Nike is off the hook from paying $5 million in attorney’s fees to a small sportswear company that sued it for trademark infringement in 2019 thanks to a decision from the U.S. Court of Appeals for the Third Circuit, which overturned a lower court’s ruling that the case is “exceptional.” In remanding the U.S. District Court for the Eastern District of Pennsylvania’s decision on the issue of attorney’s fees, the appeals court highlighted how a finding of exceptionality should not rely on “general policy considerations” like a “daunting David and Goliath” matchup that focuses on the size of the parties and their available resources, independent of the actual details and events of the case. Instead, the Third Circuit panel held that courts should focus on the “totality of the circumstances” of the immediate case at hand.
The underlying case – which pit Norristown, Pennsylvania-based Lontex Corporation against the global sportswear giant – centers on Nike’s use of “Cool Compression” to describe some of its shoes in internal documents and sales catalogs, language that third party retailers used to market the products to their own customers. The problem, according to Lontex, is that it started using the mark on shoes it sells to professional athletes and consumers long before Nike adopted it, and in fact, received a trademark registration for the mark back in 2008.
When Nike continued to use the trademark even after Lontex’s legal team put it on notice of its infringement, Lontex sued, and a jury, in finding Nike liable for willful and contributory infringement, ultimately awarded Lontex $142,000 in compensatory damages and $365,000 in punitive damages in 2019, with the court trebling the compensatory damages after a series of post-trial motions.
During the post-trial phase, the court also ordered Nike to pay Lontex attorney’s fees after determining that the matter met the Latham Act’s threshold for an “exceptional” case – the standard for awarding attorney’s fees in trademark infringement lawsuits. But in vacating the award and remanding it back to district court, the Third Circuit held that the lower court had relied on policy considerations “that apply in typical trademark infringement cases” instead of facts that were specific to the case at hand. According to the Third Circuit panel, a finding of exceptionality requires that the case “stands out from others with respect to the substantive strength of a party’s litigating position,” as well as the “unreasonable manner in which the case was litigated.”
And while “the behavior of the parties during litigation” may be relevant, the appeals court stated, exceptionality should not depend on “extralegal assessment” of the parties’ sizes and financial resources independently of the case.
Explaining its reasoning further, Judge Thomas Hardiman, writing for a three-judge panel, stated in the court’s opinion that the lower court’s reliance on the differences in the size of the two companies and their respective resources was not enough. Just because a trademark lawsuit features a “major United States corporation with much larger resources” in a “daunting David and Goliath” matchup does not make the case exceptional, the court wrote. The size of the companies involved in a trademark infringement lawsuit “may inform” a finding of exceptionality, but the Third Circuit pointed out that the district court found Nike had not engaged in any “unfair, improper litigating strategy” and that it did not litigate the case “in an unreasonable manner.” As such, the parties’ “respective sizes and resources, without more, are not relevant considerations for exceptionality.”
The appeals court also zeroed in on the lower court’s finding that trademark cases are expensive to litigate, and that “as a matter of policy,” it is not realistic to expect a small company like Lontex to be able to pay the legal bills of a major law firm. At the same time, the court shot down the lower court’s emphasis on the fact that Lontex had “showed substantial strength” in the case, with the the Third Court holding that the district court “did not provide any explanation for this conclusion.” And still yet, the court held that the company’s victory on its own does not necessarily mean it was an exceptional case without further support.
In addition to remanding the attorney’s fees award, the Third Circuit rejected Nike and Lontex’s respective appeal and cross-appeal. The court found that the district court had not abused its discretion on several motions for a judgment as a matter of law that Nike lodged during the original proceedings, which focused on the damage awards and related arguments. For instance, the appeals court found that Nike’s assertion that the jury should not have been allowed to infer willfulness based on its use of Lontex’s mark even after it received a cease-and-desist letter did not hold water because the company had continued using the trademark even after Lontex’s legal team told it to stop.
On the other side of the matter, Lontex sought to overturn the lower court’s dismissal of a counterfeiting claim it had made in the original lawsuit, which was also rejected by the Third Circuit. In analyzing the elements required for Lontex’s counterfeiting allegation, the Third Circuit found that an ordinary consumer would not find the similarity of the two marks “identical” or “substantially indistinguishable” – required elements for a counterfeiting ruling. Because Nike used “Cool Compression” as a part of longer product names accompanied by brand identifiers like “Air Jordan” and Lontex did not, the appeals court said the counterfeiting claim had been correctly decided.
THE BIGGER PICTURE: A party running into an “exceptionality” roadblock when seeking attorney’s fees in a trademark infringement case is not striking in itself. For example, the 2014 trademark case that Louis Vuitton waged against My Other Bag (“MOB”) also saw the smaller of the two parties asking the court for costs, and making many of the same arguments that the district court in the Lontex case ended up giving the greenlight to. In that matter, MOB argued the case was exceptional because “Louis Vuitton took advantage of its huge size and litigation budget to try to grind a much smaller company into submission; disparity of size has repeatedly been invoked in other cases to support a finding of exceptionality.”
However, similar to the Nike v. Lontex case, the court rejected MOB’s push for fees, noting that Louis Vuitton had not litigated the case in “an exceptionally vexatious and coercive manner considering the totality of the circumstances” – highlighting Louis Vuitton’s non-frivolous arguments in support of its trademark claims, the minimal evidence of improper conduct throughout the litigation, and the absence of proof that Louis Vuitton brought its claims solely because of an improper motive.
The case is Lontex Corporation v. Nike, 22-147 & 22-1484 (3rd. Cir.)
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