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U.S. – Attorney’s fee awards in Lanham Act cases: An “exceptional” outcome

Verisign, Inc. v. XYZ.COM, LLC, No. 17-1704, WL 2018 WL 2407644 (4th Cir. May 29, 2018)

In this recent decision, the Fourth Circuit Court of Appeals clarified the requisite showing for obtaining an award of attorney fees under the Lanham Act. Reversing a decision out of the Eastern District of Virginia, the Fourth Circuit held that a party seeking attorney fees need only prove that its case is “exceptional” by a preponderance of the evidence, and not by the more stringent clear and convincing standard applied by the district court (See id. at II).

Factual Background

 In 2014, plaintiff Verisign, a company that sells and operates internet domain names, sued competitor defendant XYZ.com, LLC (“XYZ”) for false advertising under the Lanham Act – a plaintiff asserting a Lanham Act false advertising claim under 15 U.S.C. § 1125(a) must establish, among other things, that the defendant made a false or misleading description or representation of fact in a commercial advertisement about his own or another’s product that was material, such that it was likely to influence purchasing decision. In this case, the plaintiff sued over XYZ’s promotion of allegedly high daily sales of XYZ domain names where, according to Verisign, XYZ had been giving the domain names out for free (see *1 Verisign, Inc. v. XYZ.COM LLC, 848 F.3d 292, 298-99 (4th Cir. 2017)).   In ruling in XYZ’s favor on summary judgment, the district court, as affirmed by the Fourth Circuit Court of Appeals, held that XYZ’s statements regarding its profitability and number of new customers were neither false nor material to customer purchasing decisions as required for a successful false advertising claim under Section 43(a) of the Lanham Act (see id. at *2; 15 U.S.C. § 1125(a)(1)).

After prevailing on summary judgment, XYZ moved for attorney fees under Section 1117(a) of the Lanham Act, which permits a “court in exceptional cases [to] award reasonable attorney fees to the prevailing party” (15 U.S.C. § 1117(a)). Following the Supreme Court’s interpretation of an “exceptional case” in an identical provision of the Patent Act, the Fourth Circuit has held that a determination of “exceptional” cases requires, “in light of the totality of the circumstances, that:  (1) there is an unusual discrepancy in the merits of the positions taken by the parties, based on the non-prevailing party’s position as either frivolous or objectively unreasonable; (2) the non-prevailing party has litigated the case in an unreasonable manner; or (3) there is otherwise the need or particular circumstances to advance considerations of compensation and deterrence” (See Georgia-Pacific Consumer Products LP v. von Drehle Corp., 781 F.3d 710, 719-21 (4th Cir. 2015) relying on Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014)).  Applying these factors, the district court held that XYZ had failed to establish that its case was exceptional with clear and convincing evidence (See Verisign, WL 2018 at *2-*3).

The Fourth Circuit’s Decision

Reviewing the denial of attorney fees under the Lanham Act under an abuse of discretion standard, the Fourth Circuit held that “a prevailing party need only prove that a case is exceptional under the Lanham Act by a preponderance of the evidence, and not, as the district court required, clear and convincing evidence.” See id. at *2 (emphasis added).  The Court of Appeals looked to the Supreme Court’s ruling in Octane Fitness emphasizing that neither the plain language nor purpose of the statute suggest that a party must meet the higher clear and convincing standard when seeking an award of attorney fees under either the Patent Act or Lanham Act.  The Fourth Circuit noted that this ruling would align the Fourth Circuit with six other Circuit Courts of Appeal – including the Third, Fifth, Sixth, Ninth, Eleventh, and Federal Circuits – which have either explicitly adopted the preponderance of the evidence standard in examining an exceptional case under the Lanham Act or otherwise applied Octane Fitness to Lanham Act cases (See id. at *3).

The Fourth Circuit also reiterated the Supreme Court’s rejection of the Federal Circuit’s “narrow interpretation” requiring bad faith or “independently sanctionable” behavior for a case to qualify as “exceptional.” Instead, the Fourth Circuit held that there is no statutory or precedential reason to require bad faith or sanctionable conduct to obtain attorney’s fees under the Lanham Act (See id. at *5-*6).

 Practical Implication

This case offers important clarification on the Fourth Circuit standard for assessing an award of attorney fees under the Lanham Act. The Fourth Circuit specifically rejected the “bad faith” or “independently sanctionable conduct” standard to justify an award of attorney fees.  Instead, the court concluded a prevailing party need only establish, by a preponderance of the evidence, that its case is otherwise exceptional.  This lowered standard may result in the more frequent grant of fee awards going forward.