Finance Investment Co. (Bermuda) Ltd., Plaintiffs-Appellants-Cross-Appellees, and Andrew J. Goodman and Frederick Eichhorn, Appellants-Cross-Appellees v. Geberit Ag, Defendants-Appellees-Cross-Appellants

Citations: 165 F.3d 526; 49 U.S.P.Q. 2d (BNA) 1289; 42 Fed. R. Serv. 3d 515; 1998 U.S. App. LEXIS 31728Docket: 97-2603

Court: Court of Appeals for the Seventh Circuit; December 22, 1998; Federal Appellate Court

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A legal dispute originally centered on trademark rights has evolved into a matter concerning sanctions and attorneys' fees. The United States Court of Appeals for the Seventh Circuit upheld a district court's order imposing $100,000 in sanctions against three plaintiffs and holding the plaintiffs' lead counsel liable for 25% of that sum. The plaintiffs' attempts to contest a summary judgment against them were found to be insufficiently developed and thus waived. The defendants, Geberit AG and Geberit Manufacturing Inc., cross-appealed, seeking to increase the sanctions to $800,000 and to hold the plaintiffs' lead counsel and local counsel fully accountable. The court affirmed the imposition of sanctions but remanded for clarification on the rationale behind the specific amount set. 

The plaintiffs included Finance Investment Company (FIC), Closomat U.S., and Joseph Muller Corporation Zurich, all of which were involved in distributing the CLOSOMAT brand of 'paperless' toilets, patented by Swiss company Hans Maurer AG. Maurer licensed the technology to FIC, while Closomat and JMCZ were authorized distributors. Joseph Muller managed these entities but was not a party to the lawsuit. The defendants, Geberit, also produced a competing 'paperless' toilet, indicating a market for such products, particularly among the physically disabled and in international markets.

The lawsuit originated from a March 1989 article in the European trade magazine Sala Bano, which incorrectly identified a Geberit toilet as a "Geberit, series 'Closomat' device." After Geberit received an apology from Sala Bano's editors, Muller initiated legal action in January 1992 against Geberit and the publisher, Faenza Editrice Iberica, in the U.S. District Court for the Southern District of Florida, alleging violations of the Lanham Act, seeking at least $12 million in damages and injunctive relief. The Florida court granted summary judgment in favor of Geberit in December 1992, stating that the plaintiffs did not counter Geberit's affidavits asserting no involvement with the article, leading to a lack of jurisdiction. The plaintiffs' motion for reconsideration was denied, and their subsequent appeal was affirmed by the Eleventh Circuit.

In April 1993, the Muller companies filed a similar complaint against Geberit in the Northern District of Indiana, citing Geberit's alleged involvement in the article. Following a transfer of the Florida case to Indiana in February 1994, both lawsuits were consolidated. Geberit moved for summary judgment in February 1995, which was granted in July 1995, prompting the court to consider whether the plaintiffs should pay Geberit's attorney fees. Although the plaintiffs appealed this decision, the fee proceedings continued. Geberit subsequently requested $800,000 in fees, leading to ongoing exchanges between the parties. In May 1997, the appellate court suspended the appeal and requested a status report on the district court proceedings.

The district court imposed $100,000 in monetary sanctions on the Muller companies for attorney's fees owed to Geberit, holding lead attorney Goodman jointly liable for 25% of the amount while local counsel Eichhorn received only an admonishment. Additionally, the court dismissed the Muller companies' remaining claim against Faenza from prior Florida litigation. The May 1997 order, issued under Fed. R. Civ. P. 58 and 79(a), was subsequently appealed by the Muller companies, Goodman, and Eichhorn, with Geberit cross-appealing. The court's sanctions were based on three grounds: Fed. R. Civ. P. 11, 28 U.S.C. 1927, and 15 U.S.C. 1117, with the appellate review standard being an abuse of discretion. 

The district court found that the Muller companies could not sue under the Lanham Act because: (1) their Indiana complaint falsely claimed that Closomat was sublicensed by FIC; (2) they lacked the requisite interest in the trademark to sue under § 32(1); (3) the license terms barred them from suing under § 43(a); and (4) Goodman should have recognized the absence of a valid claim. Additionally, the court determined that the plaintiffs filed suit despite knowing their claims were baseless, as prior litigation had established that Geberit was not involved with the Sala Bano article. 

On appeal, the Muller companies focused on the district court's conclusion regarding their lack of statutory standing under §§ 32(1) and 43(a) of the Lanham Act, rather than addressing all alternative holdings, which could risk waiving their claims of error.

The appellants did not address the district court's finding regarding Geberit's lack of involvement in the Sala Bano article until their reply brief, which resulted in waiver of their arguments. Consequently, the sanctions imposed by the court could be affirmed based on this waiver alone. The excerpt examines the Muller companies' claims under the Lanham Act, specifically § 32(1) and § 43(a). It clarifies that only a trademark registrant or their assignee can enforce § 32(1), and mere distributors like Closomat and JMCZ cannot bring claims under this provision. The Muller companies acknowledged this limitation and withdrew their § 32(1) claims for these entities. They argued that FIC, as an exclusive licensee, should have standing to sue under § 32(1), but the license agreement's terms indicated that FIC's rights were not equivalent to those of an assignee, as it included geographic limitations and other duties inconsistent with an assignment. Therefore, the district court's conclusion that none of the plaintiffs could sue under § 32(1) was correct. Regarding § 43(a), while it allows a broader range of plaintiffs to sue, the same license agreement terms that undermined FIC's § 32(1) claim also barred all three companies from pursuing a claim under § 43(a), as they were prohibited from bringing suit in their own capacity.

FIC was required under § 5.8 of the agreement to notify Maurer of any known infringement, after which Maurer was obligated under § 4.5 to initiate a lawsuit. FIC's failure to notify Maurer before filing suit meant they could not independently sue, as the license governing the CLOSOMAT mark did not grant them that right. The district court confirmed no evidence contradicted that Maurer had not consented to FIC’s action, thus validating the court's decision to dismiss FIC's § 43(a) claim.

Additionally, the district court found that the Muller companies, with their lawyers, pursued the Indiana lawsuit despite knowing they lacked sufficient proof against Geberit. This conclusion was supported by the record, with the Muller companies aware that their previous Florida case against Geberit was dismissed due to a lack of jurisdiction and that their evidence did not contradict Geberit's defenses. The Muller companies refiled in Indiana based on information they claimed to have obtained, yet the district court determined that their suspicions were unfounded.

The court outlined three bases for its sanctions against the Muller companies: the pre-1993 version of Fed. R. Civ. P. 11, 28 U.S.C. § 1927, and 15 U.S.C. § 1117. Since the Indiana lawsuit was initiated before the 1993 amendment to Rule 11, the court applied the earlier version, which mandates that attorneys ensure their filings are grounded in fact and law. Violations of this rule can result in sanctions, including reimbursement of expenses incurred due to the improper filing.

Lead counsel Goodman's signing of the Indiana complaint constituted a violation of Rule 11 due to a lack of standing for the plaintiffs, as established in prior Florida litigation. Goodman claimed he relied on his client's assertion that Maurer authorized the lawsuit, but this did not rectify the absence of a legitimate basis for the claims. Closomat and JMCZ had no statutory right to pursue the lawsuit, and FIC lacked a valid assignment. Consequently, the district court's imposition of Rule 11 sanctions was justified.

Additionally, the court sanctioned Goodman under 28 U.S.C. § 1927 for unreasonably multiplying proceedings, particularly given the Indiana suit was filed after the loss in Florida. Goodman's failure to properly assess evidence during discovery further warranted sanctions, as an affidavit had clarified the misidentification issue, indicating no involvement by Geberit.

The court also held the Muller companies jointly liable for Geberit's attorneys' fees under 15 U.S.C. § 1117, which allows fee shifting in exceptional Lanham Act cases. The plaintiffs' conduct was deemed "oppressive," meeting the criteria for such sanctions, especially given the extensive and complex nature of the litigation, which had lasted over four years and involved significant translation efforts. The court affirmed the sanctions but indicated that determining the appropriate amount and allocation between the lawyer and client required further consideration.

Geberit sought sanctions exceeding $800,000, but the district court awarded only $100,000 without providing a clear rationale, leading to speculation about the court's reasoning. Evidence indicates that Geberit incurred significantly higher litigation costs, including over $315,000 in one year for Indiana proceedings. Geberit cross-appealed for an increase to $800,000 in sanctions, sought joint liability for attorney Goodman, requested to include Goodman's law firm as liable under Rule 11, and proposed lesser sanctions for local counsel Eichhorn. Due to the lack of clarity on the court's discounting of the award, the appellate court suggested remanding the cross-appeal for further explanation, noting that any subsequent review would be for abuse of discretion.

The court cautioned Geberit about pursuing further costs claims, referencing a previous order that did not resolve Geberit's cost motion. It warned against frivolous filings, including a motion to correct a quotation mark, which could lead to sanctions. The court emphasized that any cost applications would be rigorously scrutinized under new Rule 11 and the district court's authority to sanction. The district court's judgment was partially affirmed and partially remanded for further proceedings, with each party responsible for its own appeal costs. The court confirmed that the sanctions award was appealable and distinct from other cost awards, ensuring jurisdiction over the appeal.