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Nutramax Laboratories, Inc. v. Manna Pro Products, LLC

United States District Court, D. South Carolina, Rock Hill Division

August 2, 2017

Nutramax Laboratories, Inc., and Nutramax Laboratories Veterinary Services, Inc., Plaintiffs,
v.
Manna Pro Products, LLC; Nutri-Vet, Wellness, LLC; and 21st Century Animal HealthCare, LLC, Defendants.

          ORDER AND OPINION

         In a December 1, 2016 order (“contempt order”), the court found Defendant 21st Century Animal HealthCare, LLC (“21st Century”) in civil contempt for violating the terms of a July 8, 2016 joint stipulation of settlement and order (“settlement order”) that had been submitted by the parties and later endorsed by the court. (ECF No. 44.) The contempt order directed 21st Century to disgorge to Plaintiffs Nutramax Laboratories, Inc., and Nutramax Laboratories Veterinary Services, Inc., (together, “Nutramax”) “its net profits from all sales, on or after July 8, 2016, of products within its Essential Pet line that employ or employed packaging with comparative advertising containing the word Cosequin or that are sold or were sold through a website that employed comparative advertising containing the word Cosequin at the time of the sale.” (Id.) This matter now comes before the court because a dispute has arisen between 21st Century and Nutramax as to the calculation of the proper amount of net profits to be disgorged. (See ECF Nos. 46, 49, 52.) This order resolves the dispute, and the court ORDERS 21st Century to disgorge to Nutramax $11, 130.14, which, for the reasons that follow, the court determines is the proper amount of net profits to be disgorged.

         I. RELEVANT FACTUAL AND PROCEURAL BACKGROUND

         In the contempt order, the court outlined the four elements that Nutramax had the burden to establish by clear and convincing evidence in order for the court to find that 21st Century was in contempt, noting that a showing of willfulness was not a required element. (See ECF No. 44 at 6-7 (citing JTH Tax, Inc. v. H&R Block E. Tax Servs., Inc., 359 F.3d 699, 705 (4th Cir. 2004); Ashcroft v. Conoco, Inc., 218 F.3d 288, 301 (4th Cir. 2000); In re Gen. Motors Corp., 61 F.3d 256, 258 (4th Cir. 1995)).) Assessing the evidence and the parties' arguments, the court “conclude[d] that Nutramax ha[d] shown by clear and convincing evidence each of the elements needed to establish a finding of civil contempt.” (Id. at 7.) In reaching this conclusion, the court explained that, although there was clear and convincing evidence that 21st Century knowingly violated an unequivocal command in the settlement order, Nutramax had not shown by clear and convincing evidence that 21 Century's violation was willful (see Id. at 15) and, in fact, “the court note[d] that nothing [in the record before it] suggest[ed] a willful violation” (id. at 20).

         In fashioning a sanction for 21st Century's civil contempt, the court emphasized that sanctions imposed for civil contempt must be only remedial and/or compensatory in nature and, unlike in the criminal contempt context, cannot be punitive in nature. (See Id. at 17 (citing United States v. United Mine Workers, 330 U.S. 258 302-04 (1947); In re Gen. Motors, 61 F.3d at 359).) Thus, as a general rule, where the court intends a sanction in the form of a fine to be compensatory, the fine imposed should not exceed the actual loss to the complainant caused by the contumacy. (See Id. (citing In re Gen. Motors, 61 F.3d at 359); In re Tetracycline Cases, 927 F.2d 411, 413 (8th Cir. 1991)).) For civil contempt proceedings arising from trademark infringement actions, such as this one, the court noted that requiring the contemnor to disgorge its net profits from the infringing activity to the complainant is an oft-used compensatory sanction. (See Id. at 18 (citing Manhattan Indus., Inc. v. Sweater Bee by Banff, Ltd., 885 F.2d 1, 5-6 (2d Cir. 1989); Buffalo Wings Factory, Inc. v. Mohd, 574 F.Supp.2d 574, 581-82 (E.D. Va. 2008); Colonial Williamsburg Found. v. Kittinger Co., 792 F.Supp. 1397, 1407-08 (E.D. Va. 1992)).) Thus, the court determined that it was “appropriate to order 21st Century to disgorge its net profits from all sales, on or after July 8, 2016, of products within its Essential Pet line that employ or employed packaging with comparative advertising containing the word Cosequin or that are sold or were sold through a website that employed comparative advertising containing the word Cosequin at the time of the sale.” (Id. at 18-19.) In the court's view, this disgorgement of net profits was “necessary to compensate Nutramax for the injury to its rights under the Settlement Order, ” was “an appropriate means to coerce 21st Century's compliance with the Settlement Order's terms, ” and “ensure[d] that the disgorgement does not become punitive in nature.” (Id. at 19.) Accordingly, the court ordered 21st Century to disgorge the profits so described, but, anticipating the instant dispute, ordered 21st Century to first “file with the court and serve on Nutramax a statement disclosing all of its sales and net profits . . . that are subject to this disgorgement order and explaining how such net profits were calculated.” (Id. at 21.)

         On January 6, 2017, 21st Century, in compliance with the court's contempt order, filed a statement disclosing its sales subject to disgorgement and explaining how it calculated the net profits therefrom. (ECF No. 46.) It asserts that the amount of net profits from sales subject to the order is $10, 912.00. (Id. at 2-3.) To reach this amount, 21st Century begins by pointing to an exhibit of a spreadsheet (the “primary spreadsheet”) containing sales and cost information for three products by reference to each product's stock keeping unit (“SKU”) number. (See ECF No. 46 at 2; ECF No. 46-2.) For the three SKU numbers combined, the spreadsheet shows that 11, 100 units were sold during the relevant period, resulting in $80, 314.00 in sales. (See ECF No. 46 at 2; ECF No. 46-2.) To substantiate these figures, 21st Century provides 65 invoices from retailers across the United States, reflecting the number of offending units sold in the relevant period (see ECF Nos. 46-3, 46-4, 46-5), and another spreadsheet breaking down the units sold by date, invoice number, and SKU number (see ECF No. 46-6).[1] 21st Century also provides the sworn declaration of its chief financial officer, Jim Jumpeter, who states that figures on the primary spreadsheet accurately represent the total number of units sold and total sales revenue therefrom, as derived from the invoices. (See ECF No. 46-1 at 1-2.)

         From the sales revenue amount of $80, 314.00, 21st Century makes two deductions, one deduction for the raw material costs in producing the offending products and another deduction for labor and overhead costs in producing the offending products. (See ECF No. 46 at 2-3; ECF No. 46-1 at 2-4.) First, 21st Century asserts that the total raw material costs amounted to $50, 100.00. (ECF No. 46 at 2.) To reach this figure, 21st Century points to three cost variances reports that provide the per-unit average raw materials cost for each of the three offending products. (See ECF No. 46 at 2 (citing ECF No. 46-7); ECF No. 46-1 at 3 (same).) The cost variance report for SKU 27358 shows a raw materials cost of $8.33987 per unit; for SKU 27359, a cost of $3.69612 per unit; and for SKU 27390, a cost of $3.14574 per unit. (See ECF No. 46-7.) However, in his affidavit, Jumpeter states that “the raw material costs vary by lot, and the estimated average for [each SKU] can be found in the handwritten notes on each [cost variances report].” (ECF No. 46-1 at 3.) Attached to each of the three cost variances reports is a yellow sticky note containing a handwritten estimated average of the raw material cost for each SKU, apparently intended to account for the fact that the raw material costs for the lots subject to the contempt order differ slightly from the raw material costs for the lots that are the subject of the cost variances reports. For SKU 27358, a sticky note lists the raw material cost as $8.4553 per unit; for SKU 27359, a sticky note lists the cost as $3.6728 per unit; for SKU 27390, a sticky note lists the cost as $3.1458 per unit. (See ECF No. 46-7.) The primary spreadsheet shows that during the relevant period, 21st Century sold 2, 544 units of SKU 27358, 3, 228 units of SKU 27359, and 5, 328 units of SKU 27390. (ECF No. 46-2 at 2.) Although the primary spreadsheet calculates the total raw material costs for the three SKUs as $50, 127.00 (id.), in Jumpeter's affidavit and in 21st Century's response to the contempt order, the figure is stated as approximately $50, 100.00 (see ECF No. 46 at 2; ECF No. 46-1 at 3).[2]

         Second, 21st Century asserts that the total labor and overhead costs amounted to $19, 200.00, with $9, 600.00 allocated to labor and $9, 600.00 allocated to overhead. (See ECF No. 46 at 2.) In reaching these figures, 21st Century admits that it does not track its labor and overhead costs by individual SKU. (Id.) Instead, 21st Century relies on Jumpeter's sworn statement that using 12% of sales revenue from each SKU to estimate overhead costs and another 12% of sales revenue to estimate labor costs would be a conservative method of estimating overhead and labor costs. (Id. at 2-3; ECF No. 46-1 at 3-4.) The primary spreadsheet lists the overhead and labor costs for SKU 27358 as $3, 028.00 each, for a total of $6, 056.00; for SKU 27359 as $2, 222.00 each for a total of $4, 444.00; and for SKU 27390 as $4, 388 each, for a total $8, 776.00. (ECF No. 46-2.) Although, adding these figures together, the primary spreadsheet arrives at figures of $9, 638.00 for overhead and another $9, 638.00 for labor (id.), which would total $19, 276.00, in Jumpeter's affidavit and in 21st Century's response to the contempt order, the figures are stated as approximately $9, 640.00 (see ECF No. 46 at 2; ECF No. 46-1 at 3), which would total $19, 280.00.[3]

         Subtracting the figure of $50, 100.00 in total raw material costs and the figure of $19, 280.00 in labor and overhead costs from the figure of $80, 314.00 in gross sales, Jumpeter and 21st Century arrive at a net profit of $10, 912.00 for the three SKUs. (See ECF No. 46 at 2-3; ECF No. 46-1 at 3-4.) 21st Century asserts that this amount-$10, 912.00-is the amount of net profits on the offending products that is subject to disgorgement under the court's contempt order. (See ECF No. 46; ECF No. 46-1.)

         On January 11, 2017, Nutramax filed an objection to 21st Century's response to the contempt order. (ECF No. 49.) In its objection, Nutramax first asserts that the court, in calculating the net profits from sales of the offending product during the relevant period, should not rely on the $80, 314.00 figure that 21st Century advances as its gross revenue from sales of the offending products during the period. (Id. at 1-5.) Nutramax argues that the invoices 21st Century attaches to its response to the contempt order demonstrates that, soon after Nutramax notified 21st Century that it sought to enforce the settlement order by forcing 21st Century to pull the offending products off the shelves, 21st Century “slashed [the] prices” of the offending products “and flooded the marketplace with products in violation of its agreement with Nutramax and in contempt of [the settlement order].” (Id. at 1.) In support of this argument, Nutramax points out that after it sent a cease and desist email to 21st Century on August 27, 2016 (see ECF No. 37-3), and after it filed its motion for contempt on August 30, 2016 (see ECF No. 34), identifying the three products at issue, 21st Century, on September 12, 2016, reduced the price for each offending product by roughly 25% from their prices on August 18, 2016, the date on which the products had their best sales within the relevant period (see ECF No. 49 at 2-3 (citing ECF No. 49-1)). Nutramax also points out that, on September 13, 2016, 21st Century sold some of the offending products at prices lower than the prices at which they had been sold on August 18, 2016, amounting to a price drop of roughly 21% for two of the products and 17% for the third product. (ECF No. 49 at 3.)[4] As suggested above, Nutramax argues that 21st Century's decision to “slash” prices and “dump” its product into the market was a willful attempt to flout the settlement order and preempt its enforcement:

21st Century's motive for dumping more than 7, 000 Nonconforming Products after the filing of the contempt motion is clear. Nutramax's contempt motion sought an order prohibiting further contemptuous sales of the Nonconforming Products. Knowing Nutramax was likely to prevail on its motion, 21st Century quickly offloaded all of its Nonconforming Products to shortcircuit this Court's ability to enforce its prior order and grant the relief sought by Nutramax. In short, 21st Century robbed Nutramax of the bargained for and Court-ordered benefit of a brightline distinction between the two parties.

(Id. at 3-4.) Because 21st Century attempted to preempt enforcement of the settlement order by deflating the price of the offending products, Nutramax argues that the court should calculate the gross revenue from sales of the offending products as if each unit had been sold at the price charged on August 18, 2016, which results in gross profits in the amount of $94, 452.08 rather than the $80, 314.00 figure advanced by 21st Century. (Id. at 4-5.)

         Second, Nutramax argues that the court should not permit 21st Century, in calculating its net profits from sales of the offending products during the relevant period, to deduct from its gross sales the cost of the raw materials used to manufacture the products. (See Id. at 5-8.) Borrowing from the law governing disgorgement of profits in the trademark infringement context, Nutramax argues that 21st Century has the burden to prove any deductions in cost from gross revenues in determining the net profit from sales of offending products (see Id. at 6 (citing 15 U.S.C. § 1117(a))) and that this burden is not carried by conclusory, unsubstantiated evidence of costs (see Id. (citing Choice Hotels Int'l Inc. v. Zeal, LLC, 135 F.Supp.3d 451, 472 (D.S.C. 2015))). Nutramax asserts that the handwritten sticky note estimations of the average per-unit raw material costs do not satisfy the burden of proving that those amounts should be deducted from the gross sales amount. (See Id. at 6-7.) The sticky notes, Nutramax argues, amount to a conclusory, unsubstantiated assertion of cost that cannot satisfy 21st Century's burden of proof. (See Id. at 7 (citing Zeal, 135 F.Supp.3d at 475).)

         In this vein, Nutramax, again borrowing from the law governing disgorgement in trademark infringement cases, argues that “the [c]ourt should not have any qualms about . . . awarding Nutramax the full amount of [21st Century's] gross revenue.” (Id.) Nutramax explains that, when a trademark infringer fails to meet its burden to prove a cost deduction from its gross revenues, a court, in the course of determining the net profits to be disgorged, should treat the full amount of gross revenues as if they were the profits subject to disgorgement. (See Id. (citing, inter alia, Mishawaka Rubber & Woolen Mfg. Co. v. S.S. Kresge Co., 316 U.S. 203, 207 (1942); Zeal, 135 F.Supp.3d at 475; Entrepreneur Media, Inc. v. JMD Ent. Group, LLC, 958 F.Supp.2d 588, 597 (D. Md. 2013)).) Thus, Nutramax argues that, if the court concludes that 21st Century failed to meet its evidentiary burden as to costs, the court should not hesitate to award Nurtramax all the gross revenues from the offending products sold during the relevant period for 21st Century's contumacy. (See Id. at 7-8.)

         Third, Nutramax argues that the court should not permit 21st Century to deduct from its gross revenues from the offending products the cost of labor and overhead. (See Id. at 8-10.) Again borrowing from the trademark infringement context, Nutramax argues that labor and overhead are fixed costs that 21st Century would incur regardless whether it manufactured the offending products and that such fixed costs are not deductible from gross sales. (See Id. at 8 (citing Abbott Labs. v. Unlimited Beverages, Inc., 218 F.3d 1238 (11th Cir. 2000); Nike Inc. v. Variety Wholesalers, Inc., 274 F.Supp.2d 1352, 1373 (S.D. Ga. 2003); Restatement (Third) of Unfair Competition § 37 cmt. h (1995)).) Nutramax further argues that, although some courts will allow such fixed costs to be deducted when the infringer establishes a sufficient nexus between the fixed costs and the manufacturing of the infringing product, the Fourth Circuit has not expressly approved this approach. (See Id. at 8-9 (citing Hamil Am. Inc. v. GFI, 193 F.3d 92, 107 (2d Cir. 1999); Gibson Guitar Corp. v. Paul Reed Smith Guitars, LP, 325 F.Supp.2d 841, 853 (M.D. Tenn. 2004)).) Applying these rules to the instant case, Nutramax argues that 21st Century may not deduct labor and overhead costs from its gross revenue from the offending products. (See Id. at 9-10.) Nutramax further argues that, even if the court allowed such deductions upon a showing of a sufficient nexus between the labor and overhead costs and the manufacturing of the offending products, 21st Century has failed to even assert such a nexus. (See id.)

         In reply to Nutramax's objection, 21st Century emphasizes the portions of the court's contempt order explaining that civil contempt remedies should be compensatory and remedial rather than punitive. (See ECF No. 52 at 1-2; see also ECF No. 44 at 17, 19 (citing McComb v. Jacksonville Paper Co., 336 U.S. 187, 193-94 (1949); United Mine Workers, 330 U.S. at 302-04; In re Gen. Motors, 61 F.3d at 259; In re Tetracycline Cases, 927 F.2d at 413).) 21st Century argues that it would be inappropriate to inflate the amount of gross revenues from sales of the offending products by treating sales on September 12 and 13, 2016, as if they were sold at August 18, 2016 prices. (Id. at 2-3.) 21st Century argues that inflating the gross revenues in this way would amount to a punitive, rather than compensatory, measure and would be inappropriate not only because civil contempt proceedings do not allow for punitive sanctions but also ...


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