Opinion ID: 767757
Heading Depth: 3
Heading Rank: 1

Heading: Damage Control Costs

Text: 37 The first form of relief to which Balance Dynamics stakes a claim is that of damage control--the costs of responding to Schmitt's false advertising. 2 Balance Dynamics argues that it can receive compensation for its damage control activities without showing actual confusion or whatare commonly called actual damages. In other words, Balance Dynamics argues that Magistrate Judge Pepe was correct as a matter of law when he recommended denying Schmitt's motion for summary judgment on the issue of loss control. The R&R that Judge LaPlata adopted states: 38 In light of the inquiries made by customers and other business contacts, a factfinder could conclude that plaintiff's actions in response to Schmitt's letter were reasonable attempts to nullify any potential damage to the corporation. A factfinder could also conclude that the letter caused serious risk to plaintiff's future sales and reputation.... Unlike plaintiff's claim for lost profits and costs, for purposes of this issue it is irrelevant whether plaintiff actually suffered damage through lost or potential sales.... Contrary to defendants' assertion, plaintiff's damage control activities are recoverable under the Lanham Act, which authorizes an award for any damages plaintiff sustains. 15 U.S.C. § 1117(a)(2). But for Schmitt's letter, plaintiff would not have incurred any expenses because it would not have had to take any corrective action. Therefore, the cost of plaintiff's response activities, if found reasonable and necessary by a jury, constitute 'damage' under the Lanham Act. (emphases in original). 39 On the other hand, Schmitt relies on Electronics Corp. of America v. Honeywell, 358 F.Supp. 1230 (D.Mass. 1973), to suggest that damage control costs are not recoverable in the absence of actual confusion or actual damages. In Electronics Corp. of America, plaintiff had waived any attempt to show so-called actual business harm in dollars and cents but nevertheless pressed its case for damages, punitive damages, costs, and attorney fees. Id. at 1233. The court held that the plaintiff could not recover in the absence of actual business harm. Id. at 1234. 40 Like many other circuits, we have held that where plaintiffs seek to recover monetary damages for false or misleading advertising that is not literally false, a violation can only be established by proof of actual deception (i.e., evidence that individual consumers perceived the advertisement in a way that misled them about the plaintiff's product). Podiatric Physicians, 185 F.3d at 614 (quoting Sandoz Pharm. Corp. v. Richardson-Vicks, Inc., 902 F.2d 222, 229 (3d Cir. 1990)) (citations omitted). In Podiatric Physicians, we also set forth a more lenient standard for obtaining injunctive relief under the Lanham Act: injunctive relief may be obtained by showing only that the defendant's representations about its product have a tendency to deceive consumers.... Id. at 618 (quoting Max Daetwyler Corp. v. Input Graphics, Inc., 608 F.Supp. 1549, 1551 (E.D. Pa. 1985)). This lower standard has arisen because when an injunction is sought, courts may protect the consumer without fear of bestowing an undeserved windfall on the plaintiff. Id. 41 Although Podiatric Physicians held that recovery of monetary damages is only available upon a showing of actual confusion, the question of the standard upon which damage control costs may be recovered is one of first impression. None of the courts requiring actual confusion as a prerequisite to monetary recovery have applied that rule to limit recovery for damage control activities; their opinions simply were not written to take account of that kind of damages. Rather, when courts have held that actual confusion must be demonstrated before monetary damages are recoverable, they have referred to plaintiffs who were seeking damages that would have been suffered in the marketplace, i.e., lost sales, lost profits, or loss of goodwill. See, e.g., Web Printing Controls, Inc., 906 F.2d at 1204-05 (plaintiff wishing to recover damages for a violation of the Lanham Act must prove actual injury, i.e., a loss of sales, profits, or present value (goodwill).); Podiatric Physicians, supra; PPX Enterprises, Inc. v. AudioFidelity Enterprises, Inc., 818 F.2d 266(2d Cir. 1987); Electronics Corp. of America v. Honeywell, supra. 42 Actual confusion is a prerequisite to an award of such marketplace damages because actual confusion tends to show that these hard-to-prove damages probably exist. Yet there is no need to use such proxies with regard to damage control expenses, for the proof of such expenses is in the possession of the plaintiff and is therefore easily produced. Hence, there seems little reason to require actual confusion before awarding compensation for damage control expenses, even though such an award is monetary. As Magistrate Judge Pepe noted, the plain language of the Lanham Act permits recovery of any damages sustained by the plaintiff upon a showing that the plaintiff is or is likely to be damaged by misrepresentative advertising. 15 U.S.C. §§ 1125(a), 1117. Magistrate Judge Pepe's view is reinforced by Podiatric Physicians, which allows a plaintiff to establish liability under the Lanham Act by showing that a false advertisement has a tendency to deceive a substantial portion of the audience, and that it has caused harm to the plaintiff. 185 F.3d at 613. 43 Damage control expenses must be treated differently from marketplace damages because, like an injunction, damage control is undertaken precisely to prevent such things as lost sales, lost profits, and lost goodwill. As is the case with plaintiffs seeking injunctive relief, plaintiffs engaging in damage control are still at a stage where substantial uncertainty exists as to the extent of business harm being inflicted by the false advertising. Cf. ALPO Petfoods, Inc. v. Ralston Purina Co., 997 F.2d 949, 952 (D.C. Cir. 1993). In the present case, Balance Dynamics first heard about Schmitt's March 16, 1993 letter when a customer faxed it to Mr. Schulte. The letter contained disparaging remarks which, if true, would ruin Balance Dynamics' business. Not yet knowing whether the letter was true or false, Schulte called his most important customers and found that most of them had received the letter and were concerned about the regulations pertaining to the halon balancer. Meanwhile, other customers initiated contact with Mr. Schulte or other officers of Balance Dynamics, and also expressed serious reservations about the continued use of the halon balancer. Balance Dynamics then investigated the veracity of the claims made in the letter and found they were false. 44 At this point, with 3,200 letters in circulation, must Balance Dynamics wait to take action until a customer actually tells someone at Balance Dynamics that she will not buy the halon balancer? Is Balance Dynamics limited to seeking injunctive relief to stop future letters being mailed out, when 3,200 people are reading statements about the halon balancer that, if believed, will be fatal to Balance Dynamics' business? At such a juncture, an injunction may be a mere palliative. We think it appropriate that Balance Dynamics, upon recognizing the reasonable likelihood of confusion, would undertake to protect its business. Cf. ALPO Petfoods, Inc. v. Ralston Purina Co., 997 F.2d at 952. We also think it appropriate that Schmitt, having violated the Lanham Act and thereby being responsible for any damages caused by such violation, should compensate Balance Dynamics for any reasonable and necessary expenses incurred in mitigating the detrimental effects of that transgression. Id. 45 Consequently, similar standards as apply to injunctive relief should also apply to recovery of damage control expenses. That is, damage control expenses should be recoverable upon a showing of the likelihood of actual confusion, rather than upon a showing of actual confusion itself. This rule recognizes that it is unreasonable to expect a businessperson faced with a Lanham Act violation to sit idly by until a customer manifests actual confusion. The law should encourage quick responses and the mitigation of damage, and should not require parties to suffer an injury beforetrying to prevent it. Moreover, a rule allowing recovery for damage control costs upon the likelihood of actual confusion does not risk an undeserved windfall to the plaintiff since such an award would not speak to the underlying marketplace damages. Cf. Podiatric Physicians, 185 F.3d at 618. 46 Distinct from Schmitt's argument that damage control costs are not recoverable without a showing of actual confusion is its assertion that damage control costs are not recoverable in the absence of actual damages or, we assume, marketplace damages. But we find that argument similarly unacceptable. No court has excluded damage control costs from its definition of damages that are considered actual. And several courts have awarded damages for the expense of responsive or reparative advertising quite apart from an award of marketplace damages. See, e.g., ALPO Petfoods, Inc. v. Ralston Purina Co., supra; U-Haul Int'l, Inc. v. Jartran, Inc., 793 F.2d 1034, 1041 (9th Cir. 1986); Otis Clapp & Son, Inc. v. Filmore Vitamin Co., 754 F.2d 738, 745 (7th Cir. 1985). Although none of these courts have awarded damage control costs in the absence of marketplace damages, none have treated marketplace injury as a prerequisite to recovery of damage control costs either. Moreover, a rule that predicated recovery of damage control expenses on a showing of marketplace damages would penalize successful efforts at mitigating damages. That is, under such a rule, a plaintiff who is successful in preventing marketplace damages would not be able to recover under the Lanham Act, but a plaintiff who is unsuccessful would be permitted to recover. That would be an anomaly. 47 We also note that the practical realities of business litigation favor a rule that damage control costs should be recoverable even where plaintiffs do not demonstrate actual confusion or marketplace injury. For one, marketplace damages and actual confusion are notoriously difficult and expensive to prove. See PPX Enterprises, Inc. v. AudioFidelity Enterprises, Inc., 818 F.2d at 272-73; U-Haul Int'l, Inc. v. Jartran, Inc., 793 F.2d at 1041. More importantly, however, even where marketplace damages or actual confusion are provable in theory, such proof often requires that a plaintiff solicit its own customers for affidavits, which puts the customers at risk of being subpoenaed by the defendant. Plaintiffs are justifiably hesitant to alienate or upset their customers in this way. In addition, plaintiffs may hesitate to put marketplace damages at issue because that would entitle a defendant to discover information about plaintiff's business. As may have been the case here, oftentimes the rational business decision is for a plaintiff to embark on a campaign of damage control and forego a demonstration of injury in the marketplace or actual confusion of their customers. Such a plaintiff should not be required to give up compensation for its damage control expenses when the defendant's wrongful action necessitated those expenses in the first place. 48 Nor should plaintiffs who are unwilling or unable to prove marketplace damages or actual confusion be limited to seeking injunctive relief. An injunction can halt a wrongful activity but it will not correct its effects. Responsive advertising may be the quickest, most effective way to mitigate damages or prevent them altogether. Further, limiting a plaintiff to injunctive relief is especially unfair where a plaintiff's inability to prove marketplace damages or actual confusion may merely reflect an understandable unwillingness to irk customers as the plaintiff pursues proof of harm. 49 Therefore, because a company may justifiably act before it actually sustains injury, standards similar to those applicable to injunctive relief are appropriate where plaintiffs seek to recover damage control expenses. Hence, to recover loss control damages, plaintiffs must show that a violation of the Lanham Act occurred, and that (1) there was a likelihood of confusion or damages to sales, profits, or goodwill; (2) its damage control expensesare attributable to the violation (i.e., caused by the violation); and (3) that its damage control efforts were reasonable under the circumstances and proportionate to the damage that was likely to occur.