Balance Dynamics Corporation v. Schmitt Industries, Incorporated

*The Honorable David D. Dowd, Jr., United States District Judge for
the Northern District of Ohio, sitting by designation.
1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2000 FED App. 0068P (6th Cir.)
File Name: 00a0068p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
BALANCE DYNAMICS
C ORPORATION ,
Plaintiff-Appellant,
v.
S CHMITT INDUSTRIES,
INCORPORATED ,
Defendant-Appellee.
;>

1
No. 97-2023
Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 94-75356—Robert E. DeMascio, District Judge.
Argued: December 17, 1999
Decided and Filed: February 25, 2000
Before: NELSON and DAUGHTREY, Circuit Judges;
DOWD, District Judge.*

-- 1 of 14 --

2 Balance Dynamics Corp.
v. Schmitt Industries
No. 97-2023
_________________
COUNSEL
ARGUED: Robert H. Golden, GOLDEN AND KUNZ,
Lathrup Village, Michigan, for Appellant. John F. Brennan,
CHELI, HESS, Royal Oak, Michigan, for Appellee.
ON BRIEF: Robert H. Golden, Armand D. Kunz, GOLDEN
AND KUNZ, Lathrup Village, Michigan, for Appellant. John
F. Brennan, CHELI, HESS, Royal Oak, Michigan, for
Appellee.
_________________
OPINION
_________________
DAVID D. DOWD, JR., District Judge.
I. Introduction
The false advertising litigation before us has continued for
six years, largely due to the paucity of legal rulings available
to the trial court on some of the unique issues presented in
this case. These issues pertain to the standards for
establishing a violation of the Lanham Trade-Mark Act, the
relief available once a violation is established, and the method
of proofs necessary to establish entitlement to such relief. In
particular, this case presents several issues of first impression:
(1) whether, upon establishing a violation of the Lanham Act,
a plaintiff can recover damage control costs without showing
that the false advertising created actual confusion in the
marketplace or actual damages in the marketplace; (2)
whether a plaintiff can recover damages to goodwill or
disgorgement of profits upon showing that an advertisement
is literally false or deliberately false, where the plaintiff has
no other proof of damages to its business; and (3) whether
out-of-state, individual corporate officers who were
personally involved in a Lanham Act violation are immune

-- 2 of 14 --

26 Balance Dynamics Corp.
v. Schmitt Industries
No. 97-2023
While it is true that “jurisdiction over the individual
officers of a corporation cannot be predicated merely upon
jurisdiction over the corporation,” Weller v. Cromwell Oil
Co., 504 F.2d at 929, we hold that the mere fact that the
actions connecting defendants to the state were undertaken in
an official rather than personal capacity does not preclude the
exercise of personal jurisdiction over those defendants.
Hence, where an out-of-state agent is actively and personally
involved in the conduct giving rise to the claim, the exercise
of personal jurisdiction should depend on traditional notions
of fair play and substantial justice; i.e., whether she purposely
availed herself of the forum and the reasonably foreseeable
consequences of that availment. See Burger King Corp. v.
Rudzewicz, 471 U.S. 462, 474 (1985); International Shoe Co.
v. Washington, 326 U.S. 310, 316 (1945). This proposition
has been applied by other circuits in the exercise of personal
jurisdiction over corporate officers who actively and
personally involved themselves in conduct violating the
Lanham Act, notwithstanding the fact that the defendants
acted as agents when they did so. See, e.g., Committee for
Idaho’s High Desert v. Yost, 92 F.3d 814, 823-24 (9th Cir.
1996); Electronic Laboratory Supply Co. v. Cullen, 977 F.2d
798, 807-08 (3d Cir. 1992); Polo Fashions, Inc. v. Craftex,
Inc., 816 F.2d 145, 149 (4th Cir. 1987); Donsco, Inc. v.
Casper Corp., 587 F.2d 602, 606 (3d Cir. 1978).
The district court erred in dismissing Case and Morgan
from the suit based merely on the fact that they acted as
agents for the corporation. The matter will be remanded for
a determination of whether their contacts with the state of
Michigan were such that due process permits the exercise of
personal jurisdiction over them.
IX. Disposition
The trial court’s ruling on Schmitt’s Rule 50 motion is
REVERSED and the judgment is VACATED. The case is
REMANDED to the district court for further proceedings
consistent with this opinion.
No. 97-2023 Balance Dynamics Corp.
v. Schmitt Industries
3
1At the time the cartoon was mailed, Balance Dynamics referred to
its product as a “freon balancer.” As this appellation took on negative
connotations in the wake of increasing environmental awareness, Balance
from the exercise of personal jurisdiction under the fiduciary
shield doctrine.
For the reasons set forth below, we hold: that a plaintiff
seeking to recover damage control costs under the Lanham
Act for a defendant’s false advertising is not required to show
that the false advertising created actual confusion or damages
in the marketplace; that in order to recover damage to
goodwill or disgorgement of profits, a plaintiff must show at
least some damage in the marketplace and cannot rely solely
on the literal falsehood of an advertisement; and personal
jurisdiction may be exercised over corporate agents based
upon their minimum contacts with the forum state, as long as
personal jurisdiction is not premised on the mere fact of
jurisdiction over the corporation.
II. Facts and History
Plaintiff-Appellant Balance Dynamics Corporation
(“Balance Dynamics”), based in Ann Arbor, Michigan, and
Defendant-Appellee Schmitt Industries (“Schmitt”), based in
Portland, Oregon, manufacture products that balance
industrial grinders and other machines that have a spinning
shaft. In a process unique in the industry, Balance Dynamics’
product uses a gas called Halon 1202 which is heated and
vaporized in one chamber and allowed to condense back to
liquid form in another. Schmitt’s products accomplish the
same result by balancing the spinning shafts with motor
driven metal weights.
During the late summer of 1992, prior to Chicago’s
International Machine Tool Show in September, Schmitt
mailed and distributed a postcard cartoon to 2,500 customers
or potential customers depicting a “freon balancer” at the top
of a “dead wheel balancer bone pile.”1

-- 3 of 14 --

4 Balance Dynamics Corp.
v. Schmitt Industries
No. 97-2023
Dynamics began referring to its product as a “halon balancer.”
In late 1992 or early 1993, Schmitt received queries
regarding its possible use of halons, freons, or other ozone-
depleting materials. On March 16, 1993, Schmitt sent a letter
to approximately 3,200 customers and prospective customers
stating that
Effective May 15, 1993, all products which contain or
have been processed with ozone depleting substances
(ODS) must have warning labels affixed. Subsequently,
these substances will be banned from general use.
Canada has already banned the substances. The ultimate
financial responsibility for environmentally sound
disposal of products containing ODS materials will rest
with the end user.
After stating that Schmitt’s balancing system did not use
ozone depleting substances, the letter continued:
Perhaps because one manufacturer of automatic grinding
wheel balancers uses halon, this type of device has come
under close scrutiny . . . Should your company operate
any halon balancers, and wish to dispose of them prior to
May 15, Schmitt Industries can supply an SBS Balance
System as an easy replacement.
The letter was signed by defendants Wayne A. Case,
Schmitt’s president, and James Morgan, Schmitt’s sales
manager.
In April of 1993, one of Balance Dynamics’ largest
customers faxed the letter to Thomas Schulte, Balance
Dynamics’ then-vice president of sales. Schulte consequently
spoke with approximately 40 individuals from 12 different
corporate customers with regard to the letter. Some of these
customer contacts were initiated by Schulte, others by the
customers themselves. After investigation, Balance
No. 97-2023 Balance Dynamics Corp.
v. Schmitt Industries
25
Case and Morgan were acting in their official capacity as
agents for Schmitt when they signed the offending letters.
In the seminal case of Marine Midland Bank, N.A. v. Miller,
664 F.2d 899 (2d Cir. 1981), the fiduciary shield doctrine is
formulated as follows: “if an individual has contact with a
particular state only by virtue of his acts as a fiduciary of the
corporation, he may be shielded from the exercise, by that
state, of jurisdiction over him personally on the basis of that
conduct.” Id. at 902. In that form, the fiduciary shield
doctrine prevents the exercise of personal jurisdiction
whenever an out-of-state officer’s contacts occur by virtue of
her official capacity. However, in Weller v. Cromwell Oil Co.
the doctrine is stated more mildly: jurisdiction over a
corporate officer cannot be predicated merely upon
jurisdiction over the corporation. 504 F.2d at 929.
Some courts in the Sixth Circuit have followed the Marine
Midland Bank formulation, holding that the mere fact that an
out-of-state defendant performed the alleged tortious or
violative conduct while acting as a corporate agent precludes
the exercise of personal jurisdiction over that person. See,
e.g., United States v. Flack, No. 2:96-CV-122, 1997 WL
187373 at *5 (S.D. Ohio January 31, 1997); Cincinnati Sub-
Zero Products, Inc. v. Augustine Medical, Inc., 800 F.Supp.
1549 (S.D. Ohio 1992). But other courts have found that the
exercise of jurisdiction over the agent depends on the extent
of that agent’s personal involvement in the conduct. See, e.g.,
State of Ohio v. Browning Ferris Indus. Inc., No. C 86-7387,
1987 WL 16940 (N.D. Ohio March 26, 1987); James v. HRP,
Inc., 852 F.Supp. 620 (W.D. Mich. 1994); Morton Walker,
D.P.M. v. Robert Concoby, ___ F.Supp.2d ___, 1999 WL
1210871 (N.D. Ohio October 12, 1999). These courts
exercised personal jurisdiction over corporate officers where
the officers were active participants in the tortious conduct.
There is support for this approach in Sixth Circuit case law.
See Chattanooga Corp. v. Klingler, 704 F.2d 903, 906-07
(6th Cir. 1983); Serras v. First Tennessee Bank N.A., 875
F.2d 1212, 1217 (6th Cir. 1989).

-- 4 of 14 --

24 Balance Dynamics Corp.
v. Schmitt Industries
No. 97-2023
the jury’s verdict in favor of Schmitt were sound, the trial
court’s ruling on the Rule 50 motion would be harmless.
However, we agree with Balance Dynamics that the jury
instructions were both infirm and prejudicial.
In reviewing the jury instructions of a trial court, an appeals
court considers “whether the charge, taken as a whole, fairly
and adequately submits the issues and applicable law to the
jury.” United States v. Martin, 740 F.2d 1352, 1361 (6th Cir.
1984). At trial, the court instructed the jury that in order to
recover damages relating to a particular letter, Balance
Dynamics had to show the following elements: (1) a literally
false or a misleading statement of fact regarding plaintiff’s
product; (2) that the statement actually deceived plaintiff’s
customer or customers; (3) that the statement actually
influenced the purchasing decision of a customer or
customers that plaintiff had; (4) a connection to interstate
commerce; (5) that plaintiff actually lost a sale or sales from
one or more of its customers as a result of defendant’s
statement. Plaintiff’s counsel objected, preserving the issue
for appeal. The jury was out for ten minutes before returning
a verdict for Schmitt.
Again, the trial court lacked the benefit of Podiatric
Physicians. That case shows that it is not necessary to show
lost sales in order to establish a violation of the Lanham Act,
nor is it necessary to establish that customers were actually
deceived. Therefore, the jury instructions were erroneous as
a matter of law and obviously prejudicial.
VIII. Dismissal of Defendants Wayne Case and James
Morgan
In a November 28, 1994 Order, Judge LaPlata dismissed
Schmitt employees Wayne Case and James Morgan on the
grounds that the fiduciary shield doctrine frustrated the
court’s personal jurisdiction over them. Citing Weller v.
Cromwell Oil Co., 504 F.2d 927, 929 (6th Cir. 1974), the
court found that personal jurisdiction was lacking because
No. 97-2023 Balance Dynamics Corp.
v. Schmitt Industries
5
Dynamics confirmed that its halon balancer was not subject
to regulation, did not require labeling, and was not slated to
be banned. It then responded by making visits to customers
and sending a “fact sheet” to those customers who expressed
concern.
Schmitt disagreed with certain items in the “fact sheet” and
hired an environmental chemist to write an opinion, which
stated that Halon 1202 had “managed to slip through the
regulatory net” but that it is “quite certain the EPA would
regulate its production and use.” It also suggested that if the
EPA failed to act, a private person could obtain a court order
requiring the EPA to list Halon 1202 as a regulated substance,
and that “it is almost certain that in the relatively near future
Halon 1202 will become very difficult to obtain.” The paper
was provided to approximately 12 Schmitt customers or
prospective customers.
In February of 1994, Balance Dynamics brought suit
against Schmitt, Wayne A. Case, and James Morgan, seeking
compensatory damages, treble damages, attorney fees,
disgorgement of Schmitt’s profits, and an injunction
restraining Schmitt from similar mailings. Balance Dynamics
claimed the defendants had violated various state laws as well
as the false advertising language of the Lanham Trade-Mark
Act, 15 U.S.C. § 1051 et seq. In orders signed by Judge
George LaPlata, based on reports and recommendations
(“R&Rs”) of Magistrate Judge Steven D. Pepe, the district
court dismissed Case and Morgan from the suit for lack of
personal jurisdiction and dismissed all of Balance Dynamics’
state law claims for failure to state a cause of action.
Balance Dynamics dropped its claim for injunctive relief on
August 21, 1994. Balance Dynamics also stipulated that it
experienced no lost sales, no lost profits, and no increased
cost of seeking capital investments. However, Balance
Dynamics reserved the right to seek treble damages, Schmitt’s
profits, damage control costs, and compensation for harm to
goodwill. Schmitt then brought a supplemental motion for

-- 5 of 14 --

6 Balance Dynamics Corp.
v. Schmitt Industries
No. 97-2023
summary judgment on Balance Dynamics’ damages claims.
In August of 1995, Judge LaPlata adopted an R&R granting
Schmitt’s motion as to lost profits and costs but denying it as
to Balance Dynamics’ claim for damage control activities.
Judge LaPlata retired in 1996 and the litigation was
transferred to Judge Horace W. Gilmore. Judge Gilmore
signed an order, purporting to reaffirm an earlier order of
Magistrate Judge Pepe, denying Balance Dynamics’ punitive
damages claim and declaring Balance Dynamics’
disgorgement claim moot. Judge Gilmore presided over a
trial for several days in April of 1997, but later recused
himself and declared a mistrial. The case was then assigned
to Judge Robert L. DeMascio, who conducted a trial in
August of 1997.
Judge DeMascio bifurcated the trial, with the issue of
liability coming first. A three-day jury trial was conducted in
which Balance Dynamics called two of its principals (Thomas
Schulte and Wayne Winzenz), an expert witness (Dr.
Jonathan Nimitz) and the president of Schmitt, Wayne Case.
Schmitt called no witnesses, rested and moved for entry of a
verdict as a matter of law under Fed.R.Civ.P. 50. The court
took the Rule 50 motion under advisement and instructed the
jury. Plaintiff’s counsel objected to the instructions,
preserving the issue for appeal. The court granted Schmitt’s
Rule 50 motion and the jury returned a finding of no cause of
action.
The trial court entered its formal findings of fact,
conclusions of law and judgment on September 17, 1997.
Balance Dynamics timely filed an appeal from the final
judgment and preceding interlocutory orders. Schmitt moved
for attorney fees under the provision in the Lanham Act
authorizing such awards in “exceptional” cases. The court
denied this motion as well as a motion for reconsideration. In
a companion case to Balance Dynamics’ appeal, Schmitt
appealed from these two orders. (Case No. 98-1143).
No. 97-2023 Balance Dynamics Corp.
v. Schmitt Industries
23
companies. Engineers know just exactly what those
standards are, just exactly what . . . the EPA rulings are
. . . frankly I have no idea why this case has been hanging
around the court for three and a half years.
Balance Dynamics protests this finding on the grounds that
Mr. Schulte had testified that, after the letter was
disseminated, some of his customers contacted him in
reference to its claims. Schulte further stated that of those
companies with whom he had initiated contact, most had
received the letter. Schulte testified that his customers told
him “they didn’t want to necessarily have anything to do with
a product that had these stipulations associated with it.” He
also testified that many customers were concerned about the
regulation and disposal of the Balance Dynamics products.
Obviously, the trial court did not have the benefit of an
articulated standard for recovery of damage control costs.
Under that standard, the testimony above contradicts the trial
court’s conclusion that Balance Dynamics failed to put on
evidence showing the existence of a “fire” to put out. The
customer inquiries Balance Dynamics received could be taken
as proof of the likelihood of damage, cf. Harper House, Inc.
v. Thomas Nelson, Inc., 889 F.2d at 210; PPX Enterprises,
Inc. v. AudioFidelity Enterprises, Inc., 818 F.2d at 272, and
may suffice to show that the deception was material and likely
to influence a purchasing decision. Further, the customer
inquiries belie the proposition that Balance Dynamics’
customers are so familiar with EPA regulations that Schmitt’s
communications would not be off-putting. Therefore, this
evidence creates a material issue of fact and the trial court
should have let the matter go to a jury for determination.
Jackson v. Quanex, 191 F.3d at 647.
VII. Jury Instructions
In a laudable attempt to conserve resources in the event its
decision on Schmitt’s Rule 50 motion was not sustained on
appeal, the trial court allowed the jury to return a verdict. If

-- 6 of 14 --

22 Balance Dynamics Corp.
v. Schmitt Industries
No. 97-2023
considers de novo the evidence “in the light most favorable to
the non-movant, giving that party the benefit of all reasonable
inferences.” Jackson v. Quanex, 191 F.3d at 657. In ruling on
a Rule 50 motion, a trial court is not permitted to “weigh the
evidence or make credibility determinations, as these are jury
functions.” Id. A dismissal pursuant to Rule 50 is improper
where the nonmovant presents sufficient evidence to raise a
material issue of fact for the jury. Id.
First, the trial court acknowledged that Balance Dynamics
could prove actual confusion by presenting evidence that the
Schmitt communications were literally false; but it found that
even Balance Dynamics’ expert had been unwilling to testify
that the Schmitt communications were literally false. Since
we have ruled that a showing of literal falsity in this case
would not have aided Balance Dynamics in its quest to
recover damages to goodwill, there is no need to decide
whether the trial court erred in its factual determination that
Balance Dynamics presented no evidence of literal falsity.
Second, Balance Dynamics contests the trial court’s finding
that its damage control activities were an over-reaction to the
problem. The trial court made the following factual
determinations:
the evidence really taken as a whole shows what
happened here. Plaintiff got a copy of this letter just as
Mr. Schulte testified, called a few of his partners together
and began to over-react something horrible, and ran out
and tried to, quote, put out the fire, when no fire was ever
testified to. I don’t know what fire the plaintiff is talking
about. There was just no fire produced for this Court
. . . . That damage that you called loss control is an over-
reaction by the Plaintiff that I think the evidence on
liability makes it very clear, you didn’t even have to do
it. You could have handled half of these customers on
the telephone, but more importantly his customers
included sophisticated engineers at Ford Motor Car
Company, the other auto manufacturers and big
No. 97-2023 Balance Dynamics Corp.
v. Schmitt Industries
7
III. Jurisdiction
The district court correctly exercised federal question
jurisdiction under 28 U.S.C. § 1331 and diversity jurisdiction
under 28 U.S.C. § 1332. Appellate jurisdiction is proper
under 28 U.S.C. § 1291.
IV. Schmitt’s Rule 50 Motion
Rule 50 gives district courts the discretion to grant a motion
for judgment as a matter of law “[i]f during a trial by jury a
party has been fully heard on an issue and there is no legally
sufficient evidentiary basis for a reasonable jury to find for
that party on that issue.” Fed.R.Civ.P. 50(a)(1). An appeals
court reviews de novo a district court’s decision to grant
judgment as a matter of law. Jackson v. Quanex Corp., 191
F.3d 647, 658 (6th Cir. 1999). “Without weighing the
evidence or assessing the credibility of the witnesses, and
after drawing all reasonable inferences in favor of plaintiff,
[an appeals court] must determine whether the record contains
evidence sufficient to have allowed jurors to find in favor of
plaintiff.” Monday v. Oulette, 118 F.3d 1099, 1101-02 (6th
Cir. 1997).
The Lanham Trade-Mark Act provides as follows:
(1) Any person who, on or in connection with any goods
or services, or any container for goods, uses in commerce
any word, term, name, symbol, or device, or any
combination thereof, or any false designation of origin,
false or misleading description of fact, or false or
misleading representation of fact, which—
(A) is likely to cause confusion, or to cause mistake,
or to deceive as to the affiliation, connection, or
association of such person with another person, or as
to the origin, sponsorship, or approval of his or her
goods, services, or commercial activities by another
person, or
(B) in commercial advertising or promotion,
misrepresents the nature, characteristics, qualities, or

-- 7 of 14 --

8 Balance Dynamics Corp.
v. Schmitt Industries
No. 97-2023
geographic origin of his or her or another person’s
goods, services, or commercial activities
shall be liable in a civil action by any person who
believes that he or she is or is likely to be damaged by
such act.
15 U.S.C. § 1125(a). The damages to which a plaintiff may
be entitled under the Lanham Act are specified in 15 U.S.C.
§ 1117:
When . . . a violation under § 1125(a) of this title, shall
have been established in any civil action arising under
this chapter, the plaintiff shall be entitled . . . subject to
the principles of equity, to recover (1) defendant’s
profits, (2) any damages sustained by the plaintiff, and
(3) the costs of the action.
Schmitt made its oral Rule 50 motion at the close of proofs
on the grounds that Balance Dynamics had failed to show
actual confusion in the marketplace and was therefore not
entitled to relief under the Lanham Act. The district court
agreed, finding that Balance Dynamics had not met its
“burden of proving that some customer, just one, was
confused or changed a purchasing decision, or lost a sale of
some kind.”
In ruling on Schmitt’s Rule 50 motion, the district court did
not have the benefit of this circuit’s recent decision in
American Council of Certified Podiatric Physicians and
Surgeons v. American Bd. of Podiatric Surgery, Inc., 185
F.3d 606 (6th Cir. 1999), in which we set forth guidelines for
deciding liability for false advertising claims under the
Lanham Act. In Podiatric Physicians, which also involved
appellate review of a district court’s Rule 50 decision, the
court established a five-element test for plaintiffs seeking to
prove liability under the Lanham Act:
[A] plaintiff must establish the following: 1) the
defendant has made false or misleading statements of fact
No. 97-2023 Balance Dynamics Corp.
v. Schmitt Industries
21
6We do not believe that the “deterrence theory,” in which one of the
trial court’s primary functions is to make violations of the Lanham Act
unprofitable to the infringing party, See Wynn Oil Co. v. American Way
Service Corp., 943 F.2d 595, 606-07 (6th Cir. 1991) (citing Roulo v. Russ
Berrie & Co., 886 F.2d 931, 941 (7th Cir. 1989)), supports disgorgement
in this case. As Magistrate Judge Pepe noted, the cases awarding profits
under the deterrence theory upon a finding of willfulness or bad faith have
been infringement cases “where defendant benefits directly from its
wrongful conduct.” See, e.g., International Star Class Yacht Racing
Ass’n v. Tommy Hilfiger, U.S.A., Inc., 80 F.3d 749, 753 (2d Cir. 1996);
Roulo v. Russ Berrie & Co., Inc., 886 F.2d at 941. Even in false
advertising cases, disgorgement has not been awarded in the absence of
harm to the plaintiff or benefit to the defendant. See, e.g., U-Haul Int’l
v. Jartran, Inc., 793 F.2d at 1036.
Balance Dynamics argued that because it could show that
Schmitt knowingly and willfully made false statements, it was
entitled to disgorgement of profits. In a closely reasoned
R&R, Magistrate Judge Pepe rejected this contention and
found that Balance Dynamics was only entitled to
disgorgement if it could show that defendant gained
additional sales due to the advertisement, or that plaintiff lost
sales, or was forced to see its product at a lower price. As
Magistrate Judge Pepe pointed out, § 35(a) of the Lanham Act
makes clear that an award of damages shall be “subject to the
principles of equity” but also states that the award is to
“constitute compensation and not a penalty.” Reviewing the
legislative history and case law concerning disgorgement of
profits, Magistrate Judge Pepe concluded that unless there is
some proof that plaintiff lost sales or profits, or that defendant
gained them, the principles of equity do not warrant an award
of defendant’s profits. We agree with and adopt Magistrate
Judge Pepe’s reasoning.6
VI. Trial Court’s Findings of Fact
In granting Schmitt’s Rule 50 motion, the trial court made
two factual findings that Balance Dynamics contests. In
considering the factual findings that a trial court has made in
the context of granting of a Rule 50 motion, a reviewing court

-- 8 of 14 --

20 Balance Dynamics Corp.
v. Schmitt Industries
No. 97-2023
5Judge LaPlata’s Order was actually issued in 1995, not 1996.
in the same market.” Id.; see also Harper House, Inc. v.
Thomas Nelson, Inc., 889 F.2d 197, 209 fn.8 (9th Cir. 1989).
The reasoning of Porous Media is applicable to the present
case since Schmitt specifically targeted Balance Dynamics’
balancer, which was the only product of its kind in the
market. However, as stated above, the evidence shows that
Balance Dynamics did not suffer marketplace injury as a
result of Schmitt’s advertisements. Therefore, even if the
advertisements were found literally false and Balance
Dynamics presented evidence of willfulness or bad faith, the
evidence defeats any presumption of damage to goodwill in
the present case.
C. Disgorgement
Balance Dynamics also claims it was improperly precluded
from seeking disgorgement of Schmitt’s profits. In an April
21, 1997 Order Concerning Damages Available at Trial,
Judge Gilmore denied as moot plaintiff’s claim for
defendant’s sales and profits as a measure of damages. Judge
Gilmore stated that this claim had already been denied in an
October 17, 1996 Order of Judge LaPlata, id.,5 which
purportedly adopted Magistrate Judge Pepe’s September 27,
1996 R&R on plaintiff’s motion in limine regarding punitive
damages and defendant’s sales. In fact, Judge LaPlata’s
Order adopts Judge Pepe’s August 30, 1995 R&R concerning
Balance Dynamics’ claims for damages based on its own lost
sales or lost profits, and it makes no mention of disgorgement
of Schmitt’s profits. According to Balance Dynamics, the
September 27, 1996 R&R concerning disgorgement was
objected to but never ruled on. It appears Judge Pepe’s
September 27, 1996 R&R concerning disgorgement never
received de novo review of the district court. Consequently,
this Court will engage in such a review.
No. 97-2023 Balance Dynamics Corp.
v. Schmitt Industries
9
concerning his own product or another’s; 2) the statement
actually deceives or tends to deceive a substantial portion
of the intended audience; 3) the statement is material in
that it will likely influence a deceived consumers’
purchasing decisions; 4) the advertisements were
introduced into interstate commerce; 5) there is some
causal link between the challenged statements and harm
to the plaintiff.
Id. at 613 (citing U.S. Healthcare, Inc. v. Blue Cross of
Greater Philadelphia, 898 F.2d 922-23 (3d Cir. 1990); ALPO
Petfoods, Inc. v. Ralston Purina Co., 913 F.2d 958, 964 (D.C.
Cir. 1990).
The second element of the Podiatric Physicians test shows
that a plaintiff may establish a violation of the Lanham Act
without proving actual confusion or a lost sale; that is, a
communication that has a “tendency to deceive” can be the
subject of a Lanham Act violation if all other elements of the
test are met. Hence, the trial court erred in granting Schmitt’s
Rule 50 motion.
V. Available Relief
The posture of this case requires that we examine the forms
of relief for which Balance Dynamics may be eligible under
the Lanham Act. The granting of Schmitt’s Rule 50 motion
is harmless error if Balance Dynamics was ineligible for any
forms of relief under the Lanham Act. In addition, a remand
of this case to the trial court will require a determination as to
the relief to be granted. Lastly, the substantial confusion
demonstrated in this case underscores the importance of
clearly distinguishing the elements necessary to prove a
breach of the Lanham Act from the elements necessary to
justify a certain remedy for that breach: “the inquiries should
be kept separate because a violation of the Lanham Act can be
remedied in more ways than one.” Web Printing Controls
Co., Inc. v. Oxy-Dry Corp., 906 F.2d 1202 (7th Cir. 1990).
Here, by not following the Podiatric Physicians test for

-- 9 of 14 --

10 Balance Dynamics Corp.
v. Schmitt Industries
No. 97-2023
2See Magistrate Judge Pepe’s Memorandum Opinion and Order of
October 24, 1996 for a summary of damage control activities undertaken
by Balance Dynamics. There is some question as to whether all of
Balance Dynamics’ claimed damage control losses really related to an
effort to mitigate damages from Schmitt’s false advertising, or whether
Balance Dynamics was simply overreaching and seeking a windfall for
activities in which it would have engaged anyway.
establishing liability under the Lanham Act, the district court
may have “read out of the Lanham Act the remedies that do
not rely on proof of injury caused by actual confusion.” Web
Printing Controls, 906 F.2d at 1205.
A. Damage Control Costs
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 what are 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:
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).
No. 97-2023 Balance Dynamics Corp.
v. Schmitt Industries
19
BASF Corp. v. Old World Trading Co., 41 F.3d at 1085-88
(finding literal falsity but requiring further proof of
marketplace damages); Castrol, Inc. v. Pennzoil, 987 F.2d
939, 941-43 (3d Cir. 1993) (affirming trial court decision
granting injunctive relief but denying monetary damages
despite finding of literal falsity).
2. Deliberate Intent or Bad Faith
Though literal falsity alone does not raise an inference of
damage to goodwill, some courts have created a presumption
of damages when literal falsity is accompanied by deliberate
intent or bad faith. The Ninth Circuit reasons that
the expenditure by a competitor of substantial funds in an
effort to deceive consumers and influence their
purchasing decisions justifies the existence of a
presumption that consumers are, in fact, being deceived.
He who has attempted to deceive should not complain
when required to bear the burden of rebutting a
presumption that he has succeeded.
U-Haul Int’l, Inc. v. Jartran, Inc., 793 F.2d at 1040-41; see
also Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134,
1146 (9th Cir. 1997); Resource Developers, Inc. v. Statue of
Liberty-Ellis Island Foundation, Inc., 926 F.2d 134, 140 (2d
Cir. 1991).
In Porous Media Corp. v. Pall Corp., 110 F.3d 1329 (8th
Cir. 1997), the court followed the Ninth Circuit’s reasoning
and permitted a presumption of money damages where there
existed proof of willful deception. Id. at 1336. However,
acknowledging that a plaintiff seeking monetary relief under
the Lanham Act generally must meet a higher level of proof
than those seeking injunctive relief, the court clarified the
presumptive damages rule as extending only to cases of
comparative advertising where the plaintiff’s product was
specifically targeted. Id. at 1334-35. Otherwise, stated the
Porous Media court, “a plaintiff might enjoy a windfall from
a speculative award of damages by simply being a competitor

-- 10 of 14 --

18 Balance Dynamics Corp.
v. Schmitt Industries
No. 97-2023
3Our research uncovered only one case that has awarded damages
based merely on the fact that an advertisement was literally false. In PPX
Enterprises, Inc. v. AudioFidelity Enterprises, Inc., 818 F.2d 266 (2d Cir.
1987), a record producer falsely labeled eight albums to represent that
they contained performances by Jimi Hendrix. Because of the literal
falsity of the packaging, the court allowed plaintiffs to prove entitlement
to damages without recourse to consumer surveys, witness testimony, or
reaction tests. Id. at 272-73. The court made clear, however, that this was
a special circumstance—the misrepresentation occurred on the product
itself, so actual damages were inferable from the fact that the records
successfully sold on the market. Id. at 272. Such is not the case here.
4Customer inquiries were taken as evidence of actual damage to
goodwill in Criticare Systems, Inc. v. Nellcor Inc., 856 F.Supp. 495 (E.D.
Wisc. 1994), where an allegedly false letter was presented at a
conference, prompting audience members to “press [plaintiff] to explain
[the false] allegations during the remainder of the conference and
afterwards.” Id. at 507. From these inquiries, the court opined that a jury
could reasonably conclude that the plaintiff had lost business and suffered
depletion of goodwill in the marketplace. Id. at 508-09. But we rejected
this approach in Podiatric Physicians, where we held that a letter of
inquiry may have demonstrated some confusion but did not show that the
customer was “tricked into believing an untruth about plaintiff.” 185 F.3d
at 617.
compensate for marketplace injury such as harm to goodwill.3
A contrary rule would risk conferring an undue windfall on
Balance Dynamics. Balance Dynamics presented no evidence
that its goodwill was harmed, or that customers were actually
deceived by its advertisement.4 To the contrary, the evidence
indicated that Balance Dynamics’ business was not harmed by
Schmitt’s letters. Balance Dynamics’ sales increased after the
period in question, and there was no decrease in the price of
its product. Further, Balance Dynamics admitted that no
customers had ever informed it that it was losing a sale due to
the Schmitt communications. While literal falsehood or the
likelihood of deception may be sufficient to entitle Balance
Dynamics to injunctive relief or reimbursement for responsive
advertising, it should not permit Balance Dynamics to recover
for injuries to goodwill in the absence of some more
substantial indication that these injuries actually occurred. Cf.
No. 97-2023 Balance Dynamics Corp.
v. Schmitt Industries
11
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).
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.
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.

-- 11 of 14 --

12 Balance Dynamics Corp.
v. Schmitt Industries
No. 97-2023
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.
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.
No. 97-2023 Balance Dynamics Corp.
v. Schmitt Industries
17
deliberate intent or bad faith does not entitle Balance
Dynamics to recover money for damages to goodwill.
1. Literal Falsity
Because proof of “actual confusion” can be difficult to
obtain, Lindy Pen Co. Inc. v. Bic Pen Corp., 982 F.2d 1400,
1407 (9th Cir. 1993), most of the circuits have ruled that
when a statement is literally false, a plaintiff need not
demonstrate actual customer deception in order to obtain
relief under the Lanham Act. However, the “literal falsity”
rule has never permitted a plaintiff to recover marketplace
damages without other proof that such damages occurred.
Rather, this rule has been stated in suits in which the plaintiff
sought injunctive relief, see, e.g., United Indus. Corp. v.
Clorox Co., 140 F.3d 1175, 1180 (8th Cir. 1998); Seven-Up
Co. v. Coca-Cola Co., 86 F.3d 1379, 1389 (5th Cir. 1996);
McNeil-P.C.C., Inc. v. Bristol-Myers Squibb Co., 938 F.2d
1544, 1549 (2d Cir. 1991); cf. Federal Trade Commission v.
Brown & Williamson Tobacco Corp., 778 F.2d 35 (D.C. Cir.
1985); or literal falsity was not found, see, e.g., Podiatric
Physicians, 185 F.3d at 614-18; C.B. Fleet Co., Inc. v.
Smithkline Beecham Consumer Healthcare, L.P., 131 F.3d
430, 434 (4th Cir. 1997); or marketplace damages were not
awarded under the Lanham Act, see, e.g., Rhone-Poulenc
Rorer Pharmaceuticals, Inc. v. Marion Merrell Dow, Inc., 93
F.3d 511, 516 (8th Cir. 1996); Avila v. Rubin, 84 F.3d 222,
227 (7th Cir. 1996); or literal falsity was accompanied by
other proof of marketplace damages. See, e.g., BASF Corp.
v. Old World Trading Co., 41 F.3d 1081, 1085-88 (7th Cir.
1994); U-Haul Int’l v. Jartran, Inc., supra.
At trial, Balance Dynamics attempted to show that
Schmitt’s advertisements were literally false. But the above
cases demonstrate that literal falsity, without more, is
insufficient to support an award of money damages to

-- 12 of 14 --

16 Balance Dynamics Corp.
v. Schmitt Industries
No. 97-2023
unwillingness to irk customers as the plaintiff pursues proof
of harm.
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 expenses are 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.
B. Damage to Goodwill
Although Balance Dynamics stipulated that it suffered no
lost sales or change in financial condition, it reserved the right
to seek, inter alia, damages to its goodwill. To recover for
damage to goodwill, the plaintiff bears the burden of proof.
Web Printing Controls Co., Inc. v. Oxy-Dry Corp., 906 F.2d
at 1204-05; Lithuanian Commerce Corp. v. Sara Lee
Hosiery, 47 F.Supp.2d 523, 533 (D.N.J. 1999). Schmitt
contends that Balance Dynamics offered no evidence that its
goodwill or reputation within the industry was actually
damaged by Schmitt’s communications. But Balance
Dynamics presented evidence of the literal falsity of the
Schmitt advertisements and also contended that Schmitt
violated the Lanham Act with deliberate intent and bad faith.
Though the “actual confusion” rule would ordinarily preclude
Balance Dynamics’ claim for goodwill, in certain
circumstances the literal falsity of an advertisement or
evidence of deliberate intent or bad faith has sufficed to
entitle a plaintiff to certain forms of relief or to create a
presumption of damages in the marketplace. The trial court
seems to have acknowledged this in stating that literal falsity
could prove the existence of actual confusion. However, we
hold that in the present case, evidence of literal falsity and
No. 97-2023 Balance Dynamics Corp.
v. Schmitt Industries
13
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.
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

-- 13 of 14 --

14 Balance Dynamics Corp.
v. Schmitt Industries
No. 97-2023
necessary expenses incurred in mitigating the detrimental
effects of that transgression. Id.
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 before trying 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.
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
No. 97-2023 Balance Dynamics Corp.
v. Schmitt Industries
15
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.
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.
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

-- 14 of 14 --