Awarding Lost Profits as a Civil Contempt Sanction

Hubbard/Downing, Inc., d/b/a HANS Performance Products v. Kevin Heath Enterprises

Civil Action No. 1:10-cv-1131 United States District Court, N.D. Georgia, Atlanta Division: Opinion Delivered January 6, 2014

In April 2010, HANS Performance Products (“HANS”) filed an action for patent infringement against Kevin Heath (“Heath”) and Kevin Heath Enterprises (“KHE”) in connection with a head and neck support device used by race car drivers. HANS alleged that Heath and KHE infringed its patent by selling and offering for sale the DefNder G70, a similar head and neck support device (the “DefNder”).

In August 2011, the parties entered into a confidential settlement agreement whereby defendants agreed to “permanently cease from making, using, selling or offering for sale the DefNder G70, or devices no more than colorably different from the DefNder G70.” The parties attached an executed consent order as an exhibit to the confidential settlement agreement, stating that the parties had entered into an acceptable settlement, agreed to dismiss the claims with prejudice, and that the terms of the settlement agreement are incorporated into the consent order and are enforceable as such. The consent order also provides the court with jurisdiction as necessary to enforce the provisions of the settlement agreement.

The consent order was entered by the court on August 22, 2011. However, on May 9, 2011, shortly after the parties began negotiating the settlement, Heath registered NecksGen, Inc. (“NecksGen”), a California corporation with the same board of directors, officers, address, and fax number as KHE. Heath subsequently testified that the purpose of forming NecksGen was that he “wanted to make [his] own neck brace and needed a corporate vehicle through which to do so.”

In June 2012, plaintiff filed an order to show cause requiring NecksGen and Heath to show cause why injunctive and monetary relief should not be awarded to plaintiff and why they should not be held in contempt of the consent order. After reviewing the parties’ written submissions and hearing testimony at an order to show cause hearing, the court found that the NecksGen device is no more than colorably different than the DefNder G70 device. The court determined that since consent decrees are enforced through the court’s civil contempt power, it would impose sanctions against plaintiff “under its broad discretion in fashioning relief for civil contempt.”

In determining the amount to impose for sanctions, the court considered “the harm caused by Defendants’ noncompliance, the probable effectiveness of the sanction, Defendants’ financial resources and the burden of the sanction [upon Defendants], and the willfulness of Defendants’ conduct in violating the Consent Order.” The court also stated that “the ultimate sanction amount depended . . . on the level of sales of the NecksGen device . . . [and] plaintiff’s lost profits.” The court further held that an award of reasonable attorney’s fees incurred in seeking contempt for violation of the consent order was appropriate.

The court held that to award lost profits as a civil contempt sanction, plaintiff “must prove a causal relation between [the sales of the NecksGen device] and [Plaintiff’s] loss of profits . . . . In other words, the burden rests on [Plaintiff] to show a reasonable probability that `but for’ the [NecksGen sales, Plaintiff] would have made the infringer’s sales.” The court clarified that “Plaintiff is not required to show causation to a certainty, rather only that there was a reasonable probability that Plaintiff would have made the sales that Defendants made of the NecksGen device.” The court further stated that “Plaintiff may satisfy the ‘but for’ test by showing: (1) demand for its product; (2) the absence of non-infringing substitutes; (3) it had the manufacturing and marketing capability to exploit the demand; and (4) the amount of profit it would have made from the diverted sales.”

Upon its review of the record, the court found that plaintiff failed to submit evidence to support the demand for its product or an absence of a non-infringing substitute in the relevant market, or evidence of sales that reasonably may have been displaced by NecksGen sales. As such, the court concluded that plaintiff failed to demonstrate that it suffered lost profits or the amount of profits that were lost, and lost profits could not be included in the court’s calculation of appropriate sanctions. It is interesting that despite defendants being compelled to settle with plaintiff in August 2011, no evidence supporting the four “but for” elements previously enumerated was submitted on the record, and that there is no indication of any expert analysis having been sought in connection with this matter.

At Rosenfarb LLC we always ensure that in addition to contributing keen business insights and connecting the dots, we understand the litigation process – including the myriad roles of, rules of and relief “fashioned” by courts. When engaged in a consultative or testifying expert role so often in demand in complex, expert-requiring patent and business disputes, we focus on framing the issues simply and in alignment with the litigation strategy, and use evidence-based-logic to support our opinions, while creating compelling stories. We are sincere, professional, and credible. We are accounting experts with legal acumen. We understand that lost profits must be based on sound evidence. We will help you win your case.