Fair Wind Sailing Inc v. H. Dempster

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
Nos. 13-3305 & 14-1572
_____________
FAIR WIND SAILING, INC.,
Appellant
v.
H. SCOTT DEMPSTER, Individually and Doing Business as
VIRGIN ISLANDS SAILING SCHOOL and VIRGIN
ISLANDS SAILING SCHOOL
____________
On Appeal from the District Court of the Virgin Islands
(D.C. No. 11-cv-00055)
District Judge: Honorable Curtis V. Gómez
____________
Argued: May 13, 2014
Before: RENDELL, FUENTES, and GREENAWAY, JR.,
Circuit Judges
(Filed: September 4, 2014)
____________
Michael C. Quinn, Esq.
Stefan B. Herpel, Esq. [ARGUED]
Gregory H. Hodges, Esq.
Dudley, Topper and Feuerzeig, LLP
P.O. Box 756
St. Thomas, VI 00804-0756
Attorneys for Appellant
Ravinder S. Nagi, Esq.
Lisa Michelle Kömives, Esq. [ARGUED]
BoltNagi PC
5600 Royal Dane Mall, Suite 21
St. Thomas, VI 00802
Attorneys for Appellees
________________________
OPINION
________________________
FUENTES, Circuit Judge:
Fair Wind Sailing, Inc. brought this action against
Virgin Island Sailing School (“VISS”) and its co-founder
Scott Dempster, alleging, in relevant part, that Defendants
infringed upon Fair Wind’s “trade dress” in violation of the
Lanham Act, 15 U.S.C. § 1051 et seq., and unjustly enriched
themselves by copying Fair Wind’s business. The District
Court dismissed Fair Wind’s trade dress and unjust
enrichment claims, and subsequently awarded Defendants
fees under Virgin Islands law. Fair Wind challenges both the
dismissal of its claims and the award of attorneys’ fees.
2
The District Court properly concluded that Fair Wind
failed to state claims for trade dress infringement and unjust
enrichment. As to the former claim, Fair Wind has failed to
adequately explain what “dress” it seeks to protect, and its
trade dress, as pleaded, is functional in nature. As to the latter
claim, Fair Wind has not pleaded with sufficient particularity
in what manner Defendants have been unjustly enriched. We
therefore affirm the dismissal of both claims.
However, we agree with Fair Wind that the District
Court improperly awarded fees for the entirety of the
litigation under Virgin Islands law. While it would have been
appropriate for the District Court to award reasonable fees
accrued defending the territorial law claims, an award for the
portion of the fees accrued defending the Lanham Act claim
was appropriate only to the extent that this was an
“exceptional” case. 15 U.S.C. § 1117(a). The District Court
did not decide whether this case was an “exceptional” one.
We therefore remand the fee dispute for further proceedings.
In the wake of new Supreme Court precedent, we take this
opportunity to amend our recently-abrogated jurisprudence on
the standard for finding “exceptionality” under § 35(a) of the
Lanham Act.
I.
A.
The complaint alleges the following facts, which we
assume to be true and construe in the light most favorable to
the plaintiff. See Ashcroft v. Iqbal, 556 U.S. 662, 678-80
(2009).
3
Fair Wind is a Michigan corporation that owns sailing
schools throughout the United States, including one in St.
Thomas, Virgin Islands. The St. Thomas school exclusively
uses catamarans. 1
In July 2007, Fair Wind hired Larry Bouffard as a
captain and sailing instructor for its St. Thomas school.
Bouffard entered into a contract with Fair Wind, which
contained a provision precluding Bouffard from joining a Fair
Wind competitor within 20 miles of the St. Thomas school for
two years after the end of his employment with Fair Wind. A
popular instructor, Bouffard stayed with Fair Wind for over
three years.
In June 2010, Bouffard introduced Dempster to Fair
Wind as a potential instructor and captain. Relying on
Bouffard’s assurance that Dempster was qualified for the
post, Fair Wind hired Dempster for a probationary two-week
period. Fair Wind was dissatisfied with Dempster’s
performance, and declined to retain Dempster at the end of
those two weeks.
Shortly after Fair Wind terminated Dempster, Bouffard
resigned. At or about this time, however, Dempster and
Bouffard decided to open a sailing school together in St.
Thomas. By the following winter, Dempster and Bouffard’s
1
For our landlocked readers, a catamaran is a boat “with twin
hulls and usually a deck or superstructure connecting the
hulls.” Catamaran Definition, Merriam-Webster.com,
http://www.merriam-webster.com/dictionary/catamaran (last
visited July 9, 2014).
4
school, VISS, was up and running, in direct competition with
Fair Wind. Opening VISS violated Bouffard’s two-year non-
compete agreement with Fair Wind.
Since its inception, VISS has copied Fair Wind’s St.
Thomas school in several respects. VISS employs 45-foot
catamarans, the same boats used by Fair Wind. VISS also
uses teaching curriculum and itineraries identical to those
used by Fair Wind, and employs the same procedures for
student feedback. The marketing on VISS’s website is
identical to Fair Wind’s marketing. Additionally, the VISS
website contains a picture of a catamaran belonging to Fair
Wind, includes “student testimonials” from students who took
classes with Dempster while he worked for Fair Wind, and
mentions Bouffard’s experience teaching “[o]ver the last
year,” presumably in reference to his time teaching at Fair
Wind. First Am. Compl. ¶ 32.
Fair Wind alleges that “[s]ince VISS began competing
with Fair Wind, Fair Wind has lost considerable business and
reputation.” Id. ¶ 35. It also alleges that “Dempster and
VISS have been enriched by their improper and unjustified
conduct.” Id. ¶ 48.
B.
Fair Wind filed an action against Dempster and VISS
in the District Court of the Virgin Islands. The complaint, as
amended shortly thereafter, alleged three claims against
Dempster and Fair Wind: (1) a “trade dress” infringement
claim under § 43(a) of the Lanham Act; (2) a common-law
tortious interference claim; and (3) a common-law unjust
enrichment claim. VISS filed a motion to partially dismiss
5
the complaint under Rule 12(b)(6) of the Federal Rules of
Civil Procedure, arguing that Fair Wind failed to state claims
for trade dress infringement or unjust enrichment.
The District Court concluded that Fair Wind had failed
to state claims for either trade dress infringement or unjust
enrichment. As to the trade dress claim, the District Court
concluded that the complaint had several dispositive flaws.
First, the District Court explained that Fair Wind had failed to
allege facts about its business that “amount[ed] to its trade
dress.” Fair Wind Sailing, Inc. v. Dempster, No. 2011-55,
2013 WL 1091310, at *4 (D.V.I. Mar. 15, 2013). “Without
knowing the precise product features that Fair Wind seeks to
protect” as trade dress, the District Court “struggle[d] to
undertake a productive Rule 12(b)(6) analysis.” Id. Second,
assuming that the product features at issue amounted to a
trade dress, the Court determined that the complaint was
“devoid of any allegations that [these features were]
inherently distinctive or ha[d] acquired any secondary
meaning.” Id. at *4-5. Third, the District Court determined
that the product features comprising Fair Wind’s alleged trade
dress were “functional” and therefore fell beyond the
protections of the Lanham Act. Id. at *5-6. With respect to
the unjust enrichment claim, the District Court concluded that
Fair Wind had failed to “allege any facts to support the first
element required for an unjust enrichment claim—that the
defendant was enriched.” Id. at *7. Accordingly, the District
Court granted VISS’s motion to dismiss in its entirety. In
response, Fair Wind voluntarily dismissed its remaining claim
for tortious interference, making the judgment final and
appealable. See Camesi v. Univ. of Pittsburgh Med. Ctr., 729
F.3d 239, 246 (3d Cir. 2013).
6
Thereafter, Defendants moved for $41,783 in
attorneys’ fees under § 35(a) of the Lanham Act and Title 5,
section 541 of the Virgin Islands Code. This constituted the
“total amount of legal fees incurred by Defendants in this
matter” over the course of the litigation. App. 64. Relying
solely on the Virgin Islands fee statute, the District Court
concluded that Defendants were entitled to a “fair and
reasonable award of attorney’s fees” for their effort defending
the entirety of this case. Fair Wind Sailing, Inc. v. Dempster,
No. 2011-55, 2014 WL 886832, at *1 (D.V.I. Mar. 6, 2014).
After concluding that a portion of the fees sought was
unreasonably expended, the District Court awarded
Defendants fees in the amount of $36,347. Id. at *3.
Fair Wind filed separate, timely appeals of both the
dismissal order and the fees order, which were subsequently
consolidated for disposition. 2
II.
We first consider Fair Wind’s trade dress claim. Like
the District Court, we conclude that Fair Wind has failed to
properly state a claim for trade dress infringement. We
therefore affirm the District Court’s dismissal of the claim. 3
2
The District Court had subject matter jurisdiction under 28
U.S.C. §§ 1331 and 1367(a). We have appellate jurisdiction
under 28 U.S.C. § 1291.
3
In deciding a motion to dismiss under Rule 12(b)(6), courts
must “accept all factual allegations as true, construe the
complaint in the light most favorable to the plaintiff, and
determine whether, under any reasonable reading of the
7
Section 43(a) of the federal Lanham Trademark Act
sets forth the standard for infringement of unregistered
trademarks. It provides in relevant part that:
(1) Any 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, shall be liable in a civil action by any
complaint, the plaintiff may be entitled to relief.” Phillips v.
Cnty. of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) (internal
quotation marks omitted). “Threadbare recitals of the
elements of a cause of action, supported by mere conclusory
statements, do not suffice.” Iqbal, 556 U.S. at 678. “A claim
has facial plausibility when the plaintiff pleads factual content
that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Id. (citing
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
8
person who believes that he or she is or is likely
to be damaged by such act.
15 U.S.C. § 1125(a)(1). Section 43(a) protects from
deceptive imitation not only a business’s trademarks, but also
its “trade dress.” 15 U.S.C. § 1125(a)(3); Two Pesos, Inc. v.
Taco Cabana, Inc., 505 U.S.763, 776 (1992) (Stevens, J.,
concurring). “Trade dress has been defined as the total image
or overall appearance of a product, and includes, but is not
limited to, such features as size, shape, color or color
combinations, texture, graphics, or even a particular sales
technique.” Rose Art Indus., Inc. v. Swanson, 235 F.3d 165,
171 (3d Cir. 2000). In short, trade dress is the overall look of
a product or business. See, e.g., Taco Cabana, Inc., 505 U.S.
at 765 (the decor of a restaurant); Am. Greetings Corp. v.
Dan-Dee Imports, Inc., 807 F.2d 1136, 1140 (3d Cir. 1986) (a
line of teddy bears with “tummy graphics”); see also Bristol-
Myers Squibb Co. v. McNeil-P.P.C., Inc., 973 F.2d 1033,
1037 (2d Cir. 1992) (graphics and arrangement of elements
on a box of Excedrin).
“The purpose of trade dress protection is to ‘secure the
owner of the trade dress the goodwill of his business and to
protect the ability of consumers to distinguish among
competing producers.’” McNeil Nutritionals, LLC v.
Heartland Sweeteners, LLC, 511 F.3d 350, 357 (3d Cir. 2007)
(quoting Shire US Inc. v. Barr Labs., Inc., 329 F.3d 348, 353
(3d Cir. 2003)). Trade dress protection does not shield
businesses from plagiarism. See Dastar Corp. v. Twentieth
Century Fox Film Corp., 539 U.S. 23, 36 (2003). Indeed,
“[t]rade dress protection must subsist with the recognition
that in many instances there is no prohibition against copying
goods and products.” TrafFix Devices, Inc. v. Mktg. Displays,
9
Inc., 532 U.S. 23, 29 (2001); see also Thomas & Betts Corp.
v. Panduit Corp., 65 F.3d 654, 657 (7th Cir. 1995) (“Copying
is not only good, it is a federal right—a necessary
complement to the patent system’s grant of limited
monopolies.”). Thus, the law does not afford every
combination of visual elements exclusive legal rights.
Instead, “trade dress protection extends only to incidental,
arbitrary or ornamental product features which identify the
product’s source.” Shire US, 329 F.3d at 353.
A plaintiff must prove three elements to establish trade
dress infringement under the Lanham Act: “(1) the allegedly
infringing design is nonfunctional; (2) the design is inherently
distinctive or has acquired secondary meaning; and (3)
consumers are likely to confuse the source of the plaintiff’s
product with that of the defendant’s product.” McNeil
Nutritionals, 511 F.3d at 357. In addition to satisfying these
three elements, it is the plaintiff’s duty to “articulat[e] the
specific elements which comprise its distinct dress.” See
Landscape Forms, Inc. v. Columbia Cascade Co., 113 F.3d
373, 381 (2d Cir. 1997); see also 1 J. Thomas McCarthy,
McCarthy on Trademarks and Unfair Competition § 8:3 (4th
ed. 2014) (“[T]he discrete elements which make up the [trade
dress claim] should be separated out and identified in a
list.”). 4 This allows the district court to ensure that the claim
4
For example, in Rose Art Industries, the plaintiff claimed
that the following elements comprised its trade dress:
(1) a prominent band that is either straight or
wavy and often black in color that cuts across
the middle of the front of the package,
extending to the sides with the words
10
is not “pitched at an improper level of generality, i.e., the
claimant [does not] seek[] protection for an unprotectable
style, theme or idea.” Landscape Forms, 113 F.3d at 381.
Even before it reaches the question of protectability, however,
a district court should scrutinize a plaintiff’s description of its
trade dress to ensure itself that the plaintiff seeks protection
“CRAYONS” or “WASHABLE MARKERS”
or other descriptive term in white letters
imprinted on the band (the “Band and Letter
feature”); (2) a yellow background on the top of
the package with a contrasting background
color (either red, purple, pink, or a combination
of purple fading to red) on the bottom of the
package; and (3) a prominent display of the
Rose Art logo in golden yellow (either foil or
print) or red, either with or without a rainbow
“swish” design behind the logo on the front of
the package. In addition, in its presentation to
the District Court, Rose Art included three other
elements in its claim of infringement: (1) the
statement “since 1923”; (2) the statement on the
front of the package that the product is
“Certified Non–Toxic;” and (3) the sentence
inviting consumer comments, “Rose Art invites
your comments and questions about this
product. Please write to Rose Art Industries,
Inc., Consumer Affairs, 6 Regent St.,
Livingston, NJ 07039 or call 1–800–
CRAYONS.”
235 F.3d at 169.
11
of visual elements of its business. As the Sixth Circuit has
noted, “any ‘thing’ that dresses a good can constitute trade
dress.” Abercrombie & Fitch Stores, Inc. v. Am. Eagle
Outfitters, Inc., 280 F.3d 619, 630 (6th Cir. 2002). However,
the “thing” must “dress[] a good.” Id. That is, the alleged
trade dress must create some visual impression on consumers.
Otherwise, there is simply no “dress” to protect.
According to Fair Wind, its trade dress is “the
combination of its choice to solely employ catamaran
vessels” and its “unique teaching curriculum, student
testimonials, and registered domain name,” which “all
combine to identify Fair Wind’s uniquely configured business
to the general public.” Appellant’s Br. at 20-21. 5 By its own
terms, then, Fair Wind’s “trade dress” is simply a hodgepodge
of unconnected pieces of its business, which together do not
comprise any sort of composite visual effect. Fair Wind is
not arguing that VISS stole Fair Wind’s “look” in order to
lure away customers. In fact, several of the elements of Fair
5
Although Fair Wind asserts in its briefs on appeal that
VISS’s domain name is nearly identical to Fair Wind’s, the
complaint makes no such allegation, nor can one reasonably
infer such an allegation. While the complaint mentions
VISS’s domain name, see First Am. Compl. ¶ 5, it never
discusses Fair Wind’s web address. Because we cannot
consider allegations outside the complaint, the similarity in
the parties’ domain names cannot play a part in our analysis.
In any event, the fact that the parties have similar web
addresses, even if properly pleaded, does not alter our
conclusion that Fair Wind has failed to allege a cognizable
trade dress.
12
Wind’s trade dress—such as the teaching curriculum—are not
clearly visual aspects of the business at all. 6 Rather, Fair
Wind asserts that Defendants have harmed Fair Wind “by
copying every material element of Fair Wind’s business and
presenting [it to] the public.” Id. at 15. This claim has little
to do with trade dress.
Perhaps realizing its failure to plead a cognizable trade
dress, Fair Wind pivoted at oral argument, placing its “web
design” at the center of the trade dress claim. But the
complaint does not enumerate what specific elements of its
website comprise a distinctive trade dress or that its site has
any distinctive ornamental features. Cf. Xuan-Thao N.
Nguyen, Should It Be a Free for All? The Challenge of
Extending Trade Dress Protection to the Look and Feel of
Web Sites in the Evolving Internet, 49 Am. U. L. Rev. 1233,
1236, 1240 (2000) (arguing that a combination of a website’s
“color, graphics, animations, designs, layout, [and] text” may
qualify for trade dress protection).
Indeed, Fair Wind has failed to allege any facts at all
relating to the substance of its own website. True, the
6
We do not suggest that the curriculum of a sailing school, if
part of, for example, an overall look of a schoolhouse or a
website, could not be part of a business’s trade dress. Cf.
Fuddruckers, Inc. v. Doc’s B.R. Others, Inc., 826 F.2d 837,
841 (9th Cir. 1987) (noting that a menu, in combination with
other aspects of a restaurant’s decor, can constitute
protectable trade dress). But the complaint does not in any
way indicate that Fair Wind’s curriculum creates any kind of
visual impression. It is not even clear from the complaint that
Fair Wind’s curriculum is something that can be seen.
13
complaint suggests that VISS’s website contains a picture of a
Fair Wind catamaran, as well as student feedback
mechanisms, curriculum, and itineraries identical to those
used by Fair Wind. First. Am. Compl. ¶ 29. But the fact that
VISS has copied aspects of Fair Wind’s business and placed
them on its website says nothing about the content of Fair
Wind’s website, let alone whether Fair Wind’s website has a
composite look that might constitute a trade dress.
Because Fair Wind has failed to give Defendants
adequate notice of what overall look it wishes to protect, its
trade dress claim cannot survive Defendants’ motion to
dismiss. See Twombly, 550 U.S. at 555.
But even assuming that Fair Wind had adequately
stated the overall design it seeks to protect, its alleged “trade
dress” is clearly functional, and therefore not protectable. A
functional feature is one that is “essential to the use or
purpose of the article,” “affects the cost or quality of the
article,” or one that, if kept from competitors, would put them
at a “significant non-reputation-related disadvantage.”
TrafFix, 532 U.S. at 33. By contrast, a feature is
nonfunctional where it “is unrelated to the consumer demand
. . . and serves merely to identify the source of the product”
or business. Prufrock Ltd., Inc. v. Lasater, 781 F.2d 129, 133
(8th Cir. 1986). Student feedback procedures, catamarans,
teaching itineraries, and curriculum all affect the quality of
Fair Wind’s business. They play a critical role in the
consumer demand for Fair Wind’s services, rather than
merely identifying Fair Wind as the source of the sailing
instruction. Cf. TrafFix, 532 U.S. at 32 (holding that the
dual-spring design was not protectable because it had a
purpose “beyond serving the purpose of informing consumers
14
that the sign stands are made by” the plaintiff). Thus, Fair
Wind’s alleged dress is plainly functional.
Rather than argue that the particular features of its
“trade dress” are nonfunctional, Fair Wind argues that the
various functional aspects of its business combine to create
something nonfunctional. Fair Wind’s argument rests on
Clicks Billiards, Inc. v. Sixshooters, Inc., where the Ninth
Circuit concluded that the sum of particular functional
elements in a pool hall, such as its counters and lighting,
could amount to a nonfunctional look. See 251 F.3d 1252,
1261-62 (9th Cir. 2001). The Clicks court explained, “[t]he
fact that individual elements of the trade dress may be
functional does not necessarily mean that the trade dress as a
whole is functional; rather, functional elements that are
separately unprotectable can be protected together as part of
trade dress.” Id. at 1259 (internal quotation marks omitted);
see also id. at 1261 (“To be sure, many of these elements,
considered in isolation, may be functional. The issue,
however, is whether, taken as a whole, the overall look and
feel of the establishment is functional.”). The plaintiff in
Clicks offered evidence that its “composite tapestry of visual
effects” had become associated with its pool halls and not
others. See id. at 1259, 1261-62. Thus, the Ninth Circuit
concluded that the plaintiff’s trade dress claim should survive
summary judgment.
In stark contrast to the plaintiff in Clicks, Fair Wind
has not explained how the identified functional elements
achieve a nonfunctional “composite tapestry of visual
effects.” Id. at 1259. Fair Wind has not suggested, in its
complaint or elsewhere, that its business has a distinctive
appearance at all. Clicks is therefore inapposite.
15
In sum, Fair Wind has failed to allege a cognizable
trade dress. Moreover, to the extent that the complaint
alleges that Fair Wind’s boats, curriculum, itineraries, and
student feedback procedures are its trade dress, that trade
dress is functional, and therefore not protectable. Fair Wind’s
claim does not hold water.
III.
Fair Wind next argues that the District Court
improperly dismissed its unjust enrichment claim by
employing too exacting a pleading standard. Specifically, the
District Court concluded that Fair Wind had failed to properly
plead that Defendants had been enriched by their conduct.
We agree with the District Court that Fair Wind has failed to
state a claim for unjust enrichment. We therefore affirm.
To recover for unjust enrichment under Virgin Islands
law, a plaintiff must prove that (1) the defendant was
enriched, (2) the enrichment was at the plaintiff’s expense,
and (3) the circumstances were such that, in equity and good
conscience, the defendant should return the money or
property to the plaintiff. Martin v. Martin, 54 V.I. 379, 393-
94 (V.I. 2010). To state the obvious, a defendant’s
enrichment is critical to the success of an unjust enrichment
claim. See Restatement (Third) of Restitution and Unjust
Enrichment § 1 cmt. d. (“Restitution is concerned with the
receipt of benefits that yield a measurable increase in the
recipient’s wealth.”).
The premise of Fair Wind’s unjust enrichment claim is
that Defendants gained, and Fair Wind lost, by Defendants
“trading on Fair Wind’s trade dress, proprietary information
16
and trade secrets.” First Am. Compl. ¶ 50. As the District
Court noted, however, the complaint contains no facts
concerning in what respect Defendants were enriched, other
than the conclusory assertion that “Dempster and VISS have
been enriched by their improper and unjustified conduct.” Id.
at ¶ 48.
At the pleadings stage, it is often not possible for a
plaintiff to recount with specificity to what extent a defendant
was enriched by her misconduct. That is what discovery is
for. At the same time, however, Rule 8(a)(2) of the Federal
Rules of Civil Procedure requires a plaintiff to plead some
factual allegations in order to survive a motion to dismiss.
See Twombly, 550 U.S. at 557; Iqbal, 556 U.S. at 678.
Pleading the “mere elements” of a cause of action will not do.
Phillips, 515 F.3d at 233. Here, Fair Wind has failed to even
allege that Defendants’ business accrued additional profits by
poaching Fair Wind’s proprietary information and trade
secrets. That may have satisfied Rule 8(a)(2)’s fairly lenient
notice-pleading standard. See id. at 234. But the bald
assertion that Defendants “have been enriched” does not.
Accordingly, we affirm the District Court’s dismissal
of Fair Wind’s unjust enrichment claim.
IV.
We next address the District Court’s award of
attorneys’ fees to the Defendants in the amount of $36,347. 7
7
“We exercise plenary review over legal issues relating to the
appropriate standard under which to evaluate an application
for attorneys’ fees. . . . We review the reasonableness of the
17
After reducing Defendants’ fee award by roughly $5,000 for
excessive billing and vague time entries, the District Court
awarded Defendants the remainder of their hours billed for
the entirety of the litigation, relying solely on Title 5, section
541 of the Virgin Islands Code. See Fair Wind Sailing, Inc.,
2014 WL 886832, at *1-3. The District Court did not attempt
to segregate which fees were accrued defending the federal
claim, nor did it discuss the Lanham Act as a basis for a fee
award. Id.
A.
Section 541 provides in relevant part that “there shall
be allowed to the prevailing party in the judgment such sums
as the court in its discretion may fix by way of indemnity for
his attorney’s fees in maintaining the action or defenses
thereto.” V.I. Code Ann. tit. 5, § 541(b). However, section
541 does not permit a district court to award the prevailing
party all of its attorneys’ fees where the case includes both
territorial and federal causes of action. Rather, “[i]n awarding
fees to a prevailing party under section 541, . . . the court
must subtract fees and costs associated with federal claims, as
section 541 is only applicable to fees for the litigant who
succeeds in pursuing [or defending] Virgin Islands territorial
claims.” Figueroa v. Buccaneer Hotel Inc., 188 F.3d 172,
183 (3d Cir. 1999) (emphasis added).
District Court’s award of attorneys’ fees for abuse of
discretion.” Nat’l Amusements Inc. v. Borough of Palmyra,
716 F.3d 57, 64 (3d Cir. 2013) (quoting People Against
Police Violence v. City of Pittsburgh, 520 F.3d 226, 231 (3d
Cir. 2008)).
18
Defendants do not dispute that the District Court failed
to “subtract fees and costs associated with” Fair Wind’s
federal claim. Id. They nonetheless insist that “the District
Court correctly chose to award Defendants . . . fees solely
under Section [541] . . . as the attorneys’ fees expended in
defending all three of [Fair Wind’s] causes of action were
inextricably intertwined.” Appellees’ Supplemental Br. at 9.
Defendants “cit[e] . . . defense counsel’s timesheets” as
evidence that “the fees incurred defending against Plaintiff’s
claims for trade dress infringement, tortious interference with
contract and unjust enrichment were ‘inextricably
intertwined.’” Id. at 23.
We have never approved of section 541 fees where the
territorial and federal claims are “inextricably intertwined.”
Acknowledging that we have not endorsed this argument,
Defendants rely on a Ninth Circuit opinion, Gracie v. Gracie,
217 F.3d 1060 (9th Cir. 2000), for their proposed exception to
the Figueroa rule. There, the Ninth Circuit held that “a party
cannot recover legal fees incurred in litigating non-Lanham
Act claims unless the Lanham Act claims and non-Lanham
Act claims are so intertwined that it is impossible to
differentiate between work done on claims.” Id. at 1069
(internal quotation marks omitted).
Despite Defendants’ insistence that the fees incurred
defending the territorial law and federal law claims cannot be
segregated, the District Court made no such finding. Unless
and until it does, we see no reason to decide when, if ever, the
“inextricably intertwined” exception to the Figueroa rule
might apply. See Gracie, 217 F.3d at 1070 (“[T]he
impossibility of making an exact apportionment does not
relieve the district court of its duty to make some attempt to
19
adjust the fee award in an effort to reflect an
apportionment.”).
Moreover, we remain unconvinced that where federal
and territorial claims are “inextricably intertwined,” it
necessarily makes sense to award fees to the prevailing party
for the entirety of the litigation under section 541. The rule
proposed by Defendants, it seems to us, would encourage
parties to obfuscate time entries. Indeed, the fact that
Defendants cite their own time entries as evidence that the
claims were inextricably intertwined lends credence to that
concern. Moreover, Defendants’ proposed rule seems
particularly inequitable in a case, such as this one, where the
majority of the parties’ energy was spent litigating the federal
claim, not the territorial claims.
In sum, the District Court should have attempted to
apportion the fees incurred defending the territorial and
federal claims.
B.
Once the time spent on the federal and territorial
claims is apportioned, the question remains whether
Defendants may recover fees spent defending the federal
claim at all. As it happens, Fair Wind’s sole federal claim
was brought under the Lanham Act, § 35(a) of which permits
the recovery of reasonable attorneys’ fees only “in
exceptional cases.” 15 U.S.C. § 1117(a). Defendants argue
that this case meets the standard for exceptionality, and that
they are therefore entitled to reasonable fees expended on the
entirety of the litigation.
20
As we have explained elsewhere, “Congress added the
attorney’s fee provision of § 35(a) to the Lanham Act in 1975
in response to the Supreme Court’s decision in Fleischmann
Distilling Corp. v. Maier Brewing Co., 386 U.S. 714 (1967),
holding that attorney’s fees were not available in trademark
cases under the Lanham Act absent express statutory
authority.” Securacomm Consulting, Inc. v. Securacom Inc.,
224 F.3d 273, 279 (3d Cir. 2000). However, while “the
statute now expressly provides for an award of attorney’s fees
at the discretion of the court in ‘exceptional cases,’ 15 U.S.C.
§ 1117(a), it does not define an ‘exceptional case[].’” Id. at
279-80 (alteration in original).
Our case law requires a district court to engage in a
“two-step process” before determining that a case is
“exceptional” under § 35(a):
First, the District Court must decide whether the
defendant engaged in any culpable conduct. We
have listed bad faith, fraud, malice, and
knowing infringement as non-exclusive
examples of the sort of culpable conduct that
could support a fee award. Moreover, the
culpable conduct may relate not only to the
circumstances of the Lanham Act violation, but
also to the way the losing party handled himself
during the litigation. Second, if the District
Court finds culpable conduct, it must decide
whether the circumstances are “exceptional”
enough to warrant a fee award.
Green v. Fornario, 486 F.3d 100, 103 (3d Cir. 2007) (internal
citation omitted). The requirement that a district court find
21
culpability before awarding attorneys’ fees under the Lanham
Act has been in place in this Circuit for over two decades.
See Ferrero U.S.A., Inc. v. Ozak Trading, Inc., 952 F.2d 44,
48 (3d Cir. 1991) (holding that awarding fees under § 35(a) is
inappropriate absent an “explicit finding . . . that [the losing
party] acted willfully or in bad faith”).
While this action was on appeal, the Supreme Court
handed down Octane Fitness, LLC v. Icon Health & Fitness,
Inc., 134 S. Ct. 1749 (2014), analyzing when a district court
may award fees under § 285 of the Patent Act. Like § 35(a)
of the Lanham Act, § 285 provides that “[t]he court in
exceptional cases may award reasonable attorney fees to the
prevailing party.” 35 U.S.C. § 285.
Prior to Octane Fitness, the Federal Circuit took the
position that “a case is ‘exceptional’ only if a district court
either finds litigation-related misconduct of an independently
sanctionable magnitude or determines that the litigation was
both ‘brought in subjective bad faith’ and ‘objectively
baseless.’” Octane Fitness, 134 S. Ct. at 1756 (quoting
Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d
1378, 1381 (Fed. Cir. 2005)). The Octane Fitness Court
rejected this standard, embracing a definition of “exceptional”
far more expansive than the one articulated by the Federal
Circuit in Brooks. Looking to the plain meaning of the term,
the Court explained that “an ‘exceptional’ case is simply one
that stands out from others with respect to the substantive
strength of a party’s litigating position (considering both the
governing law and the facts of the case) or the unreasonable
manner in which the case was litigated.” Id. at 1756. Thus, it
is within a court’s discretion to find a case “exceptional”
based upon “the governing law and the facts of the case,”
22
irrespective of whether the losing party is culpable. For
example, “a case presenting . . . exceptionally meritless
claims may sufficiently set itself apart from mine-run cases to
warrant a fee award.” Id. at 1757. This is so even if the
losing party’s conduct did not suggest “bad faith, fraud,
malice, [or] knowing infringement.” Green, 486 F.3d at 103.
While Octane Fitness directly concerns the scope of a
district court’s discretion to award fees for “exceptional” case
under § 285 of the Patent Act, the case controls our
interpretation of § 35(a) of the Lanham Act. Not only is §
285 identical to § 35(a), but Congress referenced § 285 in
passing § 35(a). See S. Rep. No. 93–1400, at 2 (1974),
reprinted in 1974 U.S.C.C.A.N. 7132, 7133; see also
Securacomm Consulting, 224 F.3d at 281. Thus, we have
“look[ed] to the interpretation of the patent statute for
guidance” in interpreting § 35(a). Id. Moreover, in its
explication of the word “exceptional,” the Octane Fitness
Court relied in part on the D.C. Circuit’s holding that the term
“exceptional,” as used in § 35(a) of the Lanham Act, means
“uncommon” or “not run-of-the-mill.” Octane Fitness, 134
S. Ct. at 1756 (quoting Noxell Corp. v. Firehouse No. 1 Bar-
B-Que Rest., 771 F.2d 521, 526 (D.C. Cir. 1985)). In so
doing, the Octane Fitness Court noted that the Lanham Act
fee provision is “identical” to § 285 of the Patent Act. Id. We
believe that the Court was sending a clear message that it was
defining “exceptional” not just for the fee provision in the
Patent Act, but for the fee provision in the Lanham Act as
well.
We therefore import Octane Fitness’s definition of
“exceptionality” into our interpretation of § 35(a) of the
Lanham Act. Under Octane Fitness, a district court may find
23
a case “exceptional,” and therefore award fees to the
prevailing party, when (a) there is an unusual discrepancy in
the merits of the positions taken by the parties or (b) the
losing party has litigated the case in an “unreasonable
manner.” Id.; cf. Green, 486 F.3d at 103 (noting that a district
court may award fees as a result of either the circumstances of
the Lanham Act violation or the way in which the losing party
litigated the claim). Whether litigation positions or litigation
tactics are “exceptional” enough to merit attorneys’ fees must
be determined by district courts “in the case-by-case exercise
of their discretion, considering the totality of the
circumstances.” Octane Fitness, 134 S. Ct. at 1756.
Importantly, that discretion is not cabined by a threshold
requirement that the losing party acted culpably. The losing
party’s blameworthiness may well play a role in a district
court’s analysis of the “exceptionality” of a case, but Octane
Fitness has eliminated the first step in our two-step test for
awarding fees under § 35(a) of the Lanham Act.
The parties ask us to decide whether this case merits
attorneys’ fees under § 35(a) of the Lanham Act. We decline
to do so. With its unparalleled knowledge of the litigation
and the parties, the District Court is better suited to make that
assessment in the first instance. See Securacomm Consulting,
224 F.3d at 279. We therefore remand to the District Court,
so that it may determine whether fees are appropriate under
this slightly altered standard for awarding fees in Lanham Act
cases. 8
Va.
8
We similarly decline to reach the “reasonableness” of the
District Court’s fee award.
24
We affirm the District Court’s dismissal of Fair
Wind’s trade dress and unjust enrichment claims. However,
we vacate the District Court’s award of attorneys’ fees. On
remand, the District Court must determine whether this case
is an “exceptional” one under § 35(a) of the Lanham Act. If
it is, the Court may award reasonable fees for the entirety of
the litigation. If it is not, the Court must subtract from its
award any fees accrued by Defendants in litigating the
Lanham Act claim.
25