IP Law Daily Storm shelter seller’s $17 million award upheld
Tuesday, October 8, 2019

Storm shelter seller’s $17 million award upheld

By Nicholas Kaster, J.D.

The Seventh Circuit reversed the denial of attorney fees and remanded for entry of a reasonable fee award.

The U.S. Court of Appeals in Chicago has upheld a damages award of over $17 million to a seller of storm shelters (4SEMO.com) in a trademark infringement case involving a manufacturer of storm shelters (Southern Illinois Storm Shelters). The appellate court rejected the argument that 4SEMO’s use of a cross logo violated a statute designed to protect the logo of the American Red Cross. The court also rejected the argument that the damage award constituted a windfall for 4SEMO, imposed an inequitable penalty, or unlawfully contained profits earned in markets outside of 4SEMO’s contractual dealership range (4semo.com, Inc. v. Southern Illinois Storm Shelters, Inc., October 7, 2019, Sykes, D.).

The case involves a long-running trademark dispute over ownership and misuse of a word-mark and logo for below-ground storm shelters. In 2005, 4SEMO.com Inc. began selling storm shelters manufactured by Southern Illinois Storm Shelters, Inc. (SISS). The dealership agreement gave 4SEMO the exclusive retail right to sell SISS shelters in portions of Missouri and Arkansas.

As part of its marketing campaign, 4SEMO created a wordmark—"Life Saver Storm Shelters"—and a logo using that name, which it affixed to the shelters. In 2006 SISS’s corporate officers asked 4SEMO for permission to use these marks on shelters marketed in southern Illinois. 4SEMO granted a limited license for that purpose, but they violated it by using the marks on products sold throughout the country.

In 2011 4SEMO discovered the widespread unauthorized use and demanded cessation. One of the corporate officers immediately offered to purchase the marks. The parties were headed toward an agreement until August 2012 when he called off the deal. The corporate officers later terminated the dealership agreement with 4SEMO and continued to use the marks even up to the month of trial.

SISS sued 4SEMO for trademark infringement, claiming prior use and ownership of the "Life Saver" wordmark. That claim did not survive summary judgment. 4SEMO counter-claimed for trademark infringement and false endorsement under the Lanham Act, along with several state-law claims. At trial, the district court found that SISS breached a valid license, generating consumer confusion and deception, and thus violated the Lanham Act. Addressing damages, the judge found that the decade-long infringement was willful, intentional, egregious, and malicious. The judge awarded over $17 million and ordered injunctive relief in the form of a cease-and-desist order. Finally, the judge held the corporate officer and his proprietorships jointly and severally liable for the judgment and denied 4SEMO’s motions for attorney fees under the Lanham Act and sanctions under 28 U.S.C. § 1927. The current appeal ensued.

On appeal, SISS argued that 4SEMO’s logo violated a statute that makes it a crime to use the iconic emblem reserved to the American Red Cross: a red Greek cross on a white background. SISS also raises a novel legal argument to attack 4SEMO’s ownership of the wordmark. Finally, SISS raised several challenges to the $17 million monetary award. In a cross-appeal, 4SEMO appealed the denial of § 1927 sanctions and Lanham Act attorney fees.

The Red Cross Statute. SISS first argued that 4SEMO’s logo was unlawful and thus unprotected by trademark law. This argument was based on a federal criminal statute that reserved the emblem of a red Greek cross on a white background for the American Red Cross. However, the appeals court found that the original version of 4SEMO’s logo wasn’t a red Greek cross on a white background, nor was it "made or colored in imitation" of the insignia reserved to the American Red Cross. The logo at the center of this dispute is a red Greek cross on a black background emblazoned with "Life Saver Storm Shelters" in large, yellow letters. The words fill nearly the entire horizontal bar of the cross, making it predominantly yellow. 4SEMO’s logo thus is not "made or colored in imitation" of the Red Cross symbol, the appeals court ruled. Thus, the statute at issue did not bar 4SEMO’s commercial use or negate the judge’s finding of trademark infringement.

Ownership of the wordmark. In the district court, SISS claimed to have marketed storm shelters under a virtually indistinguishable name—"Life-Saver Storm Shelters" (with a hyphen)—years before the relationship with 4SEMO. The judge rejected that prior-use theory.

Instead, on appeal, SISS offered a new legal theory derived from observations in a widely cited trademark treatise. Discussing trademark disputes between manufacturers and their distributors, the trademark treatise observes: "In the absence of an agreement defining ownership," there is a "rebuttable presumption that the manufacturer of [the] goods is the owner of the trademark of those goods." The treatise goes on to describe a six-factor balancing test to determine whether the presumption has been rebutted.

The appeals court, however, found that this argument was new on appeal and was thus waived.

Disgorged profits. SISS argued that the $17 million award constituted a windfall for 4SEMO, imposed an inequitable penalty, and unlawfully contained profits earned in markets outside of 4SEMO’s contractual dealership range.

Under the Lanham Act’s damages provision, however, the court may award a prevailing plaintiff (1) the defendant’s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action. At trial, 4SEMO’s expert calculated approximately $17.4 million in revenue from unlicensed sales of "Life Saver" branded shelters. Before trial SISS affirmatively waived its right to prove up any deductions. Nor did SISS object to the expert’s calculations or introduce countervailing evidence at trial. The appeals court found these litigation decisions to be fatal to SISS’s appellate attacks on the damages award. Because SISS effectively conceded the expert’s calculation at trial, its attack on the judgment as a windfall came too late, the court concluded.

SISS also argued that the trial judge should have excluded profits earned in geographic areas beyond 4SEMO’s dealership territory. In other words, because 4SEMO could not sell SISS’s shelters outside of specified counties in Missouri and Arkansas, its trademark rights were also confined to those counties. This argument too was not raised below and was thus waived.

Finally, one of the corporate officers challenged the judge’s decision to hold him personally liable. However, the court noted that a corporate officer is individually liable if he "personally participates in the manufacture or sale of the infringing article ... uses the corporation as an instrument to carry out his own willful and deliberate infringements, or ... knowingly uses an irresponsible corporation with the purpose of avoiding personal liability." The judge’s unrebutted factual findings defeat this argument, the appeals court held. He found no evidence that the corporate officers respected the corporate form of either SISS or Ingoldsby Excavating.

Sanctions and fees. Finally, although the trial judge reasonably concluded that §1927 sanctions were not warranted, the appeals court found that his summary denial of Lanham Act fees could not be squared with his factual findings and legal conclusions on the merits of the infringement claim.

The Lanham Act permits district courts "in exceptional cases" to "award reasonable attorney fees to the prevailing party." The appeals court found that this qualified as an exceptional case. The judge found that the conduct of the corporate officers was "willful, egregious, and intentional" and that they acted in bad faith. Then he summarily denied them attorney fees. That conclusion, the appeals court held, simply doesn’t follow from the factual findings of willfulness, maliciousness, and bad faith.

The Seventh Circuit therefore reversed the denial of attorney fees and remanded for entry of a reasonable fee award. In all other respects, the district court’s judgment was affirmed.

This case is Nos. 18-1998 and 18-2095.

Attorneys: Charles S. Kramer (Riezman Berger, PC) for 4Semo.Com, Inc. Douglas D. Churovich (Sandberg, Phoenix & Von Gontard, PC) for Southern Illinois Storm Shelters, Inc., Ingoldsby Excavating, Inc. and Bob Ingoldsby d/b/a Bob Ingoldsby Construction.

Companies: 4Semo.Com, Inc.; Southern Illinois Storm Shelters, Inc.; Ingoldsby Excavating, Inc.; Bob Ingoldsby d/b/a Bob Ingoldsby Construction

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