United States v. 2005-10-07 | 04-35229 | the State of Idaho Potato Commission V G&tterminal…

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
 THE STATE OF IDAHO POTATO
COMMISSION, No. 04-35229
Plaintiff-Appellee, D.C. No.
v. CV 98-0088 DOC
G&T TERMINAL PACKAGING, INC.,
Defendant-Appellant. 
 THE STATE OF IDAHO POTATO
COMMISSION, No. 04-35238
Plaintiff-Appellant, D.C. No.
v. CV 98-0088 DOC
G&T TERMINAL PACKAGING, INC., OPINION
Defendant-Appellee. 
Appeals from the United States District Court
for the District of Idaho
David O. Carter, District Judge, Presiding
Argued and Submitted
July 13, 2005—Seattle, Washington
Filed October 7, 2005
Before: A. Wallace Tashima, Richard A. Paez, and
Consuelo M. Callahan, Circuit Judges.
Opinion by Judge Tashima
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COUNSEL
Michael S. Gilmore, Deputy Attorney General (Idaho), Boise,
Idaho, for the plaintiff-appellant and cross-appellee.
Richard C. Boardman, Perkins Coie LLP, Boise, Idaho, for
the defendant-appellee and cross-appellant.
OPINION
TASHIMA, Circuit Judge:
In its appeal, the Idaho Potato Commission (“IPC”) chal-
lenges the district court’s ruling that a no-challenge provision
in its certification mark licensing agreement with G&T Ter-
minal Packaging (“G&T”) is unenforceable. G&T appeals
several damages awards to IPC for breach of contract and vio-
lation of the Lanham Act, as well as an award of attorney’s
fees and costs. We have jurisdiction over these appeals pursu-
ant to 28 U.S.C. § 1291.
Agreeing with the Second Circuit in Idaho Potato Commis-
sion v. M&M Produce Farms & Sales, 335 F.3d 130 (2d Cir.
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2003) (M&M III), cert. denied, 541 U.S. 1027 (2004), we
hold that the no-challenge provision in IPC’s licensing agree-
ment is unenforceable. We also affirm the district court’s $1
and $100,000 damages awards to IPC. We reverse, however,
the $50,000 contract damages award to IPC, and vacate the
award of attorney’s fees and costs to IPC and remand those
matters to the district court for reconsideration in light of our
limited reversal.
FACTS AND PROCEDURAL BACKGROUND
IPC is a statutorily-created agency of the State of Idaho
formed for the purpose of promoting Idaho potatoes. See
Hapco Farms, Inc. v. Idaho Potato Comm’n, 238 F.3d 468
(2d Cir. 2001). IPC finances its promotional work in part by
licensing several certification marks for Idaho potatoes
including “Idaho” and “Grown in Idaho.” G&T is a wholesale
distributor of potatoes. Beginning in 1968, G&T entered into
a series of licenses with IPC to use IPC’s certification marks.
The most recent of these licenses expired on September 1,
1998. This license contained provisions in which G&T recog-
nized the validity of IPC’s marks and agreed not to challenge
IPC’s rights in the marks while the license was in effect or
after its expiration.
In February 1998, IPC filed this action in the United States
District Court for the District of Idaho against G&T. IPC
alleged that G&T had breached its licensing agreement and
infringed IPC’s certification marks by, inter alia, failing to
keep adequate records and using unlicensed potato repackers.
In July 1998, G&T filed a complaint in intervention in three
consolidated cases involving IPC and potato wholesalers in
the United States District Court for the Southern District of
New York. G&T’s complaint in intervention alleged that
IPC’s certification marks were unenforceable and subject to
cancellation under the Lanham Act. The New York district
court stayed further proceedings in IPC’s Idaho case against
G&T pending resolution of the issues raised in G&T’s com-
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plaint. The New York court eventually dismissed G&T’s
claims, concluding that the Eleventh Amendment shielded
IPC from suit.1 M&M II, 95 F. Supp. 2d at 156.
After dismissal of G&T’s New York action, this Idaho case
was reactivated in March 2001. IPC added a breach of con-
tract claim based on G&T’s New York complaint, alleging
that G&T had violated the no-challenge clause in its license
and seeking to recover IPC’s costs in defending the suit. The
Idaho district court granted partial summary judgment for
IPC, concluding that G&T had breached the licensing agree-
ment as a matter of law. It denied summary judgment on the
issue of damages, however, determining that an issue of fact
remained as to the amount IPC spent defending against
G&T’s claims. In April 2003, the remaining issues in the case
proceeded to trial.
On July 11, 2003, after trial but before the district court
rendered judgment, the Second Circuit issued a decision hold-
ing the no-challenge provision of IPC’s license agreement
unenforceable. M&M III, 335 F.3d at 139. Based on M&M
III, G&T moved for reconsideration of the district court’s rul-
ing that G&T’s New York complaint breached the no-
challenge provision of its licensing agreement. The district
court granted G&T’s motion, and elected to follow M&M III.
It thus vacated its previous grant of summary judgment to IPC
on that issue.
In October 2003, the district court awarded IPC: (1) $1 as
a result of G&T’s violation of an IPC rule requiring that Idaho
1The New York district court had earlier held that the no-challenge
clause in G&T’s license estopped it from challenging the validity of IPC’s
federal marks. Idaho Potato Comm’n v. M&M Produce Farm & Sales, 35
F. Supp. 2d 313, 323 (S.D.N.Y. 1999) (M&M I). The court in effect
vacated this ruling by holding that the Eleventh Amendment precluded
G&T’s suit. Idaho Potato Comm’n v. M&M Produce Farm & Sales, 95
F. Supp. 2d 150, 156 (S.D.N.Y. 2000) (M&M II), aff’d sub nom. Hapco
Farms, Inc. v. Idaho Potato Comm’n, 238 F.3d 468 (2d Cir. 2001).
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potato packaging identify the variety of potatoes contained
therein; (2) $50,000 as a result of G&T’s failure to preserve
all of its records of sales and purchases of Idaho potatoes in
violation of its licensing agreement; (3) statutory damages of
$100,000 for G&T’s violation of the Lanham Act by purchas-
ing bags with IPC’s certification mark on them and using
them to package potatoes after G&T’s license to use the mark
had expired; and (4) IPC’s costs. IPC later requested an award
of attorney’s fees pursuant to the license agreement and G&T
made a motion to amend the court’s findings and conclusions
and to alter or amend the judgment. The court denied G&T’s
motion and awarded IPC 40 percent of its requested attor-
ney’s fees.
ANALYSIS
IPC challenges the district court’s ruling that the no-
challenge provision in its licensing agreement is unenforce-
able. G&T contests the propriety of each of the court’s dam-
ages awards and its award of IPC’s attorney’s fees and costs.
I. IPC’s No-Challenge Provision
IPC asks us to disagree with M&M III and hold the no-
challenge provision in its licensing agreement enforceable.
G&T argues that issue preclusion bars IPC from litigating the
issue in this court and that, in the event we reach the merits
of the dispute, we should adopt the Second Circuit’s
approach.
A. Issue Preclusion
G&T relies on the doctrine of issue preclusion, or collateral
estoppel, to argue that M&M III bars IPC from relitigating the
issue of whether the no-challenge provision is enforceable.2
2As G&T points out, although a defendant generally must plead issue
preclusion as an affirmative defense in the district court, the Second Cir-
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Issue preclusion can apply only if: (1) M&M III gave IPC a
full and fair opportunity to litigate the issue; (2) the issue was
actually litigated in M&M III; (3) IPC lost on the issue as a
result of a final judgment in M&M III; and (4) IPC was a
party or in privity with a party in M&M III. United States
Internal Revenue Serv. v. Palmer (In re Palmer), 207 F.3d
566, 568 (9th Cir. 2000). The parties appear to agree that
these elements are met.
[1] Nonetheless, IPC argues that because it is a state agency
it is not subject to issue preclusion on issues of law. In United
States v. Mendoza, 464 U.S. 154, 162 (1984), the Supreme
Court held that nonmutual offensive collateral estoppel3 did
not apply against the federal government so as to preclude
relitigation of the issues in that case. Despite the Supreme
Court’s previous approval of the use of nonmutual offensive
collateral estoppel by private litigants, Mendoza recognized
cuit issued its M&M III decision after the Idaho district court had granted
IPC summary judgment on its breach of contract claim. It was only on
later reconsideration in light of M&M III that the district court held the no-
challenge provision unenforceable. G&T thus could not have raised issue
preclusion as an affirmative defense. It is therefore permissible for G&T
to raise the issue on appeal. Chew v. Gates, 27 F.3d 1432, 1437 n.2 (9th
Cir. 1994).
3Nonmutual collateral estoppel refers to use of collateral estoppel by a
nonparty to a previous action to preclude a party to that action from reliti-
gating a previously determined issue in a subsequent lawsuit against the
nonparty. Blonder-Tongue Labs., Inc. v. Univ. of Ill. Found., 402 U.S.
313, 320-30 (1971). “Offensive” use of nonmutual collateral estoppel
occurs when a plaintiff seeks to prevent a defendant from relitigating an
issue that the defendant previously litigated unsuccessfully against a dif-
ferent party. Mendoza, 464 U.S. at 159 n.4. “Defensive” use of nonmutual
collateral estoppel involves a defendant attempting to preclude a plaintiff
from relitigating an issue that the plaintiff previously litigated unsuccess-
fully against a different party. Id. Defendant G&T invokes nonmutual
defensive collateral estoppel in an attempt to prevent Plaintiff IPC from
relitigating the issue of the validity of its no-challenge license provision
because in M&M III the Second Circuit determined that IPC could not
enforce an identical license provision against a former licensee. See 335
F.3d at 139.
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that the government differs from private litigants in the geo-
graphic breadth of its litigation and in the nature of the issues
it pursues. Id. at 159-60 (“Government litigation frequently
involves legal questions of substantial public importance;
indeed, because the proscriptions of the United States Consti-
tution are so generally directed at governmental action, many
constitutional questions can arise only in the context of litiga-
tion to which the government is a party.”). It noted that:
A rule allowing nonmutual collateral estoppel
against the government in such cases would substan-
tially thwart the development of important questions
of law by freezing the first final decision rendered on
a particular legal issue. Allowing only one final
adjudication would deprive this Court of the benefit
it receives from permitting several courts of appeals
to explore a difficult question before this Court
grants certiorari. Indeed, if nonmutual estoppel were
routinely applied against the government, this Court
would have to revise its practice of waiting for a
conflict to develop before granting the government’s
petitions for certiorari.
Id. at 160 (citations omitted).
[2] Mendoza’s rationale applies with equal force to G&T’s
attempt to assert nonmutual defensive collateral estoppel
against IPC (a state agency). See Coeur D’Alene Tribe of
Idaho v. Hammond, 384 F.3d 674, 689-90 (9th Cir. 2004)
(relying on Mendoza’s reasoning to conclude, under Idaho
state law preclusion principles, that nonmutual offensive col-
lateral estoppel did not preclude a state agency from relitigat-
ing a legal issue that had previously been determined against
the agency by a state court); Hercules Carriers, Inc. v. Claim-
ant State of Fla., 768 F.2d 1558, 1578-79 (11th Cir. 1985)
(applying Mendoza to hold that nonmutual defensive collat-
eral estoppel did not operate against a state government). We
therefore hold that issue preclusion does not prevent IPC from
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challenging the district court’s determination that the no-
challenge clause of IPC’s licensing agreement is unenforce-
able. Because G&T cannot collaterally estop IPC from reliti-
gating the issue, we go on to assess the validity of IPC’s no-
challenge provision.
B. M&M III
[3] In M&M III, the Second Circuit held that M&M Pro-
duce Farm & Sales (“M&M”) could challenge the validity of
IPC’s certification mark for Idaho potatoes in spite of a no-
challenge provision in a licensing agreement between the two.
335 F.3d at 139. M&M’s former licensing agreement con-
tained a provision, like the one in G&T’s license, in which
M&M recognized the validity of IPC’s certification marks
and promised not to challenge the marks during the license
term or after its expiration. See id. at 134. M&M sought to
challenge the validity of the certification marks nonetheless,
arguing that the no-challenge provision was unenforceable
because it violated the public policy underlying the Lanham
Act. Id. The Second Circuit applied the balancing test articu-
lated by the Supreme Court in Lear, Inc. v. Adkins, 395 U.S.
653 (1969), to determine that the provision should not be
enforced. See M&M III, 335 F.3d at 135-37.
Lear involved a dispute between a patent holder and a
licensee who sought to challenge the validity of the patent
based upon which it had agreed to pay royalties. 395 U.S. at
655-56. The Court held that licensee estoppel did not preclude
the licensee’s challenge, overruling a previous decision hold-
ing that a licensee operating under a license agreement gener-
ally could not simultaneously challenge the validity of the
underlying patent. Id. at 670-71; see also Automatic Radio
Mfg. Co. v. Hazeltine Research, Inc., 339 U.S. 827, 836
(1950). The Court reasoned that:
Surely the equities of the licensor do not weigh very
heavily when they are balanced against the important
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public interest in permitting full and free competition
in the use of ideas which are in reality a part of the
public domain. Licensees may often be the only indi-
viduals with enough economic incentive to challenge
the patentability of an inventor’s discovery. If they
are muzzled, the public may continually be required
to pay tribute to would-be monopolists without need
or justification. We think it plain that the technical
requirements of contract doctrine must give way
before the demands of the public interest in the typi-
cal situation involving the negotiation of a license
after a patent has issued.
Lear, 395 U.S. at 670-71. The Court also refused to enforce
a provision of the parties’ license agreement that would have
required the licensee to pay royalties until a court held the
patent invalid. Id. at 671-74. It noted that:
The parties’ contract, however, is no more control-
ling on this issue than is the State’s doctrine of
estoppel, which is also rooted in contract principles.
The decisive question is whether overriding federal
policies would be significantly frustrated if licensees
could be required to pay royalties during the time
they are challenging patent validity in the courts.
Id. at 673. The Lear court thus balanced the policies underly-
ing state contract law against those animating federal patent
law in placing limits on the parties’ contractual obligations.
In M&M III, the Second Circuit noted that courts had fre-
quently applied the Lear balancing test to trademark licensing
contracts. 335 F.3d at 136. It went on to observe that courts
have generally precluded licensee challenges to trademarks
after weighing the public interest in trademarks against con-
tract principles. Id. (citing MWS Wire Indus., Inc. v. Cal. Fine
Wire Co., 797 F.2d 799, 803 (9th Cir. 1986), and Beer Nuts,
Inc. v. King Nut Co., 477 F.2d 326, 329 (6th Cir. 1973)). It
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concluded that the trademark cases were not controlling in the
certification mark context, however, because the two types of
marks serve different public interests. Id. at 138.
Trademarks protect the public from confusion by accu-
rately indicating the source of a product. They preserve a pro-
ducer’s good will “in order that the purchasing public may not
be enticed into buying A’s product when it wants B’s prod-
uct.” Id. (quoting T & T Mfg. Co. v. A. T. Cross Co., 587 F.2d
533, 538 (1st Cir. 1978)). Trademark owners have a monop-
oly over their marks, which they can license as they see fit as
long as such licensing does not cause public confusion. Id. A
certification mark, on the other hand, is a mark used by some-
one other than its owner to signify that a product or service
has a certain characteristic. 3 McCarthy on Trademarks and
Unfair Competition § 19:91 (4th ed. 2005) (“McCarthy”). The
certification mark owner is required to license the mark to
anyone who meets the certification criteria. M&M III, 335
F.3d at 138 (citing McCarthy § 19:96).
The M&M III court observed that the distinction between
certification marks and trademarks reflects different underly-
ing public interests. While certification marks resemble trade-
marks in that they attempt to prevent consumer confusion by
communicating information regarding a product’s characteris-
tics, certification marks also have another purpose. Id. M&M
III reasoned that certification marks protect “a further public
interest in free and open competition among producers and
distributors of the certified product.” Id. This is achieved by
protecting certification mark licensees from the certification
mark owner’s influence in an attempt to ensure the broadest
possible competition in the market for certified goods. Id. (cit-
ing 15 U.S.C. § 1064(5), which allows cancellation of a certi-
fication mark when the owner: produces or markets goods to
which the mark is applied; permits use of the mark for pur-
poses other than to certify; or discriminately refuses to certify
one who maintains the standards the mark signifies). The
court viewed this public interest as “akin to the public interest
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in the ‘full and free use of ideas in the public domain’
embodied in the patent laws.” Id. at 138-39 (quoting Lear,
395 U.S. at 674).
[4] The Second Circuit held that IPC could not enforce the
no-challenge provision against M&M because the public
injury that would result outweighed the general interest in
enforcing written contracts. Id. at 139. In reaching this con-
clusion, the court first observed that the provision restricted
licensees in a way unrelated to controlling the quality of the
certified product. Id. This restriction inured to the benefit of
IPC in contravention of its duty not to interfere with a free
market for Idaho potatoes. Id. Next, the court noted that par-
ties having at some point entered into an IPC licensing agree-
ment might be the only ones with sufficient economic
incentive to challenge any of IPC’s conduct that arguably
compromised its neutrality as a certification mark holder. Id.
Finally, the court looked to the public interest underlying the
merits of M&M’s challenges. Id. It reasoned that M&M’s
specific allegations regarding violations of IPC’s duties as a
mark holder implicated the public interest in creating a free
market for Idaho potatoes unaffected by IPC’s potentially
conflicting economic interests. Id.
IPC makes three primary contentions in arguing that we
should disapprove the district court’s reliance on M&M III.
First, it argues that the policy underlying certification marks
mirrors that of trademarks and that M&M III therefore erred
in treating certification marks differently. Next, it contends
that M&M III improperly imported into its analysis patent law
principles inconsistent with the policies underlying the Lan-
ham Act. Finally, IPC points out that a large number of certi-
fication mark holders share its concerns regarding M&M III’s
holding.
C. Certification Marks Versus Trademarks
IPC argues that the only certification mark policy reflected
in the Lanham Act is that underlying trademarks — the avoid-
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ance of public confusion. In its view, M&M III should have
therefore enforced the no-challenge provision as courts have
done in the trademark context.
Certification marks, however, differ from trademarks in a
number of significant ways. See McCarthy § 19:91 (“A certi-
fication mark is a special creature created for a purpose
uniquely different from that of an ordinary trademark or ser-
vice mark.”). Certification marks are subject to cancellation if
the owner produces or markets goods on which the mark
appears, permits use of the mark for purposes other than to
certify, or discriminately refuses to certify the goods of one
who meets the standards the mark denotes. 15 U.S.C.
§ 1064(5). The mark holder’s duty to license all who qualify
makes certification “a form of limited compulsory licensing.”
McCarthy § 19:96.
[5] The Lanham Act makes clear that certification marks
serve other public interests in addition to the prevention of
public confusion. Its certification mark cancellation provi-
sions illustrate the legislative intent to protect “a further pub-
lic interest in free and open competition among producers and
distributors of the certified product.” M&M III, 335 F.3d at
138. By requiring certification mark holders to license all
individuals who meet the certification criteria, the Lanham
Act ensures that the market will include as many participants
as can produce conforming goods. By preventing mark hold-
ers from becoming market participants, it removes incentives
for mark holders to engage in anti-competitive conduct. The
Lanham Act’s cancellation provisions thus appear designed to
promote free competition in the market for certified products.4
We therefore agree with M&M III’s assessment of the policy
concerns underlying the Lanham Act’s certification mark
regime.
4IPC offers no persuasive argument to the contrary, simply asserting
that the Lanham Act’s restrictions on certification mark holders serve an
anti-confusion purpose but failing to explain why they cannot also encour-
age free competition.
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[6] We also find persuasive M&M III’s conclusions regard-
ing the relative weight of the pertinent public interests. In
M&M III, as in this case, IPC sought to enforce a no-
challenge provision against a former licensee. Allowing it to
do so would enable it to prevent anyone who had ever held
an IPC license from challenging its conduct as a certification
mark owner. This would likely leave IPC’s conduct
unchecked by precluding challenges by the only individuals
with enough economic incentive to bring them.5 See M&M
III, 335 F.3d at 139 (“[P]arties that have entered into a
licensee relationship with the IPC may often be the only indi-
viduals with enough economic incentive to challenge the
IPC’s licensing scheme, and thus the only individuals with
enough economic incentive to force the IPC to conform to the
law.” (citing Lear, 395 U.S. at 670)). As M&M III concluded,
the public interest in ensuring free competition in the market
for certified goods outweighs IPC’s interest in enforcing a
contractual provision that would prevent all current and for-
mer licensees from challenging its conduct as a certification
mark holder.
D. M&M III’s Use of Patent Law Principles
IPC devotes much of its argument to asserting that M&M
III improperly weighed the public interest underlying patents
instead of one underlying certification marks. While M&M III
analogized the public interest underlying certification marks
to that underlying patents, it went on to analyze certification
5IPC mentions in passing that the Federal Trade Commission is empow-
ered to challenge the validity of certification marks. See 15 U.S.C. § 1064.
It offers no further analysis, however, and one is left to wonder what
resources, if any, the FTC devotes to policing the behavior of certification
mark holders. A search of Westlaw’s “ALLFEDS” database returns 8
cases containing the terms “certification mark” and “Federal Trade Com-
mission.” None of the 8 cases involves an FTC challenge to a certification
mark. Similarly, none of the 33 Trademark Trial and Appeal Board deci-
sions containing the term “certification mark” involves challenges by the
FTC.
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mark policies rooted in the Lanham Act’s certification mark
provisions. See 335 F.3d at 138-39. We thus reject IPC’s con-
tention that M&M III improperly considered the patent law
policy goals articulated in Lear instead of those underlying
certification mark law.
IPC also contends that M&M III should not have applied
the Lear balancing test at all. It acknowledges, however, that
other courts have balanced the public interests in trademark
cases involving no-challenge clauses. See M&M III, 335 F.3d
at 136 (citing MWS Wire Indus., 797 F.2d at 803; VISA Int’l
Serv. Assn. v. Bankcard Holders of Am., 784 F.2d 1472, 1473
(9th Cir. 1986); T & T Mfg., 587 F.2d at 538; Beer Nuts, 477
F.2d at 329). Because IPC offers no persuasive reason for
why it is improper to use Lear balancing in Lanham Act
cases, we adopt M&M III’s approach.
E. M&M III’s Potential Adverse Effects for
Certification Mark Holders
Finally, IPC summarizes the arguments of 20 certification
mark holders who filed a joint amici curiae brief in support
of IPC’s petition for a writ of certiorari in M&M III. The
amici’s arguments restate many of IPC’s concerns, with
emphasis placed on the increased cost of enforcement M&M
III will cause for non-profit and governmental certification
mark holders. While it may be true that infringement actions
will now cost more because licensees and former licensees
will often challenge the validity of the mark in question, the
amici’s arguments fail to address or give any weight to the
countervailing public policy concern. Allowing certification
mark holders to preclude challenges by all individuals who
hold or have held a license would remove what appears to be
the principal mechanism for ensuring that mark holders abide
by their statutory duties.
[7] We agree with the district court that M&M III appropri-
ately balanced the relevant public policies in holding no-
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challenge provisions in certification mark licenses unenforce-
able. Accordingly, we conclude that the district court did not
err in declining to enforce the no-challenge provision against
G&T.
II. Damages, Attorney’s Fees, and Costs
The district court initially awarded IPC: $1 in nominal
damages because G&T had violated its license by failing to
comply with IPC’s variety labeling rule; $50,000 as a result
of G&T’s breach of its license by failing to preserve all of its
records of Idaho potato sales and purchases; statutory dam-
ages of $100,000 for G&T’s violation of the Lanham Act by
purchasing and using bags with IPC’s certification mark on
them after G&T’s license to use the mark had expired; and
IPC’s costs. It later went on to deny G&T’s motion for recon-
sideration and to award IPC 40 percent of the amount of attor-
ney’s fees it requested.
G&T challenges all of these awards. First, it argues that the
$1 award constitutes an improper civil penalty under Idaho
Code § 22-1213. It goes on to contest the $50,000 award as
unsupported by the record. It then challenges the $100,000
award as based on an erroneous conclusion that IPC was enti-
tled to statutory damages. Finally, it contends that the district
court improperly awarded IPC attorney’s fees and costs.
G&T appeals from the district court’s Findings of Fact and
Conclusions of Law and from its denial of G&T’s Federal
Rule of Civil Procedure 52(b) and 59(e) motion to amend the
court’s findings and conclusions and to alter or amend the
judgment. We review for abuse of discretion the denial of
G&T’s motion. See Smith v. Pac. Props. & Dev. Corp., 358
F.3d 1097, 1100 (9th Cir. 2004). We review the district
court’s findings of fact for clear error and its conclusions of
law de novo. Watkins v. Ameripride Servs., 375 F.3d 821, 824
(9th Cir. 2004).
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A. Nominal Damages Award for IPC Rule Violation
As part of its licensing agreement with IPC, G&T agreed
to comply with IPC’s rules in general and specifically with its
variety labeling rule. The district court found that G&T failed
to comply with the variety labeling rule. It went on to hold
that G&T’s violations were minor and that IPC should there-
fore recover $1 from G&T. G&T does not dispute that it vio-
lated its license by failing to include variety labeling on its
packaging.
G&T argues, however, that the district court erred by
imposing a $1 civil penalty as a result of the variety labeling
violations. This award, it contends, contravenes Idaho Code
§ 22-1213, which creates civil penalties for violating IPC
rules or licensing agreements. In G&T’s view, because § 22-
1213 requires IPC to provide notice and opportunity for a
hearing before IPC assesses civil penalties, it also requires
IPC to exhaust its administrative remedies by giving such
notice and opportunity before seeking to recover in court for
rule violations. See Idaho Code § 22-1213(3).
[8] As a preliminary matter, § 22-1213 does not by its
terms require IPC to exhaust administrative remedies before
filing suit. Section 22-1213(1) provides that IPC or its duly
authorized agent may assess civil penalties of not more than
$1,000 for each offense against any person who violates an
IPC rule or licensing agreement. Section 22-1213(3) states
that no civil penalty may be assessed unless the person
charged was given notice and opportunity for a hearing and
that IPC may enforce in district court penalties it is unable to
collect administratively. Subsection (3) goes on to state that
“[n]othing contained in this section shall be deemed to pre-
clude the commission from pursuing any other civil or crimi-
nal remedies available to it as provided by law.”
[9] The pertinent question is whether § 22-1213 authorizes
a court, as opposed to IPC, to impose the civil penalties. As
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G&T points out, the statute specifically provides for IPC to
assess civil penalties but makes no mention of a court doing
so. See Idaho Code § 22-1213(1), (3). Section 22-1213 thus
does not explicitly empower a court to impose the civil penal-
ties it creates. IPC points to no pertinent authority suggesting
that it implicitly does so, and we have found none. We there-
fore conclude that if civil penalties are to be assessed under
§ 22-1213, IPC must assess them in administrative proceed-
ings and then enforce them in district court if necessary. The
$1 award by the district court therefore cannot be a § 22-1213
civil penalty.
[10] The $1 award can, however, constitute nominal dam-
ages for breach of contract. Despite the fact that IPC sought
civil penalties under § 22-1213, the district court did not indi-
cate reliance on § 22-1213 in imposing the $1 damages
award. We thus conclude that the award can be viewed as
nominal damages and we affirm the award on that basis.6
B. Damages Award for Failing to Preserve Records
The district court awarded IPC $50,000 for G&T’s breach
of its license by failing to preserve all of its records of Idaho
potato sales and purchases. The court found the breach to be
relatively serious because of IPC’s resulting discovery prob-
lems and the attendant discovery disputes involving the court.
It did not explain how or why it chose the $50,000 figure.
6G&T also argues that the $1 award is improper because IPC waived its
right to require G&T to comply with its variety labeling rule. G&T points
to an October 1997 letter that IPC wrote to G&T warning it against unli-
censed use of IPC marks and against using unlicensed repackers and con-
tainer manufacturers. In G&T’s view, by failing to mention that G&T was
also required to follow other IPC rules as provided in its license, IPC
waived the right to enforce the variety labeling rule against G&T. As IPC
points out, G&T offers no authority for the proposition that warning a per-
son about certain legal requirements under a license waives other legal
requirements. G&T’s waiver argument therefore fails.
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G&T argues that the lack of record evidence of damage to
IPC resulting from the breach renders the $50,000 an
improper contract damages award. It also argues that the
award is improper as beyond the scope of the relief sought by
IPC. IPC counters that we can uphold the $50,000 award as
a discovery sanction or as a civil penalty under Idaho Code
§ 22-1213, implicitly conceding the lack of support for a con-
tract damages award. It goes on correctly to point out that the
district court may award relief not prayed for under Federal
Rule of Civil Procedure 54(c). Finally, it argues that we
should remand to the district court for further explanation of
the $50,000 award in the event that we decide not to affirm
the award.
1. Discovery Sanction
IPC first argues that we can uphold the $50,000 award as
a discovery sanction based on G&T’s violation of its ongoing
duty to preserve evidence. See Fujitsu Ltd. v. Fed. Express
Corp., 247 F.3d 423, 436 (2d Cir. 2001) (observing that a dis-
trict judge has discretion to impose an appropriate sanction
when he or she has determined that a party on notice of its
obligation to preserve evidence intentionally destroyed it).
While G&T stipulated that it failed to preserve some of its
records of sales and purchases of Idaho potatoes, the district
court’s factual findings contain no indication that G&T inten-
tionally destroyed records with knowledge that those records
were relevant to this litigation. Cf. United States v. Kitsap
Physicians Serv., 314 F.3d 995, 1001 (9th Cir. 2002) (holding
that defendants did not engage in spoliation of evidence when
records were intentionally destroyed in accordance with a
document retention policy and state regulations before litiga-
tion commenced). Our review of the record does not reveal
any evidence supporting the conclusion that G&T intention-
ally destroyed evidence and IPC points to none. The record is
thus insufficient to allow us to affirm the award as a discovery
sanction.
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2. Civil Penalty
IPC also argues that we can affirm the award as a civil pen-
alty under Idaho Code § 22-1213. As discussed above, § 22-
1213 does not authorize a court to impose the civil penalties
it creates. We therefore cannot affirm the award as a § 22-
1213 civil penalty.
[11] Because our review of the record reveals no basis upon
which the district court could properly have imposed a dam-
ages award of $50,000, we decline IPC’s invitation to remand
the award for further explanation. Accordingly, we reverse the
$50,000 damage award.
C. Statutory Damages Award for Violation of the
Lanham Act
[12] The district court concluded that G&T violated the
Lanham Act by purchasing bags bearing IPC’s certification
mark and using them to package potatoes after G&T’s license
to use the mark had expired. It went on to award IPC
$100,000 in statutory damages under 15 U.S.C. § 1117(c).
Section 1117(c) allows a plaintiff to opt for statutory damages
in cases involving the use of a counterfeit mark. 15 U.S.C.
§ 1117(c). G&T contends that statutory damages were
improper in this case, thus raising the question of whether its
use of IPC’s mark constituted counterfeiting or mere infringe-
ment. The district court’s determination that G&T’s unautho-
rized use amounted to counterfeiting is a legal conclusion
subject to de novo review. Humetrix, Inc. v. Gemplus S.C.A.,
268 F.3d 910, 921 (9th Cir. 2001).
In order to invoke § 1117’s special civil monetary remedies
against counterfeiting, IPC must establish that: (1) G&T
intentionally used a counterfeit mark in commerce; (2) know-
ing the mark was counterfeit; (3) in connection with the sale,
offering for sale, or distribution of goods; and (4) its use was
likely to confuse or deceive. See McCarthy § 25:15 (citing 15
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U.S.C. §§ 1114(1)(a), 1117(b)). In this context, the mark used
by G&T was counterfeit if: (1) it was a non-genuine mark
identical to IPC’s mark; (2) IPC’s mark was registered on the
Principal Register for use on the same goods to which G&T
applied the mark; (3) IPC’s mark was in use; and (4) G&T
was not authorized to use IPC’s mark on potatoes. See id. (cit-
ing 15 U.S.C. §§ 1116(d)(1)(B), 1127).
G&T acknowledges that it was using IPC’s registered mark
on packages of potatoes without a license to do so. The issue
of whether its behavior constituted counterfeiting therefore
turns on whether its use of IPC’s certification mark was likely
to cause confusion.
G&T contends that its unlicensed use of IPC’s mark was
not likely to cause confusion because the potatoes it packaged
were genuine Idaho potatoes. It points out that courts have
held that the unauthorized sale of genuine goods does not con-
stitute trademark infringement because it does not cause con-
sumer confusion. See, e.g., NEC Elec. v. CAL Cir. Abco, 810
F.2d 1506, 1509 (9th Cir. 1987) (“[T]rademark law is
designed to prevent sellers from confusing or deceiving con-
sumers about the origin or make of a product, which confu-
sion ordinarily does not exist when a genuine article bearing
a true mark is sold.”). However, many cases have found a
likelihood of confusion when a trademark owner was pre-
vented from exercising quality control over the merchandise
bearing its mark. See, e.g., Shell Oil Co. v. Commercial Petro-
leum, Inc., 928 F.2d 104, 107-08 (4th Cir. 1991); El Greco
Leather Prods. Co., Inc. v. Shoe World, Inc., 806 F.2d 392,
395 (2d Cir. 1986) (“One of the most valuable and important
protections afforded by the Lanham Act is the right to control
the quality of the goods manufactured and sold under the
holder’s trademark.”). In addition, many courts have held that
an ex-licensee’s continued use of a trademark is enough to
establish likelihood of confusion. See U.S. Structures, Inc. v.
J.P. Structures, Inc., 130 F.3d 1185, 1190-92 (6th Cir. 1997)
(holding that “proof of continued, unauthorized use of an
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original trademark by one whose license to use the trademark
had been terminated is sufficient to establish ‘likelihood of
confusion,’ ” noting that many courts have reached this con-
clusion, and affirming a treble damages award under 15
U.S.C. § 1117(a), which allows a court to assess treble dam-
ages in cases of mere infringement); see also Burger King
Corp. v. Mason, 710 F.2d 1480, 1492 (11th Cir. 1983) (“The
unauthorized use of a trademark which has the effect of mis-
leading the public to believe that the user is sponsored or
approved by the registrant can constitute infringement.”). But
see U.S. Structures, 130 F.3d at 1192 (holding that ex-
franchisee’s unauthorized use of franchisor’s trademark did
not constitute counterfeiting for purposes of awarding attor-
ney’s fees under 15 U.S.C. § 1117(b)).
In the certification mark context, the mark holder’s ability
to institute quality controls seems vital if a mark is to serve
its purpose. By licensing a party to use the “Idaho” mark, IPC
certifies that the party’s potatoes meet the standards the mark
represents. G&T asserts that its potatoes did meet IPC’s qual-
ity control standards because G&T procured its potatoes from
licensed distributors. It stipulated, however, that it did not
keep all of the records that it was required to keep under IPC
rules. By depriving IPC of the opportunity to monitor and
control quality, G&T created the potential for consumer con-
fusion. See El Greco, 806 F.2d at 395 (noting that “the actual
quality of the goods is irrelevant; it is the control of quality
that a trademark holder is entitled to maintain”). G&T’s use
of the certification mark implied that its potatoes had been
produced and distributed in accordance with IPC’s quality
control procedures, and the fact that this was not the case was
likely to cause consumer confusion. See Shell Oil, 928 F.2d
at 108 (noting that use of Shell’s mark “implies that the prod-
uct has been delivered according to all quality control guide-
lines enforced by the manufacturer” and concluding that the
defendant’s failure to follow those guidelines gave rise to “a
likelihood of customer confusion as to the quality and source
of the bulk oil”). If parties use IPC’s mark without abiding by
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IPC’s quality control provisions, as G&T did in this case, the
certification mark may lose its value because goods bearing
the mark do not consistently meet the standards the mark sig-
nifies.
In addition, those making unauthorized use of the mark
gain a market advantage by avoiding the expense of record
keeping and following IPC’s other rules. Because IPC’s func-
tion is to police its mark, and not to make a profit from the
goodwill associated with it as trademark owners do, IPC will
have trouble establishing damages when it brings a court
action against an unlicensed user. If its only remedy is injunc-
tive relief, as G&T contends should be the case, then there is
very little incentive for potato packers and distributors to
obtain a license. Thus, the qualities that distinguish a certifi-
cation mark from a trademark weigh in favor of making
§ 1117’s statutory penalties available in cases like this one,
where an ex-licensee intentionally makes unauthorized use of
a certification mark.
[13] Because G&T’s unlicensed use of IPC’s certification
mark was likely to cause confusion and to undermine the
effectiveness of IPC’s certification mark licensing regime, we
hold that G&T’s use constituted counterfeiting. Accordingly,
we affirm the district court’s award of statutory damages.
D. Attorney’s Fees
The district court awarded IPC attorney’s fees of
$66,897.60, 40 percent of the requested amount, under the
licensing agreement. Idaho law permits attorney’s fees awards
pursuant to contract provisions. Idaho R. Civ. P. 54(e)(1). We
review for abuse of discretion an award of attorney’s fees
under state law. Vess v. Ciba-Geigy Corp. USA, 317 F.3d
1097, 1102 (9th Cir. 2003). The license agreement provides
that IPC is entitled to recover its attorney’s fees and costs in
any action “to enforce the terms of this agreement, to prose-
cute a violation of this agreement or Licensor’s statutes or
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rules, to enjoin Licensee from an infringement of the marks
or to recover damages for breach of such agreement or for
such infringement. . . .”7
G&T argues that IPC’s suit was driven by allegations with-
drawn at trial regarding G&T misbranding potatoes (that is,
selling non-Idaho potatoes in packages identifying them as
Idaho potatoes). It contends that these allegations were based
on a faulty accounting assessment, absent which IPC would
have renewed G&T’s license. It asserts that an attorney’s fees
award is inequitable under these circumstances.8 IPC counters
that G&T’s failure to keep adequate records and its use of an
unlicensed repacker gave IPC independent grounds to bring
suit and to refuse to renew G&T’s license. It also points out
that “self-help” use of a mark is not an appropriate remedy for
one improperly deprived of its use. See McCarthy § 25:31.
In its finding as to the amount of the award, the district
court stated:
However, as alluded to earlier, the Court finds that
it would be inequitable to award Plaintiff all attor-
ney’s fees incurred in this action. Plaintiff was suc-
cessful on a number of claims, but it was also
unsuccessful in a number of others. From the infor-
mation before the Court, it appears that the unsuc-
cessful claims were in many ways the more costly
claims in terms of attorney time. After a review of
the fee request documents and consideration of the
conduct in and outcome of the case, the Court finds
7Although not expressly so stated in the license agreement, presumably,
IPC is entitled to recover its attorney’s fees only if it prevails in the action.
This implicit condition is not contested on this appeal.
8G&T also argues without citation that the attorney’s fee provision of
the licensing agreement places an unreasonable restriction on the use of
certification marks in contravention of IPC’s duty not to discriminate in
licensing its mark. It fails to explain how such a general license contract
provision constitutes a discriminatory refusal to license.
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that an award of 40% of the requested attorney’s fee
amount would be equitable and appropriate.
[14] As indicated above, we have reversed the damages
award of $50,000 for breach of the license agreement as
unsupported by the record. From the court’s general finding
(and lack of specific allocation), we are unable to tell how
much of the attorney’s fees award was based on the now
reversed $50,000 breach of the license agreement claim. We
therefore vacate the attorney’s fees award and remand to per-
mit the district court to reconsider the amount of that award
in light of these changed circumstances.
E. Costs
The district court awarded IPC its full costs “as it is clearly
the prevailing party in this action.” See Fed. R. Civ. P.
54(d)(1) (“[C]osts other than attorneys’ fees shall be allowed
as of course to the prevailing party.”). We review for abuse
of discretion an award of costs to a prevailing party pursuant
to Rule 54(d). See Save Our Valley v. Sound Transit, 335 F.3d
932, 944 (9th Cir. 2003). Rule 54(d)(1) creates a presumption
in favor of awarding costs to a prevailing party, requiring the
losing party to show why costs should not be awarded. Id. at
944-45.
[15] G&T contends that IPC should not be considered the
prevailing party because it did not win on all of its claims.
Again, just as with the award of attorney’s fees, we cannot tell
the extent to which our reversal of the breach of contract
claim might affect the district court’s prevailing party calcu-
lus. We therefore vacate and remand the award of full costs
to IPC for the district court’s reconsideration.
CONCLUSION
We affirm the district court’s ruling that the no-challenge
provision in IPC’s licensing agreement is unenforceable. We
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also affirm the $1 damages award and the $100,000 statutory
damages award under the Lanham Act. We reverse, however,
the $50,000 award for breach of the license agreement as
unsupported by the record. We also vacate the award of attor-
ney’s fees and costs, and remand those matters to the district
court for its reconsideration in light of this opinion. Each
party shall bear its own costs on appeal.
AFFIRMED in part, REVERSED in part, VACATED
in part, and REMANDED.
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