Plaintiff The New York State Society of Certified Public Accountants ("the Society" or "Plaintiff') commenced this action against Defendant Eric Louis Associates ("ELA" or "Defendant") on April 27, 1999, asserting causes of action for (1) tradernark/servicemark infringement, false designation of origin, and unfair competition under § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a); (2) trademark/servicemark dilution under §43)(c) of the Lanham Act, 15 U.S.C. § 1125(c); (3) trademark/servicemark dilution under New York General Business Law § 360-1; and (4) copyright infringement under § 101 et seq. of the Copyright Act of 1976, 17 U.S.C. § 101 et seq. On the same date, the Society moved for a preliminary injunction, and applied for and was granted a temporary restraining order. After two adjournments, a hearing on the Society's preliminary injunction motion was set for May 24, 1999. On that date, counsel orally stipulated to entry of an order of permanent injunction, and the Court issued such an Order on June 1, 1999. (*1) The Order authorized the Society to apply for an award of monetary damages and/or attorneys fees by June 25, 1999. Presently before the Court is (1) the Society's application for an award of attorney fees under § 35(a) of the Lanham Act, 15 U.S.C. § 11 17(a); and (2) the Society's motion for discovery and a hearing pursuant to an application for an award of damages, infringer's profits, costs, and/or attorney fees under §§ 504(b) and 505 of the Copyright Act, 17 U.S.C. §§ 504(b), 505.
This application for attorney fees and damages comes to the Court in an awkward procedural posture. Faced with Plaintiff's motion for a preliminary injunction, Defendant chose to forego briefing and a hearing on the claims of liability raised in that motion-deciding instead
to consent to an order permanently enjoining Defendant from continuing the actions that,
according to Plaintiff, were violative of Plaintiff's servicemark and copyright. Furthermore,
Defendant's formal consent to that order is replete with disclaimers of liability. (*2) Similarly,
Defendant's submissions in opposition to Plaintiffs application for damages and attorney fees
contain numerous denials of liability. (*3) Finally, as is discussed more fully in Sections I and II
below, a determination that a prevailing plaintiff in a trademark action is entitled to attorney fees requires a determination that the defendant's infringing or diluting conduct was willful or tinged
with bad faith. This latter determination obviously presupposes an initial finding of infringement
and/or dilution.
Taken together, the preceding considerations raise the question whether the Court can
simply infer Defendant's liability on Plaintiff s underlying infringement and dilution claims from
Defendant's consent to the permanent injunction-thereby ignoring Defendant's disclaimers of
liability - or, instead, is obliged to decide these liability issues.
Unfortunately, however, there appears to be no clear, direct legal authority on this
question, and the legal rules bearing on it indirectly point in conflicting directions.
We begin with three Federal Rules of Civil Procedure. First, Federal Rule of Civil Procedure 65(d) provides in relevant part that "[e]very order granting an injunction - . . shall set forth the reasons for its issuance . . . ." Where such an order is issued on the basis of the defendant's consent to an injunction, however, this requirement could be satisfied by a simple statement of this fact (i.e., by the statement that the order is being issued because the defendant has consented to the injunction). Hence, this rule is of little help.
Similarly, Federal Rule of Civil Procedure 52(a) requires in relevant part that "[I]n all actions tried upon the facts without a jury or with an advisory jury, the court shall find the facts specially and state separately its conclusions of law thereon . . . ." At least one court has held that this requirement applies to actions seeking a permanent injunction. See United States v. Rohm & Haas Co., 500 F.2d 167, 177 (5th Cir. 1974) (emphasis added) (citations omitted) ("In cases tried without a jury, Rule 52(a) mandates findings of fact and conclusions of law sufficiently detailed and exact to indicate the factual basis for the District Court's ultimate conclusion. Although the rule refers only to the granting or refusing of interlocutory injunctions, the language 'all actions tried upon the facts without ajury' encompasses suits in which permanent injunctions are issued."). As the language of both the rule and that opinlion indicate, however, the rule appears to be predicated on the "trying" of an issue and subsequent deciding thereof by a court. In approving the agreement embodied in the permanent injunction Order, the Court did not decide any issue in dispute between the parties. Hence, Rule 52(a) provides no more guidance than does Rule 65(d).
Third, Federal Rule of Civil Procedure 68 creates a mechanism by which defendants "may serve upon the adverse party an offer to allow judgment to be taken against" them. As this mechanism is closely analogous to the more informal procedure of consenting to entry of a permanent injunction, the case law interpreting Rule 68 may shed some light on the issue under consideration here. Courts have held that Rule 68 offers can be made in cases seeking equitable relief, see 12 Wright, Miller & Marcus, Fed. Prac. & Proc. § 3001.1, at 79 (1997), and that defendants "can . . . disclaim liability while offering that judgment be entered as so specified," id. § 3002, at 93. "[S]uch a [disclaimer] provision may present nice questions if the offer provides for injunctive relief that is authorized only after a finding of a violation." Id. It is a very similar "nice question" with which we find ourselves presented here.
We turn, next, to four rules established in the case law that have some bearing on the issue. First, the standard for granting a permanent injunction is actual success on the merits. See, e.g., Hard Rock Cafe Int'l (USA) Inc. v. Morton, 1999 WL 701388, at *4 (S.D.N.Y. 1999). Hence, it could be argued that, having ordered a permanent injunction, this Court determined, ipso facto, that Plaintiff prevailed on its underlying trademark and copyright claims. Like Rule 52(a), however, this rule would seem to apply only when a court must decide whether a permanent injunction should issue. In endorsing the agreement embodied in the permanent injunction Order, the Court did not necessarily determine that Plaintiff had actually succeeded on the merits of its infringement claims. Hence, this rule is inconclusive.
Second, in SEC v. Bausch & Lomb, Inc., 82 F.R.D. 50, 51 (S.D.N.Y. 1979), the defendants, in consenting to a permanent injunction "neither admitted nor denied the allegations of the complaint [but] . . . . specifically waive[d] their right to require the Court to make findings of fact and conclusions of law." This case thus supports the view that liability should not be inferred from a defendant's consent to a permanent injunction.
Third, support for this view is likewise provided by a Second Circuit opinion involving claims similar to those brought by Plaintiff here, albeit a somewhat different procedural history, In Goodheart Clothing Co., Inc. v. Laura Goodman Enters., Inc., 962 F.2d 268 (2d Cir. 1992), a hearing was held on, and the court granted, plaintiff s motion for a preliminary injunction. Defendants then tendered a Rule 68 offer of judgment that provided for a permanent injunction, and the court accordingly issued an order of permanent injunction. Plaintiff then filed an application for costs and attorney fees under § 35(a) of the Lanham Act. The issue on appeal was whether the district court's finding (in its opinion granting the preliminary injunction) that defendant had acted in bad faith was law of the case for the purposes of the application for attorney fees. See id. at 272-74. The Court of Appeals ruled that, despite language in the district court's order purporting to incorporate its opinion on the motion for a preliminary injunction, the issue of defendant's bad faith, for purposes of the application for attorney fees, could not be taken as settled by the court's finding of bad faith in its preliminary injunction opinion. See id. at 274 ("It would . . . be anomalous at least in most cases . . . to regard the initial ruling as foreclosing the subsequent, more thorough consideration of the merits that the preliminary injunction expressly envisions."). Although this holding is thus not directly on point, it is consistent with the proposition that, unless a defendant explicitly concedes an issue in the consent to a permanent injunction, a court cannot infer the establishment of this issue from the defendant's consent.
In contrast, two Court of Appeals decisions provide some support for the view that liability can be inferred from consent to a permanent injunction. In a case from the closely related area of patent law, the Second Circuit held that "in a decree, at least in one entered by consent, either an adjudication of infringement, or a grant of some relief from which infringement may be inferred, is essential before any effect of res judicata can be given to it on the issue of [patent] validity." Addressograph-Multigraph Corp. v. Cooper, 156 F.2d 483, 485 (2d Cir. 1946). Applying this rule in a patent infringement case, the Eighth Circuit held that "[a]lthough the consent decree, under consideration here, does not explicitly adjudge that the defendants had infringed [plaintiff's patented] device, that finding is implicit in the decree. Infringement was the key issue in the original suit; injunctive relief was sought, and pursuant to consent of the defendants, they were 'permanently enjoined from infringing [plaintiff's] patents . . . .' Surely the injunctive relief granted is 'relief from which infringement may be inferred."' Crane Boom Life Guard Co. v. Saf-T-Boom Corp. 362 F.2d 317, 321-22 (8th Cir. 1966). It should be noted, however, that there is no indication in Crane Boom that the consent decree included disclaimers of liability.
Finally, we consider an argument based on § 35(a) of the Lanham Act, i.e., the statutory basis for an award of attorney fees and damages for trademark infringement and/or dilution. Like many other fee-shifting statutes, § 35(a) specifies that attorney fees are recoverable only by the prevailing party to a trademark suit. As such, a considerable jurisprudence has developed on the issue of when a party is to be deemed "prevailing" for the purpose of shifting fees. In suits
brought under the civil rights statutes, it is well-established law that "when relief has been
obtained by settlement or consent decree without a judicial resolution of the controversy, the
plaintiff is the prevailing party for fee award purposes." 1 Albe Conte, Attorney Fee Awards §
3.07, at 145 (2d ed. 1993) (citing Hanrahan v. Hampton, 466 U.S. 754 (1980); Maher v. Gagne,
448 U.S. 122 (1980)); see also Crowder v. Hous. Auth. of Atlanta, 908 F.2d 843, 849 (11th Cir. 1990) (holding that party who had secured injunctive relief by means of adverse party's consent to permanent injunction was prevailing party for purposes of attorney fee award under 42 U.S.C. § 1988). Although it appears that this rule has not been extended to applications for fees under § 35(a), it could be argued that this extension should now be made.
This argument should be resisted, however, because there is a crucial difference between the civil rights fee shifting statute, 42 U.S.C. § 1988, and § 35(a). Like the award of costs under §35(a), the award of attorney fees under § 1988 depends solely on a party's attaining "prevailing" status. See Hensley v. Eckerhart, 461 U.S. 424, 429 (1983) (internal citations and quotations omitted) (holding that "a prevailing party should ordinarily recover an attorney's fee unless special circumstances would render such an award unjust'). An award of attorney fees under § 35(a), in contrast, requires, in addition, a judicial determination that the party's infringing conduct was "exceptionally" bad. See Bowmar Instrument Corp. v. Continental Microsystems, Inc., 497 F.Supp. 947, 961 (S.D.N.Y. 1980) ("Costs, in contrast [to attorney fees], should be awarded with respect to the entire action because [§ 35(a) of the Lanham Act does not limit such an award to "exceptional cases" but makes it one of the routine elements of a prevailing plaintiff's recovery."). Because of this additional requirement, the mere determination that a party has prevailed in a trademark suit does not entitle the party to an award of attorney fees.
In view of this important difference between § 35(a) and § 1988, the § 1988 rule (concerning consent to permanent injunctions) could, at most, be extended analogically to § 35(a); i.e., it could be taken to suggest the rule that, under § 35(a), consent to a permanent injunction suffices to establish that the case is exceptional. The adoption of such a rule, however, would be misguided for at least two reasons. First, it would be inconsistent with established judicial interpretation of what constitutes an "exceptional case" under § 35(a). As is discussed more fully in Section I below, the Second Circuit has held that an exceptional case of trademark infringement or dilution is one involving willfulness, fraud, or bad faith. While it makes sense to hold that obtaining a permanent objection via the defendant's consent counts as prevailing in an action for injunctive relief, it makes far less sense to say that obtaining a permanent objection via the defendant's consent amounts to showing that the defendant infringed a trademark willfully, fraudulently, or in bad faith. This is because a finding of willful infringement requires a close examination of the defendant's conduct and state of mind-an examination, moreover, that must be carried out for each alleged trademark violation. If a plaintiff alleges both trademark infringement and trademark dilution, for example, it is possible that the defendant willfully infringed but did not willfully dilute.
Second, such a rule would have the per-verse effect of discouraging settlement. Defendants occasionally consent to injunctions because they simply lack the funds required for litigation. In fact, Defendant ELA suggests that this was its reason for consenting to the Court's Order of permanent injunction. (See Elias Aff. Para. 14 ("The plaintiff knew that we were a tiny company, and thus must have known that we could not afford to litigate.").) More important, defendants frequently consent to injunctions because they believe they are likely to lose on only one or some of the plaintiff's claims. In the present case, for instance, it is especially implausible to contend that Defendant, in consenting to the permanent injunction, conceded liability on Plaintiff's copyright claim based on Defendant's "framing" of Plaintiff's web site within Defendant's web site. As Defendant (correctly) points out, no court to date has held that framing constitutes copyright infringement. (See Mem. Opp. at 3.) Therefore, the proposed rule would create a disincentive to consent; defendants who believed that they were liable on only some of the plaintiff's claims would be less likely to consent to an injunction if their doing so was necessarily construed as an admission of liability on all of the plaintiffs claims. In other words, the argument has the effect of vitiating the practice of including disclaimers of liability in consent agreements. Yet many consent agreements would never be signed without the inclusion of such disclaimers.(*4)
Taking the foregoing considerations into account, we found that, on balance, the better view is that, for the purposes of deciding an application for attorney fees, a defendant's liability on the underlying trademark or copyright claims cannot be simply inferred from the defendant's consent to a permanent injunction. In light of this, we concluded that we are obliged to make findings of fact and draw conclusions of law concerning Plaintiff's substantive claims to the extent necessary for deciding Plaintiff's application for damages and attorney fees. Upon reaching this conclusion, we advised the parties of our belief that Plaintiff's fee application required the Court to make findings of fact and reach conclusions of law on the merits of Plaintiff's claims. We asked the parties whether, in light of this, there was any desire to submit any additional documentation or present any live testimony. Plaintiff submitted an additional brief affirmation, and Defendant submitted a brief letter. Neither party, however, expressed a desire to present live testimony.
