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National Products, Inc. v. Arkon Resources, Inc.

United States District Court, W.D. Washington, Seattle

November 16, 2017

NATIONAL PRODUCTS, INC., Plaintiff,
v.
ARKON RESOURCES, INC., Defendant.

          ORDER GRANTING IN PART AND DENYING IN PART THE PARTIES' MOTIONS IN LIMINE

          JAMES P. DONOHUE, Chief United States Magistrate Judge

         This matter comes before the Court on the parties' motions in limine. Dkt. 92; Dkt. 98.

         The parties are advised that the findings and conclusions regarding the motions in limine, like all rulings in limine, are preliminary and can be revisited at trial based on the facts and evidence as they are actually presented. Subject to these principles, the Court rules as follows for the guidance of the parties:

         I. PLAINTIFF'S MOTIONS IN LIMINE

         1. Motion to Exclude Evidence and Testimony Regarding Arkon's Estimated Overhead and Costs of Goods for Calculating Recoverable Infringer's Profits.

         GRANTED IN PART AND DENIED IN PART. The Lanham Act provides that “in assessing profits the plaintiff shall be required to prove defendant's sales only; defendant must prove all elements of cost or deduction claimed.” 15 U.S.C. § 1117(a). If an infringer were not permitted to deduct all costs incurred in generating the gross revenues, including overhead costs, the trademark owner would be awarded more than just profits and the infringer would not only be deprived of whatever benefit it derived from the infringement, as was the apparent intent of Congress, but would also suffer affirmative punishment. In the Ninth Circuit, a defendant may only deduct costs if it proves that such costs were “of actual assistance” in the production, distribution, or sale of the infringing product. Kamar Int'l, Inc. v. Russ Berrie & Co., 752 F.2d 1326, 1332 (9th Cir. 1984); see also Winterland Concessions Co., v. Fenton, 835 F.Supp. 529, 533 (N.D. Cal. 1993) (same). If the defendant fails to adequately prove such costs, the trademark owner is entitled to all gross profits. Lindy Pen Co. v. Vic Pen Corp., 982 F.2d 1400, 1408 (9th Cir. 1993), abrogated on other grounds by SunEarth, Inc. v. Sun Earth Solar Power Co., 839 F.3d 1179 (9th Cir. 2016) (“Once the plaintiff demonstrates gross profits, they are presumed to be the result of the infringing activity. The defendant thereafter bears the burden of showing which, if any, of its total sales are not attributable to the infringing activity, and, additionally, any permissible deductions for overhead.” See also Nintendo of Am., Inc. v. Dragon Pac. Int'l, 40 F.3d 1007, 1012 (9th Cir. 1994) (“[W]here infringing and noninfringing elements of a work cannot be readily separated, all of a defendant's profits should be awarded to a plaintiff”).

         National Products, Inc. (“NPI”) moves the Court to exclude a report titled “Sales by Year by Item Number Number, ” which purports to list sales by Arkon of its accused products through June 29, 2016. Dkt. 99 (Ware Decl.), Ex. 1-2 (Sales spreadsheets). Arkon's witness and the author of this report, Steven Hull, testified during his deposition that the “estimated cost of goods sold” and “overhead expense” percentages in the chart (59% and 38%, respectively) were not, in fact, tabulated from actual costs incurred from the sale and manufacture of only the accused products. Id., Ex. 3 (Hull Dep. Tr.) at 54:17-69:22; Ex. 6 (financial control sheet)). Instead, they were calculated by dividing expenses incurred for all Arkon products, whether accused or not, from the sales of all Arkon products. Id. Arkon's damages expert, Thomas Young, then took these estimated percentages into account in his August 19, 2016 report to calculate a “net profit” of between 2-3% for the accused product for the purpose of determining infringer's profits under 15 U.S.C. § 1117(a). Id., Ex. 7 (Young Report) at 7.

         NPI argues that Mr. Hull's testimony revealed that with the exception of legal fees, Arkon would have incurred the overhead expenses regardless of whether it sold the accused products or not. Id., Ex. 3 (Hull Dep. Tr.) at 91:5-92:24. NPI further argues that the estimated costs of goods sold percentage is unrelated to Arkon's actual cost of goods for the accused products in the accused product sales spreadsheet. Id., Ex. 2 (sales spreadsheet). See also Dkt. 99, Ex. 3 (Hull Dep. Tr.) at 88:11-16 (agreeing with the statement that the Est. COG number in the spreadsheet “doesn't reflect any actual cost for the purchase of that item by Arkon.”). Thus, NPI contends that Arkon cannot show that any of these overhead expenses actually assisted in the production, distribution, or sale of the accused products, because Arkon's witness stated that the only new expenses in the “estimated overhead costs” incurred were for the legal fees incurred in this litigation, which are not deductible expenses in calculating lost profits. Id., Ex. 3 (Hull Dep. Tr.) at 91:5-92:24. Thus, NPI asserts that Arkon's “estimated overhead costs” should be excluded, as improperly based upon all products. Similarly, NPI asserts that Arkon's estimates for the cost of goods sold (“COGS”) has no relationship to the actual costs of the accused products, and should therefore be excluded. NPI contends that Arkon and its damages expert could have computed its actual cost of goods sold from manufacturer and shipping invoices available to it and produced in this litigation, but instead relied on an “Est COGS at 59%” figure which “doesn't reflect any actual cost for the purchase” of the accused products and therefore do not reflect costs that were “of actual assistance in the production, distribution or sale of the infringing products.” Kamar Int'l, 752 F.2d at 1332; 15 U.S.C. § 1117(a).[1] Thus, plaintiff asks the Court to exclude all evidence and testimony at trial regarding Arkon's cost and expense estimates, which are found in Arkon's summary financial documents, as well as the damages report of Thomas Young.

         Arkon responds that although NPI believes that the costs and overhead were calculated incorrectly, the summary chart was but one of the pieces of evidence relied upon by defendant's expert. Arkon alleges that Steven Hull is a fact witness, and not an expert witness, and the summary charts are not direct evidence. Arkon asserts that “whether or not the chart is admitted into evidence, there will be substantial evidence of costs in this matter.” Dkt. 108 at 5. Further, as a lay witness who is the controller of the company, Mr. Hull is allowed to give limited opinion testimony as to costs, and he is likely to testify as to overhead costs, both general and specific to these products. Id. Arkon points out that NPI has not objected to evidence of the bare costs of the parts from Arkon's suppliers, and Arkon provided detailed income statements for 2014, 2015, and part of 2016 generated by its computer accounting system that itemized costs and operating expenses. Dkt. 111 (Karish Decl.), Ex. O. Costs and overhead were also detailed at length in the deposition of Mr. Hull. Id., Ex. P (Hull Dep. Tr.) at 54:6-69:12. Thus, Arkon argues that NPI should be able to prevent Arkon from presenting testimony on “estimated” costs and overhead when it will already be presenting testimony on direct costs (in the form of dozens of receipts and invoices as well as from business records that are admissible under Fed.R.Evid. 803(6)) from a witness with direct knowledge of the costs and overhead.

         NPI's motion is GRANTED IN PART and DENIED IN PART. Specifically, NPI's request to exclude the summary report titled “Sales by Year by Item Number, ” which purports to list sales by Arkon of its accused products through June 29, 2016, is GRANTED. See Dkt. 99 (Ware Decl.), Ex. 1-2 (Sales spreadsheets). As discussed below, NPI's motion to exclude the damages report of Arkon's expert Thomas Young, Dkt. 99 (Ware Decl.), Ex. 7, is also GRANTED. However, NPI's motion to exclude all “all evidence and testimony at trial regarding Arkon's cost and expense estimates” is DENIED.

         NPI is correct that Arkon's witness and the author of the report, Steven Hull, testified during his deposition that the “estimated cost of goods sold” and “overhead expense” percentages in the chart (59% and 38%, respectively) were not tabulated from actual costs incurred from the sale and manufacture of only the accused products, but were instead calculated by dividing expenses incurred from the sales of all Arkon products. Id., Ex. 3 (Hull Dep. Tr.) at 54:17-69:22; Ex. 6 (financial control sheet)). Notably, Arkon does not attempt to argue that the costs and overhead figures in that chart were calculated correctly. At oral argument, Arkon simply asserted that it would be very burdensome to provide more exact figures. The summary charts are not admissible. Dkt. 99, Ex. 1-2.

         However, the Court agrees with Arkon that although the Arkon's summary financial documents should not be admitted at trial, Mr. Hull shall be allowed to testimony as a lay witness regarding his direct knowledge of the costs and overhead costs, both general and specific to the accused products. In addition, Arkon can present direct evidence to substantiate these costs. To the extent that Mr. Hull provides opinion testimony regarding costs or overhead, plaintiff shall have an opportunity to cross-examine him and also impeach him based upon his prior deposition testimony.

         2. Motion to Exclude Expert Testimony of Thomas Young.

         GRANTED. NPI argues that Arkon's damages expert, Thomas Young, should not be permitted to testify at trial because his expert report purporting to calculate the “net profit” from the sale of accused products utilized the faulty figures (discussed above) provided by Mr. Hull and unclear methodology. Dkt. 98 at 6-7. As discussed above, Mr. Young concluded that “Arkon likely made around $7, 152 in net profit from sales of the products at issue after September 30, 2016” after he used Steven Hull's estimate that the cost of goods sold and overhead were 59% and 38%, respectively, and subtracted the combined percentage from 100% (representing total revenue). Dkt. 98, Ex. 7 (Young Report) at 2, 8. NPI contends that because “all evidence, arguments or reference related to the ‘Est COGS%' and ‘EST OH%' should be excluded as irrelevant, Mr. Young should be precluded from testifying as to the infringer's net profits opinions in his report.” Dkt. 98 at 7. In addition, “because Mr. Young's report does not disclose any other opinion, all other potential testimony from Mr. Young should be excluded as being outside the scope of his report.” Id. (citing Fed.R.Civ.P. 26(a)(2)(b), 27(c)(1)).

         Arkon responds that the Court should reject plaintiffs argument that because Mr. Young relies upon information that should be excluded under Motion in Limine No. 1, Mr. Young's opinion should be excluded as a discovery sanction for going beyond the extent of facts required to be disclosed under Fed.R.Civ.P. 26. Dkt. 108 at 7. Arkon asserts that “where an expert report relies on allegedly faulty data, that data goes to the weight - not the admissibility - of the report. Plaintiff may take issue with some of the facts or summary data presented to Young, but that is no reason to prevent Young from testifying.” Id. In addition, Arkon points out that NPI did not do a proper Daubert/FRE 702 analysis regarding Mr. Young, who relied upon several documents in reaching his conclusions. Id. at 7-8. Arkon asserts that “there are fertile grounds for inquiry at trial, but plaintiffs problem with one narrow document relied upon by Young is not sufficient to completely foreclose that inquiry.” Id. at 8.

         The Court agrees with NPI that Arkon's damages expert Thomas Young should not be permitted to testify at trial. Mr. Young's report does not explain his methodology, but appears to have calculated the “net profit” from the sale of accused products by utilizing the faulty figures (discussed above) provided by Mr. Hull. Dkt. 98 at 6-7. It appears undisputed that Mr. Young utilized Steven Hull's estimates regarding cost of goods sold and overhead at 59% and 38%, respectively, and then subtracted the combined percentage from 100% (representing total revenue), to arrive at a net profit of between 2-3%. Dkt. 98 at 7; Dkt. 99, Ex. 7 (Young Report) at 2, 8. Arkon simply argues that although “the document at issue in Motion in Limine No. 1 was relied upon by Young, ” it is not necessarily “the sole basis for his conclusions.” Dkt. 108 at 8. As the only opinion offered in Mr. Young's report was the amount of Arkon's net profits from the sales of the products at issue after September 30, 2016, and it is undisputed that he relied upon a faulty estimates to calculate this number, Arkon has not established how Mr. Young's report or testimony would be helpful to the jury. Instead, any possible testimony would be related to the subject matter of Motion in Limine No. 1, or new opinions that are outside the scope of his report.

         3. Motion to Exclude Evidence, Attorney Arguments or Reference That Any Portion of Arkon's Post-Filing Revenue for Product Numbers Corresponding to the Accused Products is Not, in Fact, Revenue from Arkon's Infringing Activity.

         DENIED. NPI asks the Court to preclude Arkon from arguing that any portion of the revenue in its financial spreadsheets (Dkt. 99, Exs. 1-2) post-dating the filing of plaintiff s complaint should be excluded from damages, as that revenue is attributable to Arkon's alleged infringing activity and therefore part of its relevant gross profits. Dkt. 9 at 7-8. Specifically, NPI argues that Arkon began selling the accused robust mount products in March 2014, and selling a redesigned version of the robust mounts in 2016. Id. at 8. NPI initiated this action on September 30, 2015, accusing specific products in Arkon's “robust mounts” product line of infringing NPI's registered hourglass shape trade dress. Dkt. 1. Although the redesigned version was introduced by Arkon in response to this lawsuit to replace the original hourglass shaped robust mounts, the redesigned products share the same product identifier numbers as their original counterparts. Id. In addition, NPI asserts that Arkon did not stop selling its originally designed robust mounts until an unspecified date in 2016, and only began selling the redesigned version after it ran through its inventory of originally designed robust mounts.[2]Dkt. 99, Ex. 3 (Hull Dep. Tr.) at 94:7-96:5. It is also undisputed that Arkon continued to use pictures of its original robust mount design with an hourglass shape to sell its redesigned products in some of its marketing materials well into 2016. Dkt. 98 at 8-9 (citing Dkt. 99, Exs. 13-36).[3]

         Thus, NPI argues that Arkon not only infringed by distributing and selling the original hourglass-shaped robust mounts, but also by marketing and advertising the original hourglass-shaped mount in connection with the sales of the redesigned robust mounts. Dkt. 98 at 9. NPI believes it is entitled to all of Arkon's post-filing revenue disclosed in its financial spreadsheets, because all that revenue is derived from this infringing activity. Id. Finally, NPI points out that Arkon chose not to provide sales revenue data in a form that would permit the parties to exclude revenue from the redesigned products, on the grounds that it would be too difficult to pinpoint exactly when specific sales of a model of accused produced ceased and the redesigned version of that particular model began. Id. at 10.

         Arkon contends that there is no law that supports NPI's argument that all sales during a period of allegedly infringing advertising, when some marketing materials that still displayed the original design were “in the pipeline, ” also constitute infringement and entitle NPI to all revenues from that period. Dkt. 108 at 8. Instead, Arkon asserts that NPI can object under Rule 37 at trial if Arkon attempts to introduce evidence it should have disclosed in discovery.

         The Court agrees with Arkon, and declines to find that all the post-filing revenue in its financial spreadsheets are necessarily part of Arkon's gross profits attributable to its use of the hourglass shape. As discussed below with respect to Arkons' Motion in Limine No. 4, the Court finds that evidence of Arkon's redesigned products shall be excluded under Fed.R.Evid. 407 and 408 to avoid undue prejudicial to Arkon as a result of its remedial measures.

         Information about Arkon's redesigned products is not necessary to explain why certain sales in Arkon's sales reports should be excluded. Instead, the parties should have witnesses simply explain which invoices should be considered in this case. As the Court ruled at the conclusion of oral argument on the motions, the relevant time period for sales of the accused products in this case is between the October 2, 2015 service date of the complaint and April 30, 2016.

         4. Motion to Exclude Evidence, Attorney Arguments or Reference to Arkon's Assertion that NPI's Federal Registration of the Hourglass Shape Trade Dress was Fraudulently Procured.

         GRANTED. NPI asks the Court to exclude evidence, attorney arguments or reference at trial to regarding Arkon's assertion that NPI's federal registration in its hourglass shape trade dress was fraudulently procured. Dkt. 98 at 10. NPI asserts that this issue was summarily adjudicated in the Court's December 13, 2016 Order Granting In Part Defendant's Motion for Summary Judgment. Dkt. 74. Specifically, Judge Lasnik held that “[a]lthough defendant is certainly free to argue that the hourglass shape of plaintiff s mounts is generic, that the feature is functional or utilitarian, and that the shape has not acquired a secondary meaning, it has not, as a matter of law, overcome the contrary presumptions that the federal registration creates on these issues.” Id. at 3-4. Indeed, Judge Lasnik found that “[n]o deception has been shown.” Id. . at 3.

         Arkon argues that plaintiff has the burden of proving that its trade dress is nonfunctional and has acquired secondary meaning, and NPI intends to rely heavily on the presumption of validity accorded by its trademark registration. Dkt. 108 at 10. Arkon asserts that the presumption of validity “can be attacked, as the Court recognized in its order on Defendant's Motion for Summary Judgment[.]” Dkt. 108 at 10 (citing Dkt. 74 at 3). Arkon points out that by making the arguments invited by the Court, Arkon will necessarily be arguing that the USPTO wrongly granted U.S. Trademark Registration No. 4, 25, 4086. Id. Arkon asserts that “to do that, Defendant needs to be able to explain the problems and weaknesses of the evidence Plaintiff provided to the USPTO, particularly the consent judgment that was the major piece of evidence used to show secondary meaning.” Id. at 10-11. Arkon wants to show evidence of the various versions of the consent judgment, and “explain[] the evidence the USPTO relied on and why that evidence is flawed[.]” Id. at 11. Arkon understands that it cannot use the term “fraud” or argue that NPI “fraudulently obtained” the trademark at issue. Id.

         NPI's motion, which is very narrowly framed, is granted. Judge Lasnik has previously considered, and rejected, Arkon's argument that NPI's federal registration in its hourglass shape trade dress was fraudulently procured. Dkt. 74 at 3-4. As a result, Arkon may not make such an argument at trial in this case. However, Arkon may argue that the earlier versions of the consent judgment presented to Judge Pechman establish that the USPTO relied on flawed evidence. In addition, some evidence related to the patent may be relevant to the issue of functionality and secondary meaning, and may be admissible for the purpose of arguing that the presumption of validity attached to the trademark registration should not apply in light of the patent filing.

         5. Motion to Exclude Evidence, Attorney Arguments, or Reference Regarding NPI's Alleged Claiming of the Hourglass Shape During Prosecution of the ‘885 Patent Family.

         DENIED. NPI seeks to exclude evidence that the hourglass shape was claimed, or attempted to be claimed, in patent applications filed by NPI and Mr. Carnavali. Dkt. 47 at 1, 7- 10. Arkon has previously argued that (1) certain “means-plus-function” elements in the U.S. Patent No. 5, 845, 885 (“the ‘885 patent”) cover the hourglass shape, and (2) that “reduced diameter waist” language in claims that were submitted, then ...


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