Seventh Circuit: Sanction of no damages for improper witness contact too severe compared to harmFebruary 25, 2008

In a decision Friday, the Seventh Circuit affirmed a jury verdict of trademark infringement, but reversed the district court's ruling holding the plaintiff had forfeited damages because of improper conduct towards a prospective witness. The court dealt with whether the burden of proof for the sanction was by clear and convincing evidence or as the district court concluded, by a mere preponderance of the evidence.The court ultimately decided that when the appropriate burden of proof is not clear, the issue is resolved within the limits of proportionality. Specifically, a larger sanction requires a higher degree of harm caused by the misconduct. Since, there was no harm caused by the misconduct, the district court's imposition of the sanction was revered. The harm was mitigated in this case because the defendant decided not to call the witness in question, which turned out to be a tactical mistake, as the witness was going to offer testimony on a potentially meritorious defense, namely that the mark at issue was generic.More detail of Ty Inc. v. Softbelly's, Inc. after the jump.Ty Inc., the manufacturer of "Beanie Babies," brought suit against Softbelly's alleging trademark infringement. Softbelly's manufactures a product that resembles a Beanie Baby but has a chamois belly for wiping computer screens. The name of Softbelly's products are "Screenie Beanies."The case was first tried in 2002 wherein the judge entered judgment for Ty as a matter of law. The court awarded both injunctive relief and $713,000 in damages. Softbelly's moved to vacate the judgment on the grounds that that Ty had tampered with a prospective witness for Softbelly's. This motion was denied, judgment entered, and a subsequent appeal was filed with the Seventh Circuit. The Seventh Circuit reversed the lower court judgment because evidence tending to show that "Beanie" was a generic mark was erroneously excluded.On remand the case was retried and the jury found trademark infringement. However, the judge awarded no damages, instead imposing a sanction of forfeiture of the $713,000 award because of Ty's allegedly improper conduct towards a witness. The district court did, however, award Ty the attorney's fees that it had incurred for the trademark infringement suit.The improper conduct that led to the forfeiture of damages stemmed from Ty's action towards a prospective witness. The witness, Harold Nizamian, employed Ty Warner before he left to form Ty Inc. Nizamian would have testified that the word "beanie" was used generic at least as early as 1988 – well before Ty began selling its "Beanie Babies." A few days before the 2002 trial began, Softbelly's deposed Ty Warner and revealed its plan to call Nizamian to testify that "beanie" was a generic term. Immediately after the deposition, Ty Warner called Nizamian and expressed his concern of the trouble Nizamian's testimony would create. After the conversation, Nizamian informed Softbelly's that he no longer wished to testify.At the outset, the court weighed the burden of proof required for the imposition of the sanction. Ty's contended that because the sanction was punitive and accordingly its appropriateness had to be proven by clear and convincing evidence. The court noted that Softbelly's did not contend that it had suffered any harm from the conduct as Softbelly's had not called Nizamian even though he was willing and able to testify at the retrial. Instead Softbelly's mistakenly believed that the jury would find that Ty's had not proved likelihood of confusion and would lose regardless of the issue of genericness of the term "beanie."The court agreed with Ty that sanction was punitive and found that since Softbelly's had not suffered any harm the large sanction could not stand. The court found that when the burden of proof is unclear, the inquiry is controlled by proportionality. In this case, the large sanction was imposed on the grounds that serious misconduct had occurred. That misconduct, as the court noted, had not harmed Softbelly's beyond a litigation expense. The court concluded that Ty's "had been punished enough for litigation misconduct that fortunately did not affect the course or outcome of the litigation."The court also dealt briefly with Softbelly's appeal of the trademark infringement verdict. The court first highlighted Softbelly's abandonment of the only argument which could have carried the day: "beanie" is the generic term for soft, plush objects in the shape of animals. The court earlier had expressed concern that Ty's competitors might be rendered "speechless" if beanie was not found to be generic. Nevertheless, because the injunction was narrowly drawn, Softbelly's was still free to call its product a "beanbag screen cleaner," "Screenie Bean" or "Cleanie Critter." The tactical decision not to pursue the genericness argument therefore hurt Softbelly twice on appeal.Finally, the court affirmed the willful infringement finding as Softbelly's had chosen the name "Screenie Beanies" with reckless disregard for the likelihood of customer confusion. Additionally, Softbelly's attempt to federally register the name "Screeniebeanies" had been rejected by the USPTO on the ground that it was potentially confusing. This provided sufficient evidence to support a finding of willful infringement.To read the full decision in Ty Inc. v. Softbelly's, Inc., click here.