Sanction against Beanie Babies maker reduced

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Mercifully, the 1990s ended long ago. Unfortunately, litigation over those ’90s icons, the Beanie Babies, continues unabated.

In the latest round of litigation, the Seventh Circuit held on Feb. 22 that it was an erroneous exercise of discretion to impose a sanction nine times greater than the damage caused by a party’s infringement of the Beanie Babies trademark. The court also held that a party need only prove fraud on the court by a preponderance of the evidence, rather than clear and convincing evidence.

Ty Inc., the manufacturer of Beanie Babies, brought suit in federal court in Illinois against Softbelly’s Inc., alleging that Softbelly’s violated Ty’s trademarks by selling a product called “Screenie Beanies.”

Screenie Beanies look and felt like Beanie Babies, but have chamois bellies for the purpose of cleaning computer screens.

Judgment for Ty

After a trial in 2002, the district court entered judgment in favor of Ty for $713,000.

Softbelly’s later moved to vacate the judgment, on the ground that Ty Warner, the owner of Ty Inc., had tampered with a prospective witness for Softbelly’s.

The district court denied the motion, but the Seventh Circuit reversed, concluding that the trial judge erroneously excluded evidence that “Beanies” had become a generic mark. 353 F.3d 528 (7th Cir. 2003).

However, the court also held that, if Ty prevailed on retrial, despite admission of the evidence, it would be entitled to the damages awarded at the first trial. Finally, the court directed the district judge to conduct a hearing on whether Ty Warner had tampered with a witness.

On remand, the jury again found that Softbelly’s infringed Ty’s trademark. However, the judge awarded no damages, as a sanction, after concluding that the witness tampering occurred.

Instead of damages, the district court awarded Ty only the attorney fees it incurred in proving the trademark infringement.

Both parties appealed, and in a decision by Judge Richard A. Posner, the Seventh Circuit affirmed the finding of infringement, but reversed the sanction as excessive.

Sanction

The court first held that fraud on the court, in the form of trying improperly to influence a witness, need not be proved by clear and convincing evidence, but that a mere preponderance is sufficient.

The court acknowledged the general rule that fraud must be proved by clear and compelling evidence, but found the rule inapplicable. In Maynard v. Nygren, 332 F.3d 462, 468 (7th Cir. 2003), the court held that any substantial sanction for misconduct in litigation must be proved by clear and convincing evidence.

However, the court noted that the rule in Maynard was recently called into question in Wade v. Soo Line R.R. Corp., 500 F.3d 559, 561 (7th Cir. 2007).

Turning to the reasons for imposing a higher burden of proof, the court concluded that they were not present in this case.

The court noted that, in an ordinary civil case, where the only consequence of error is money, the lower burden of proof — preponderance of the evidence — applies; in criminal cases, where the consequence of error is unjust conviction and imprisonment, the highest standard — beyond a reasonable doubt — is required.

In a civil action for fraud, the consequences of error are somewhat higher than in an ordinary civil case, because the defendant’s reputation can be injured with no corresponding benefit to the plaintiff. Thus, the intermediate standard — clear and convincing evidence — is generally used.

Here, however, Ty was not sanctioned for fraud in its business activities, but fraud in the litigation itself. As a result, the court concluded that the higher standard was not warranted.

The court reasoned, “The sanction will often be written off by the larger community containing the defendant’s peers — if the sanction is even noticed — as a mere battle scar of litigation.”

Although the court affirmed the imposition of a sanction, it concluded the sanction imposed — loss of the entire $713,000 judgment — was excessive.

Noting that the sanction was nine times the amount of attorney fees incurred by Softbelly’s — $78,000 — the court concluded that a sanction in the amount of Softbelly’s actual attorney fees was a sufficient sanction.

The court concluded “Ty started Softbelly’s on what has proved a wild goose chase, and must bear the consequences. But it has been punished enough for litigation misconduct that fortunately did not affect the course or outcome of the litigation.”

Turning to Softbelly’s appeal, the court concluded that the evidence supported a finding of infringement, and affirmed on that issue.

Analysis

The effect of the decision may be to greatly reduce a district court’s discretion in imposing sanctions for misconduct during litigation.

Many prior Seventh Circuit cases consider the propriety of dismissal as a sanction for misconduct.

The sanction in the Ty case, by wiping out the entire judgment in favor of Ty, had the practical effect of operating as a dismissal.

By holding that this sanction was excessive, because of the lack of prejudice to the defendant, the court’s holding fits easily within its prior precedents.

However, by reducing the sanction to the defendant’s actual attorney fees, rather than remanding to the district court to exercise its discretion and impose an unspecified, lower, sanction, the court’s decision goes beyond its prior precedent.

Softbelly’s incurred $78,000 in litigating the issue of Ty’s misconduct. Thus, were the sanction even one dollar lower than that amount, it would be inadequate to compensate Softbelly for the misconduct.

Thus, the opinion could be read very broadly, to imply that a court may impose no greater sanction than is necessary to do justice between the parties.

Or, perhaps the court just wanted finality. This is the second time the appeal has been before the court; had the court remanded the case to the district court to impose a lower, but unspecified, sanction, the case may well have generated a third (unwanted) appeal.

Such an interpretation may rest on nothing more than speculation; but given the lack of any explicit language that a sanction should be no greater than necessary, it may be closer to the truth than the broad implicit interpretation that the court’s choice of remedy could be read to suggest.