
the origin, sponsorship, or approval of his or her goods, services, or commercial
activities by another person, or
(B) in commercial advertising or promotion, misrepresents the nature,
characteristics, qualities, or geographic origin of his or her or another person’s
goods, services, or commercial activities[.]
15 U.S.C. § 1125(a)(1).
The district court found that Pace violated § 43(a) in two ways. First, it found that Pace,
in representing that the cloned products that it manufactured and sold had been produced by Pace
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 11
rather than by Best, made a false designation of origin that was likely to cause consumer
confusion, violating 15 U.S.C. § 1125(a)(1)(A). Second, the district court found that Pace
violated § 1125(a)(1)(B)’s prohibition on false advertising by similarly misrepresenting in its
marketing catalogs “the origin of the [cloned products].” Both of the district court’s conclusions
were erroneous.
2.
The district court and the parties all agree that Best’s false-designation claim proceeded
under what is known as a “reverse passing off” theory. “Passing off” refers to counterfeit
production; it occurs when a firm “puts someone else’s trademark on its own (usually inferior)
goods,” Bretford Mfg., Inc. v. Smith Sys. Mfg. Corp., 419 F.3d 576, 580 (7th Cir. 2005)—for
instance, “the Coca–Cola Company’s passing off its product as Pepsi–Cola.” Dastar Corp. v.
Twentieth Century Fox Film Corp., 539 U.S. 23, 28 n.1, 32 (2003). “Reverse passing off” is the
converse: a firm sells someone else’s goods or services, misrepresenting them as its own—for
instance, the Coca–Cola Company taking Pepsi–Cola’s flagship beverage and marketing it as the
Coca–Cola Company’s own product. Id.1 In this case, therefore, Best’s reverse passing off
claim argued—and the district court found—that Pace falsely represented that the cloned
products originated with Pace when in fact they originated with Best.
The problem with this conclusion is the district court’s assumption that the cloned
products that were manufactured by Pace somehow belonged to Best. See, e.g., PgID
5095 (identifying as “Best products” items that “were manufactured by Pace, with a Pace
product number, in a box Pace made, with Pace’s UL number on the product”). Again, Pace
filled orders for Best and then used the same tooling to make a separate batch of exactly the same
product for its own customers. Only by denominating the cloned products as “Best’s products”
could the district court find that Pace was misrepresenting someone else’s products as its own.
And only by concluding that Best’s role in originating the intellectual concepts for the cloned
products made it the “origin” of the products for purposes of § 43(a) could the district court find
1
“Why would anyone want to do such a thing? One reason might be to obliterate the plaintiff’s corporate
identity and prevent him from entering new markets, where the defendant, having appropriated the plaintiff’s
trademark, would claim that the plaintiff was the infringer.” Peaceable Planet, Inc. v. Ty, Inc., 362 F.3d 986, 987
(7th Cir. 2004).
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 12
that the products were, in fact, “Best’s products.” Boiled down, then, the district court’s liability
finding on the reverse passing off claim depended upon its conclusion that Pace falsely
designated the cloned products’ “origin” by failing to represent to its customers that the
products—although manufactured by Pace—stemmed from ideas or intellectual property that
were initially brought to the table by Best.
But as the Supreme Court has pointed out, the Lanham Act protects the ability to control
one’s brand; it does not protect the ability to control one’s inventions or innovations. Dastar,
539 U.S. at 32, 34, 37. With respect to false-designation claims specifically, the Act’s use of the
term “origin” does not refer to “the person or entity that originated the ideas or communications
that ‘goods’ embody or contain.” Id. at 32. It denotes only “the producer of the tangible product
sold in the marketplace”—and, by extension, possibly also “the trademark owner who
commissioned or assumed responsibility for . . . production of the physical product.” Id. Thus,
in the context of a reverse passing off claim, use of a trademark makes a representation regarding
only the product’s physical origin, not its intellectual ancestry. See Mark P. McKenna, Dastar’s
Next Stand, 19 J. INTELL. PROP. L. 357, 374 (2012) (“A trademark cannot be taken to indicate
anything about the origin of the intellectual creation embodied in that good.”).
As Dastar makes plain, an entity makes a false designation of origin sufficient to support
a reverse passing off claim only where it falsely represents the product’s geographic origin or
represents that it has manufactured the tangible product that is sold in the marketplace when it
did not in fact do so. 539 U.S. at 29, 31. In Dastar, the Court observed that the defendant would
have violated § 43(a) if it “had bought some of [the plaintiff’s] videotapes and merely
repackaged them as its own.” Id. at 31. But because the defendant “produced its very own series
of videotapes” and was thus the manufacturer of “the physical ‘goods’ that [were] made
available to the public,” the court held that the defendant’s designation of itself as the “origin” of
the goods was not false, even though its products were almost wholesale copies of the plaintiff’s
previous work. Id.
Thus, reselling goods that have been manufactured by someone else carries different
consequences than making your own copies of those goods and marketing them under your own
mark. “[T]aking tangible goods and reselling them as your own constitutes a Lanham Act
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 13
violation; taking the intellectual property contained in those goods and incorporating it into your
own goods does not.” Stolle Mach. Co., 2015 WL 1137429, at *12 (citation omitted); see also
Gen. Universal Sys., Inc. v. Lee, 379 F.3d 131, 149 (5th Cir. 2004) (no reverse passing off where
the defendant copied software ideas and concepts but did not take “tangible copies” of the
software and market them under its own mark); Zyla v. Wadsworth, Div. of Thomson Corp.,
360 F.3d 243, 252 (1st Cir. 2004) (no reverse passing off where the defendant was the
manufacturer of the physical book, even though it allegedly failed to attribute the source of its
creative content); McArdle v. Mattel Inc., 456 F. Supp. 2d 769, 783 (E.D. Tex. 2006) (“‘[O]rigin
of goods’ means the physical producer of tangible products marketed and sold.”); Monsanto Co.
v. Syngenta Seeds, Inc., 443 F. Supp. 2d 648, 652 (D. Del. 2006) (holding that corn seed—not
the seed’s genetic traits—was the tangible product relevant to a reverse passing off claim).
In this case, it is undisputed that Pace manufactured the tangible cloned objects that it
represented as having manufactured. The undisputed facts thus show that Pace never made a
false designation of the products’ “origin” within the meaning of § 43(a). Pace represented that
the cloned products originated with Pace; and even though the ideas and initial design may well
have originated with Best, the tangible products themselves did not. See Dastar, 539 U.S. at 34.
For purposes of the Lanham Act, the physical products originated with Pace, the entity that
manufactured them. Where the initial ideas for the products came from is irrelevant. Id. at 32;
see also Enzo Biochem, Inc. v. Amersham PLC, 981 F. Supp. 2d 217, 228 (S.D. N.Y. 2013) (no
reverse passing off where defendant represented goods as its own and plaintiff did not
manufacture the goods but only “had a distribution contract with [defendant] by which
[defendant] would manufacture the products and distribute them”).
Best resists this conclusion by asserting that it, not Pace, was the “origin” under Dastar
because it “commissioned or assumed responsibility for (‘stood behind’) production of the
physical product.” Dastar, 539 U.S. at 32. But Best’s argument neglects two important things.
First, Dastar opined only that a “trademark owner who commissioned or assumed
responsibility” for the production of the product might qualify as the product’s origin. Id.
(emphasis added). Best has never claimed that it owns a relevant trademark with respect to the
Pace-branded, cloned products. Second—and more fundamentally—Best neither
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 14
“commissioned” nor “assumed responsibility” for the cloned products. Id. Pace manufactured
them on its own initiative and against the wishes of Best. As tangible objects, the cloned
products are in every respect Pace’s alone—Best would much rather that they never have been
produced at all. Under no reading of Dastar can Best be considered the cloned products’
“origin” within the meaning of § 43(a). See Enzo Biochem, 981 F. Supp. 2d at 228 (“[T]he
author of ideas is not the origin of goods if the author is not also producing those goods in
tangible form.” (internal quotation marks and alteration omitted)).
Nor is Best’s position supported by authority suggesting that a reverse passing off case
“includes situations in which a defendant markets another’s product that has been only slightly
modified and then relabeled.” Pioneer Hi-Bred Int’l v. Holden Found. Seeds, Inc., 35 F.3d 1226,
1241 (8th Cir. 1994); see also Roho, Inc. v. Marquis, 902 F.2d 356, 359 (5th Cir. 1990). But see
Bretford, 419 F.3d at 580 (“No one makes a product from scratch, with trees and iron ore
entering one end of the plant and a finished consumer product emerging at the other.”). Even
assuming that this line of authority has survived Dastar, it is inapposite because Pace was not
reselling a product that had been manufactured by Best. Instead of taking a preexisting tangible
object and then modifying it, Pace manufactured “its very own series” of objects, albeit using
ideas that it had gleaned largely from Best. Dastar, 539 U.S. at 31. As far as the tangible items
are concerned, Pace was not marketing Best’s products; it was marketing its own.
To the extent that the district court’s liability finding stemmed from an intuition that the
Lanham Act prohibits wholesale copying, that intuition is misplaced. Protection against
imitation and mimicry ordinarily is found in patent and copyright law, not in the Lanham Act.
“In general, unless an intellectual property right such as a patent or copyright protects an item, it
will be subject to copying.” TrafFix Devices, Inc. v. Mktg. Displays, Inc., 532 U.S. 23, 29
(2001). The Lanham Act—which, unlike the patent and copyright regimes, creates exclusive
rights that have no automatic expiration—does not create “a species of perpetual patent and
copyright,” nor does it create “a cause of action for, in effect, plagiarism—the use of otherwise
unprotected works and inventions without attribution.” Dastar, 539 U.S. at 33–34, 36, 37. That
is because the Act “does not exist to reward manufacturers for their innovation in creating a
particular device; that is the purpose of the patent law and its period of exclusivity.” Id. at 34.
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 15
Instead, the Lanham Act’s “general concern is with protecting consumers from confusion as to
source,” Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 157 (1989), and
preventing consumer confusion does not warrant reading § 43(a)’s prohibition against false
designation of origin so broadly that it provides a way for inventors to stifle indefinitely the
mimicry of items that have been neither patented nor copyrighted. Dastar, 539 U.S. at 34–37;
Groeneveld Transp. Efficiency, Inc. v. Lubecore Int’l, Inc., 730 F.3d 494, 513 (6th Cir. 2013). It
does not matter that Best may have created the market for the products in question. See Dastar,
539 U.S. at 36–37 (production of knockoff product is not reverse passing off); Bretford, 419 F.3d
at 581 (same). Best cannot use a false-designation Lanham Act claim to substitute for failing to
have a protectable intellectual property right in the products.
Because “the person or entity that originated the ideas” embodied in a good or service is
not the “origin” of the good or service for purposes of § 43(a), a manufacturer does not falsely
designate a product’s origin under the Lanham Act if it makes an exact replica of someone else’s
item and labels the item as its own. Dastar, 539 U.S. at 32. At bottom, Best’s Lanham Act
claims are an attempt to recover from Pace for stealing its product ideas to manufacture a rival,
facsimile product. That is not what the Lanham Act guards against. Id. at 34. “Businesses often
think competition unfair, but federal law encourages wholesale copying, the better to drive down
prices. Consumers rather than producers are the objects of the law’s solicitude.” Bretford,
419 F.3d at 581. “The right question . . . is whether the consumer knows who has produced the
finished product” even if “most of the product’s economic value came from elsewhere.” Id.
Regardless of whether Pace’s conduct was prohibited under other legal regimes, it was not
prohibited by the Lanham Act.
3.
The district court’s finding that Pace also violated § 43(a)’s prohibition against false
advertising, see 15 U.S.C. § 1125(a)(1)(B), is defective for largely the same reasons. The parties
appear to assume that the false-advertising claim is almost exactly identical to the false-
designation claim. The district court followed suit, holding that § 1125(a)(1)(B) prohibits
exactly the same reverse passing off behavior—a defendant “marketing other companies’
products as its own”—that is prohibited under § 1125(a)(1)(A). For the same reasons that it
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 16
found that Pace had falsely designated the products’ origin, the district court found that Pace’s
use of “Best products” in Pace’s own catalogs “constitutes a misleading representation through
marketing as to the origin of a product” and thereby violated § 1125(a)(1)(B).
This reasoning was not quite correct. Even if the analysis of a false-advertising claim
exactly mirrored the analysis of the false-designation claim, the district court would have been
incorrect to conclude that a product’s “origin” references the originator of the concepts embodied
in the product. Under Dastar, the term denotes only the manufacturer of the tangible object,
which means that Pace’s advertising was not false. See 539 U.S. at 32.
But in any event, false-advertising claims involving a misrepresentation about a product’s
“origin” under subsection (B) are not subject to an analysis that is identical to false-designation
claims under subsection (A). Subsection (B) prohibits the use in commercial advertising of a
false “designation of origin” or other factual misrepresentation about “the nature, characteristics,
qualities, or geographic origin” of the goods or services in question. 15 U.S.C. § 1125(a)(1)(B).
The products’ geographic origin is not at issue in this case. And as we have previously
suggested, a misrepresentation about the source of the ideas embodied in a tangible object (such
as a misrepresentation about the author of a book or the designer of a widget) is not a
misrepresentation about the nature, characteristics, or qualities of the object. Romero v.
Buhimschi, 396 F. App’x 224, 233 (6th Cir. 2010). Absent a false statement about geographic
origin, a misrepresentation is actionable under § 1125(a)(1)(B) only if it misrepresents the
“characteristics of the good itself”—such as its properties or capabilities. Sybersound Records,
Inc. v. UAV Corp., 517 F.3d 1137, 1144 (9th Cir. 2008). The statute does not encompass
misrepresentations about the source of the ideas embodied in the object (such as a false
designation of authorship); to hold otherwise would be to project the Lanham Act into the
province of the Copyright and Patent Acts. See Baden Sports, Inc. v. Molten USA, Inc., 556 F.3d
1300, 1307 (Fed. Cir. 2009). But see Malla Pollack, Reclassifying Reverse Passing Off As
Failure to Contract or As False Advertising, 17 B.U. J. SCI. & TECH. L. 40, 49–50 (2011)
(arguing that use of a competitor’s branded product in advertising materials, even where the
mark is not visible, could support a false advertising claim).
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 17
The district court did not find that Pace made any false representation about the
characteristics of the cloned products themselves; it found that Pace’s advertisements were false
only because they represented that Pace, rather than Best, was the intellectual origin of the
products. Because § 1125(a)(1)(B) does not impose liability for misrepresenting the intellectual
progenitor of a tangible product, the district court erred in finding that Pace’s conduct violated
the statute. Its judgment finding Pace liable on both Lanham Act claims is reversed.
IV.
Pace also argues that the district court erred in finding that Pace breached the Supply
Agreement into which the parties entered in January 2007 and which remained in effect until
January 2008. The district court found that Pace breached three clauses of the Supply
Agreement: the non-compete clause, the assignment clause, and the use clause. Again, the
district court’s factual findings are reviewed for clear error while its conclusions of law are
reviewed de novo. Beaven, 622 F.3d at 547. We agree with Best that the district court did not
err in concluding that Pace breached all three provisions of the agreement.
A.
The Supply Agreement’s non-compete clause provided that “Pace shall not sell
emergency lights or exit signs nor ballasts, nor solicit sales of these items to any party in North
America without Best’s prior written consent.” Before the agreement was signed, Pace received
several purchase orders for cloned products from North American companies. The parties do not
dispute that Pace shipped products to fill these orders after the agreement came into effect. They
disagree, however, on whether shipping products to fill a previously received order constitutes a
“sale” of the products.
The district court found that the non-compete clause’s use of the term “sell” was
ambiguous, determined that the parties had intended to prohibit Pace from transferring title in
any competing products, concluded that title had been transferred when the products were
shipped, and found as a consequence that Pace’s shipments breached its promise not to “sell”
competing products while the agreement was in force. Pace argues that the district court’s
determination of the meaning of the term “sell” was clearly erroneous. As proof of its position
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 18
regarding the parties’ intent, Pace observes that representatives of both Pace and Best
subsequently indicated that they believed a “sale” took place at the moment that a purchase order
was accepted instead of when the products were shipped.
Pace is incorrect that the district court committed clear error. The term “sell” is not
ambiguous. Pace and Best agreed that the Supply Agreement would be governed by Ohio law.
Regardless of the parties’ subsequent lay interpretations, Ohio law provides clear definitions of
the terms “sell” and “sale” within the context of agreements to transfer goods. Under Ohio’s
Uniform Commercial Code, “[a] ‘sale’ consists in the passing of title from the seller to the buyer
for a price.” Ohio Rev. Code § 1302.01(A)(11). Although a promise to ship goods in response
to a purchase order gives rise to a contract to sell them, see Ohio Rev. Code §§ 1302.01(A)(11),
1302.09(A)(2), title to the goods passes only when the goods are delivered unless the parties
explicitly agree otherwise. See Ohio Rev. Code § 1302.42(B).
Even though Pace’s entry into the contracts to sell the goods in question may have
occurred before it entered the Supply Agreement, title to the goods did not pass until the goods
were delivered to its customers. The district court was not wrong to read the Supply Agreement
as incorporating this commonplace meaning of “sale,” and it did not clearly err in finding that
Pace’s shipment and delivery of the goods in question after entering the agreement breached its
obligations under the non-compete clause.
B.
Under the Supply Agreement’s assignment clause, Pace agreed to “assign[ ] to Best all
designs and intellectual property (and all derivations thereof) for products developed or to be
developed at or by Pace for Best.” Observing that the term “design” is quite broad, the district
court found that “[a]t least some level of creativity went into the design of the products Pace
manufactured for Best” and found that Pace breached the assignment clause when it used “the
same designs” to manufacture the cloned products that it had used to manufacture the products
ordered by Best.
Given the breadth of the term “design,” we hold that the district court did not commit
clear error in finding that Pace breached the assignment clause. Particularly in light of the
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 19
parties’ prior history, the term “design” encompasses a much broader array of creative output
than is protectable under intellectual property regimes. See, e.g., Webster’s Unabridged
Dictionary of the English Language 539 (2d ed. 2001) (defining the noun “design” as including
“an outline, sketch, or plan” of a work to be created, “the combination of details or features” of
an object, or “a plan or project”). There is no dispute that Pace created the tooling that it used to
manufacture both Best’s products and the cloned products. And Pace’s president agreed that
Best “would give us the general description of what they wanted the product to do and we would
develop it for them.” Even if Pace primarily copied products that already existed on the market,
its designs for the tooling and the products—even if not protectable intellectual property—were
nonetheless assigned to Best under the Supply Agreement. The district court did not clearly err
in finding that Pace’s use of the designs for its own line of products violated the assignment
clause.
C.
The Supply Agreement’s use clause provided that “Pace shall not use any tooling owned
by Best other than for the manufacture of products for sale to Best.” The district court found as a
matter of fact that Best owned “all of the tooling” that Pace used to manufacture both the
products for Best and the cloned products, concluding that Pace had therefore breached the
contract. Pace does not dispute that Best owned some of the tooling, the ownership of which
Pace specifically transferred to Best in “the Big Wash” transaction in order to assuage Best’s
claims that Pace had shipped to Best numerous defective products. But Pace contends that the
district court’s finding that Best owned all of the tooling was clearly erroneous because,
according to Pace, Best failed to prove that it owned anything other than the tooling that was
transferred in the Big Wash.
Pace is incorrect. Best executives testified that, pursuant to industry standard, Best
purchased the tooling by amortizing its cost per unit ordered from Pace. Pace’s president
similarly admitted that Best paid “for its own tooling,” and other evidence showed that Pace
generally used only a single set of tooling to make both the cloned products and the products that
Best ordered. Given this testimony, the district court did not clearly err in finding as a matter of
fact that Best owned all of the tooling upon which its products were made and that Pace used
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 20
Best-owned tooling to manufacture numerous of the cloned products. Although Pace insists that
the district court’s findings must be reversed because Best failed to prove that each of the cloned
products was made on Best-owned tooling, those arguments are better resolved at the damages
phase rather than on the question whether Pace breached the use clause. The district court’s
finding that Pace breached each of these three clauses of the Supply Agreement is affirmed.
V.
Pace next argues that the district court erred in finding it liable for conversion. Best
predicates its conversion claim upon only the tooling that Best owned pursuant to the “Big
Wash” transaction in 2005. The district court found that Pace retained possession of the tooling,
rather than returning it to Best upon request, and that Pace was therefore liable for converting
Best’s tooling.
In Ohio, a conversion claim requires a plaintiff to demonstrate not only that the defendant
dispossessed the plaintiff of its property and caused the plaintiff damage, but also that the
defendant’s interference with the plaintiff’s property rights was “wrongful.” Dice v. White
Family Cos., 878 N.E.2d 1105, 1109 (Ohio Ct. App. 2007).
Pace does not dispute the operative facts; it contests only the district court’s finding that
its retention of the tooling was wrongful. As Pace observes, Ohio law grants a lien to a molder
on a customer’s tooling that is in its possession for “[t]he amount due from the customer” for
manufacturing work performed with the tooling. Ohio Rev. Code § 1333.31(A)(1)(a). Best
concedes that it did not pay Pace for almost $900,000 worth of products that Pace had
manufactured with the tooling and delivered to Best. Nor does Best convincingly argue that
Pace failed to comply with the procedural aspects needed under the statute to retain possession of
the molding under the lien. See Ohio Rev. Code § 1333.31(B), (C). When Best demanded the
return of its tooling in April 2008, therefore, Pace had a valid molder’s lien under Ohio law that
justified its refusal to return the tooling to Best. Without citing any legal authority, the district
court nevertheless found that Pace “wrongfully” retained possession of the tooling because it had
previously breached the Supply Agreement, including by using the tooling for its own purposes.
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 21
The district court was incorrect to hold that Pace’s breach of the contract voided its
otherwise valid lien, giving rise to liability for conversion. A lien is asserted against property,
not against a person. See Guernsey Bank v. Milano Sports Ents. L.L.C., 894 N.E.2d 715, 731–32
(Ohio Ct. App. 2008). The contractual relationship between the property owner and the holder
of the lien is not relevant to whether the lien may be enforced because “the entitlement to enforce
a . . . lien arises as a matter of law and not from a written instrument or verbal contract.” Id. at
732. As long as the lienholder meets the requirements of the statute, the lien is valid, irrespective
of the contractual relationship between the parties.
Whether Pace breached its contractual obligations to Best is not relevant to whether the
elements of the statutory lien were met with respect to the tooling. There is no dispute that Best
failed to pay for products that Pace manufactured for it with the tooling—and Best concedes that
Pace was entitled to at least some of the unpaid amount. The only dispute was whether Best was
entitled to offset the full amount it owed by recovering damages from Pace for the ancillary
wrongs that Pace had inflicted upon it. While that question was being litigated, Pace had every
right to retain possession of the tooling. Best may have accurately predicted that it would not
need to pay the full amount it owed Pace once all of the offsetting damages were calculated. But
until a court declared that Best had no obligation to pay “[t]he amount due” for the products that
Pace had manufactured for it, Pace was statutorily authorized to retain possession of the tooling
in question while Best refused to ante up. Ohio Rev. Code § 1333.31(A)(1)(a). If Best had
wanted to obtain possession of the tooling while the parties’ respective obligations were being
litigated, it could have done so by depositing a bond with the court. See id. at § 1333.31(C)(2).
Because Pace retained the tooling pursuant to its valid lien, it did not “wrongfully”
possess the tooling and is not liable for conversion. See, e.g., Lee Tool & Mould, Ltd. v. Fort
Wayne Pools, Inc., 791 F.2d 605, 608 n.5 (7th Cir. 1986) (construing Indiana law). The district
court was incorrect to find that Pace had converted the tooling before the parties’ reciprocal
obligations had been adjudicated in court, given the undisputed debt that Best owed to Pace
when Pace retained the tooling. The portion of its judgment finding Pace liable and awarding
damages on Best’s conversion claim is reversed.
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 22
VI.
Pace next asserts that the district court erred in concluding that it was liable for tortiously
interfering with both Best’s business relationships and its business expectations. Finding that
Pace sold cloned products in virtually identical packaging to at least four of Best’s established
customers in contravention of the Supply Agreement, the district court concluded that Pace’s
competition with Best was “wrongful” due to Pace’s use of its confidential relationship with Best
to further its mimicry of Best, coupled with the fact that Pace’s conduct flatly breached its
contractual promises to Best that it would not move in on Best’s customers.
Pace first argues that, because there are multiple competing firms in the lighting products
industry, Best failed to prove that it would have made sales to the four customers in question if
Pace had not swooped in and sold to the customers instead. But as the district court noted, there
is little dispute that the customers had established business relationships with Best and that Best
at least had a reasonable certainty that they would continue to purchase products from Best rather
than any competitor. See Firestone v. Galbreath, 616 N.E.2d 202, 203 (Ohio 1993) (outlining
elements for tortious interference with expectancy); Dolan v. Glouster, 879 N.E.2d 838, 848
(Ohio Ct. App. 2007) (noting that tortious interference with a business relationship “includes
intentional interference with prospective contractual relations not yet reduced to a contract”
(citation omitted)).
Pace primarily contends that the district court erred in concluding that its interference
with Best’s customer relationships involved “improper” means of competition. Ohio law directs
that the question of impropriety be resolved by reference to the factors listed in the Restatement
(Second) of Torts § 767 (1979), which generally focus upon the actor’s conduct and motives, the
interests of the parties, and the competing social interests in protecting business expectancy
while preserving free competition. See Fred Siegel Co. v. Arter & Hadden, 707 N.E.2d 853, 860
(Ohio 1999).
Where there is room for disagreement on whether the defendant acted improperly, the
determination is an issue of fact that is to be decided by the jury. Restatement (Second) of Torts
§ 767, cmt. l; Brookeside Ambulance, Inc. v. Walker Ambulance Serv., 678 N.E.2d 248, 253
(Ohio Ct. App. 1996). But where the defendant establishes that his conduct amounted merely to
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 23
“fair competition” within the meaning of Restatement (Second) of Torts § 768, a tortious
interference claim is barred as a matter of law. Fred Siegel Co., 707 N.E.2d at 861. Section 768,
in turn, provides that competition is “proper” where, among other things, “the actor does not
employ wrongful means” in competing with the plaintiff. Id.
Pace’s abuse of its confidential relationship with Best seems to have been the primary
consideration motivating the district court’s conclusion that, for purposes of both sections 767
and 768, Pace’s competitive conduct was improper. The district court did not reversibly err in
concluding that Pace’s breach of confidence—coupled with the breach of a specific contractual
promise intended to shore up that confidence—resulting in the production and sale to Best’s
customers of exactly identical products was an “improper” means of competition sufficient to
give rise to liability for tortious interference. At root, the protection for “fair competition” exists
in order to promote superior efficiency and service. See Restatement (Second) of Torts § 768,
cmt. e. In this case, Pace’s market edge came only from appropriating, wholesale, Best’s product
line and putative trade secret after duping Best into continuing the collaboration by specifically
promising not to compete against it. Insulating Pace from liability for tortious interference on
these facts would deter synergistic collaboration without encouraging marketplace efficiency and
would not serve the primary purposes of § 768’s “fair competition” safe harbor.
Finally, Pace is correct that Ohio law does not permit a tortious interference claim on the
sole basis that a breach of contract was particularly flagrant or had substantially injurious knock-
on effects; generally, even if a breach of contract “necessarily interferes with the injured party’s
business relations with third parties, the injured party is limited to an action for breach of
contract and may not recover in tort for business interference.” Digital & Analog Design Corp.
v. N. Supply Co., 540 N.E.2d 1358, 1368 (Ohio 1989) (internal quotation marks omitted). But an
injured party may recover under a tortious interference theory if “the breaching party indicates,
by his breach, a motive to interfere with the adverse party’s business relations so that any
resulting interference with business is no longer merely incidental to the breach.” Universal
Windows & Doors, Inc. v. Eagle Window & Door, Inc., 689 N.E.2d 56, 61 (Ohio Ct. App. 1996).
The same is true here. The harm to Best was not “merely incidental” to Pace’s breach of its
contract with Best, and the fact that Best secured for itself the additional protection of a binding
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 24
non-compete agreement does not mean that its recourse against Pace is now limited to an action
in contract. The district court did not err in finding Pace liable for tortious interference.
VII.
Next, Pace contends that the district court erred in sua sponte amending Best’s pleadings
in order to award Best a $318,000 offset on Best’s breach-of-warranties counterclaims. After
Pace sued Best, alleging that Best breached the Supply Agreement by failing to pay for almost
$900,000 in products that Pace had manufactured for Best, Best requested an offset and
counterclaimed for breach of warranties, alleging that the products that Pace had manufactured
pursuant to the Supply Agreement were defective. Despite recognizing that “Best’s formal
pleadings only enumerate claims based on defective goods purchased during the Supply
Agreement,” the district court ruled that Best had adequately argued and was entitled to damages
for defective products that Best had purchased at any time from Pace, including before and after
the parties entered into the Supply Agreement. The district court ultimately held that Best was
entitled to a $318,077.38 offset from the amount that it owed to Pace, due to the defective
products. Pace now argues that the district court erred in sua sponte amending Best’s pleadings
in order to allow it to recover damages for which Best did not initially ask and against which
Pace was not prepared to defend.
“The general rule is when issues not raised in pleadings are raised by the express or
implied consent of the parties, the court may treat the issues in all respects as if the parties had
raised them in the pleadings.” Yellow Freight Sys., Inc. v. Martin, 954 F.2d 353, 358 (6th Cir.
1992). Best does not dispute that the district court amended the pleadings under Federal Rule of
Civil Procedure 15; it argues only that Pace implicitly consented to the amendment because the
issue was fully tried by the parties.
But we previously have counseled caution in finding that a defendant has acquiesced in a
plaintiff’s expansion of its theory of relief beyond what is outlined in the pleadings. “Implied
consent is not established merely because one party introduced evidence relevant to an
unpleaded issue and the opposing party failed to object to its introduction. It must appear that
the parties understood the evidence to be aimed at the unpleaded issue.” Id. Otherwise, the court
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 25
runs the risk of violating the defendant’s procedural due process rights by imposing judgment
upon a claim against which the defendant did not know he had to defend himself. Id. at 357.
Because a defendant must have notice that an implied claim is being tried against him,
“an issue has not been tried by implied consent if evidence relevant to the new claim is also
relevant to the claim originally pled.” Douglas v. Owens, 50 F.3d 1226, 1236 (3d Cir. 1995).
That is the best characterization of what happened here. Best did, indeed, offer evidence at trial
that it purchased defective products at various times during its commercial relationship with
Pace, without specifically proving that all of the defective products were purchased under the
Supply Agreement. But according to Pace, Best’s identification at trial of products that it had
purchased prior to or after the Supply Agreement demonstrated simply a failure of proof on the
breach-of-warranties claim that Best had pled, not an implicit agreement by the parties to permit
Best to expand its theory of relief. Pace claims that, had it known that Best would be permitted
to recover damages for every defective product that Pace had ever sold to it, Pace would have
altered its defense strategy and pursued arguments that Best’s claims were barred by the statute
of limitations and that products that had not been purchased under the Supply Agreement were
subject to Pace’s “standard terms and conditions,” which expressly exclude all express and
implied warranties.
In the absence of express or implied consent, Rule 15(b) does not permit a plaintiff to
submit an assortment of evidence at trial and determine only afterwards which legal allegations
fit the evidence; it is “not designed to allow parties to change theories in mid-stream.” Yellow
Freight, 954 F.2d at 358 (citation omitted). See Fed. R. Civ. P. 15(b)(2); Dillon v. Cobra Power
Corp., 560 F.3d 591, 599 (6th Cir. 2009). Nor may a court do the same thing on the plaintiff’s
behalf. Best has not pointed to any area of testimony supporting its argument that “the parties
understood the evidence to be aimed at the unpleaded issue.” Yellow Freight, 954 F.2d at 358.
In light of the fact that the evidence of defective products was generally relevant to the claim that
Best had actually pled, we must presume that the expanded version of Best’s breach-of-
warranties claims was not tried by Pace’s implied consent. Douglas, 50 F.3d at 1236.
Because the district court erred in sua sponte amending Best’s breach-of-warranties
counterclaims to encompass all defective products that Best had ever purchased from Pace, we
No. 14-3347 Kehoe Component Sales v. Best Lighting Products Inc. Page 26
vacate its judgment finding Pace liable and awarding Best damages on those claims, and we
remand for the district court to determine whether, on the facts that it found at trial, Best proved
liability and damages only for products that Best purchased from Pace during the effective term
of the Supply Agreement.
VIII.
Pace also challenges several other aspects of the district court’s rulings, including its
damages calculations and the attorneys’ fees award.2 In light of the reversal of the liability
findings on several of Best’s claims, however, each of the district court’s damages, attorneys’
fees, and injunctive relief awards must be vacated. Rather than wade into the parties’ damages
disputes prematurely, we deem it prudent for the district court to reassess its damages and fees
awards after excising the failed claims from consideration. Nothing in our resolution of this case
should be taken to preclude the district court from awarding the damages and fees (including
punitive damages and attorneys’ fees, to the extent that they are available) merited by the parties’
conduct.
IX.
For these reasons, we affirm the liability findings on the breach of contract and tortious
interference claims; reverse the liability findings on the trade secrets claim, the Lanham Act
claims, and the conversion claim; vacate the liability finding on the breach of warranties claim;
vacate the awards of compensatory damages, punitive damages, attorneys’ fees, and injunctive
relief; and remand for further proceedings.
2
Pace also asserts that the district court abused its discretion in excluding the testimony of one of its
proffered expert witnesses, James Hooley. Pace’s position is without merit.