Hubbard/Downing, Inc. v. Kevin Heath Enterprises et al

Filing 97

OPINION and ORDER regarding Plaintiff's award of sanctions and attorneys' fees and expenses. Defendants shall be jointly and severally liable for sanctions in the amount of $301,967.00. Defendants shall be jointly and severally liable for attorneys' fees and expenses in the amount of $129,170.04. Signed by Judge William S. Duffey, Jr. on 1/6/2014. (dfb)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION

HUBBARD/DOWNING, INC.,
d/b/a HANS PERFORMANCE
PRODUCTS,
Plaintiff,
v.

1:10-cv-1131-WSD

KEVIN HEATH ENTERPRISES,
Defendant.

OPINION AND ORDER
This matter is before the Court following the Court’s May 30, 2013, Order
(the “May 30th Order) [65] finding Kevin Heath and NecksGen, Inc. (collectively,
“Defendants”)1 in contempt for violating the Court’s August 22, 2011, Consent
Order (the “Consent Order”) [37]. In the May 30th Order, the Court determined
that Plaintiff is entitled to an award of sanctions and its reasonable attorneys’ fees
and expenses incurred as a result of Defendants’ violation of the Consent Order.

1

Heath and his company, Kevin Heath Enterprises, were the original defendants
in this action. On January 19, 2011, Plaintiff dismissed Heath from this case.
Plaintiff then initiated this contempt action currently before the Court against
Heath and NecksGen, Inc., a separate company owned by Heath.

The Court also directed Plaintiff to submit documentation evidencing the
attorneys’ fees and expenses incurred in prosecuting its Motion for Order to Show
Cause. On July 1, 2013, Plaintiff filed its Declaration and Supporting
Documentation Evidencing the Attorneys’ Fees and Expenses Incurred in the
Prosecution of Its Motion for Order to Show Cause (the “Attorneys’ Fee Request”)
[67]. On July 12, 2013, Defendants filed their Consolidated Motion and Brief
Requesting Clarification of the Court’s May 30, 2013, Order Regarding Sanctions
Briefing and Requesting a Hearing Regarding Previously Unaddressed Issues (the
“Consolidated Motion”) [69].2 In the Consolidated Motion, Defendants opposed
the amount of attorneys’ fees claimed and requested to be heard on any sanction
that might be imposed as a result of the Court’s finding that they violated the
Consent Order.
On November 7, 2013, the Court granted Defendants’ request to respond to
the sanctions claimed by Plaintiff and scheduled for December 13, 2013, a hearing
at which the parties could present evidence regarding the sanction to be imposed.3, 4
2

The Court notes that Defendants retained new counsel after entry of the
May 30th Order.
3
Defendants also moved to depose Norman Morgan and to require him to submit
an expert report, claiming Plaintiff was relying on Morgan’s expert opinions in
advocating it requested lost profits sanction. Because Morgan had testified at the
March 12, 2013, hearing on Plaintiff’s show cause motion and was subject to
significant cross examination at that hearing, the Court determined that Morgan’s
2

I.

BACKGROUND
A.

Procedural History

On April 16, 2010, Plaintiff HANS Performance Products (“HANS”) filed
an action for patent infringement against Kevin Heath Enterprises (“KHE”) and
Kevin Heath, asserting infringement of U.S. Patent No. 6,009,566 (the “‘566
patent”), which pertains to a head and neck support device used by drivers of race
cars and other high-performance vehicles (the “Underlying Action”). Plaintiff
alleged in its Complaint [1] that KHE and Heath infringed the ‘566 patent by
selling and offering for sale the DefNder G70, a similar head and neck support
device (the “DefNder”).

testimony at the December 13, 2013, hearing, even if he was called to testify as a
fact witness, would be limited to those matters about which he testified at the
March hearing. Defendants’ motion to depose Morgan thus is moot.
4
On October 28, 2013, Defendants also submitted a Notice of Supplemental
Authority [83] in which Defendants referenced Ncube Corp. v. Seachange Int’l,
Inc., 732 F.3d 1346 (Fed. Cir. 2013). Because the notice does not request any
relief, the Court declined to consider the notice as a request for action including a
request to reconsider the May 30th Order. The Court notes that the parties had
entered into the Agreement and Consent Order to settle the patent case originally
filed by Plaintiff in this litigation and in doing so, they simply elected to adopt a
“no more than colorably different” standard as a settlement agreement contract
term to be used in evaluating if Defendants were manufacturing, selling or offering
for sale any products in violation of the Agreement and Consent Order. Ncube
simply discusses the well-established two-part analysis for determining whether a
party violated an injunction against infringement of a patent, not whether a party
violated a patent standard that parties decided to include in a settlement agreement
and consent order. Ncube does not apply to the litigation here.
3

On August 4, 2011, Plaintiff and Defendant KHE elected to conclude the
litigation by entering into a Confidential Settlement Agreement (the “Agreement”)
to “settle, compromise, and resolve the Action.” (Mar. 12, 2013, Hr’g, Defs.’
Ex. F). The Agreement required that a Consent Order be entered by the Court and
the Consent Order was attached as Exhibit A to the Agreement. Heath signed the
Agreement in his capacity as president of KHE.
On August 22, 2011, the Court entered the Consent Order requested by the
parties. The Consent Order provides:
Plaintiff, Hubbard/Downing, Inc., d/b/a Hans Performance Products
(“Hans”), and Defendant, Kevin Heath Enterprises, Inc. (“KHE”),
having conferred and agreed upon an acceptable settlement of this
case, hereby dismiss with prejudice all claims and defenses alleged in
this case. Each side shall bear its own costs.
This Court shall retain jurisdiction as necessary to enforce the
provisions of the applicable Confidential Settlement Agreement
entered into by the parties. The terms of the Confidential Settlement
Agreement are incorporated into this Order and are enforceable as
such.
(Aug. 22, 2011, Consent Order at 1).
B.

Summary of Settlement Agreement

The parties, in executing the Agreement, agreed to the following relevant
terms:
This Agreement (the “Agreement”) is made and entered into by and
between Hubbard/Downing, Inc. d/b/a HANS Performance Products
4

(“HANS”) and Kevin Heath Enterprises, Inc. (“KHE”) (collectively,
the “Parties”), and effective as of the 4th day of August, 2011 (the
“Effective Date”).
...
4. KHE agrees to permanently cease from making, using, selling or
offering for sale the DefNder G70, or devices no more than colorably
different from the DefNder G70.
...
11. This Agreement shall be binding upon and inure to the benefit
of the parties hereto, their affiliates, licensees, successors and assigns.
The parties will impose the obligations under this agreement upon any
legal successors.
...
13. This Agreement constitutes the entire agreement between the
Parties and supersedes any and all other oral or written agreements
relating to this subject matter. No amendments or changes to this
Agreement shall be effective unless made in writing and signed by the
authorized representatives of each party.
(Agreement at 1-3).
C.

This Litigation and Contentions of the Parties

On March 28, 2011, KHE made to Plaintiff its offer to settle the Underlying
Action. On May 9, 2011, shortly after the parties began negotiating their
settlement, Heath registered NecksGen, Inc., (“NecksGen”) as a California
corporation. (Pl.’s Mem. in Supp. of its Mot. at Exs. 4, 5, 9). The corporate
registration lists Heath as NecksGen’s corporate contact. NecksGen and KHE
5

have the same board of directors, officers, office address, and fax number.
(Mar. 12, 2013, Hr’g Tr. at 31, 33, 66, 68). In founding NecksGen, Heath testified
that he “wanted to make [his] own neck brace”5 and needed a corporate vehicle
through which to do so.6 (Id. at 8).
On August 4, 2011, the parties entered into the Agreement, which Heath
signed as president of KHE. On August 22, 2011, this Court entered the Consent
Order agreed to by the parties.7
Less than a year later, by about April 18, 2012, NecksGen began marketing
the NecksGen device. (Pl.’s Mem. in Supp. of its Mot. at Ex. 7).8 The NecksGen
device is sold worldwide, except that Heath elected not to directly sell the
5

The DefNder device Heath and KHE were selling had been designed and
manufactured by a company in China. (Mar. 12, 2013, Hr’g Tr. at 10).
6
On June 27, 2011, NecksGen filed a trademark application in the United States
Patent and Trademark Office (“PTO”) for the trademark “NecksGen.” (Pl.’s Mem.
in Supp. of its Mot. at Ex. 6). Heath signed the trademark application in his
capacity as president of NecksGen. (Id.). In the information fields of the
application, [e-mail] is listed as the email address of the
applicant and the application lists the same physical address as KHE as the address
for NecksGen. (Id. at Exs. 6, 9). The trademark is listed as being intended for use
in association with a “[n]eckbrace for the automobile racing industry for injury
prevention.” (Id. at Ex. 6).
7
On April 18, 2012, NecksGen, by Heath, its president, filed a Trademark/Service
Mark Statement of Use in the PTO. (Pl.’s Mem. in Supp. of its Mot. at Ex. 7). In
its Statement of Use, NecksGen states that the NecksGen mark was first used
anywhere on May 27, 2011, and first used in commerce on February 29, 2012.
8
NecksGen currently markets its NecksGen Rev device. Plaintiff has not claimed
it violates the Consent Order.
6

NecksGen device in Georgia, in his attempt to avoid Plaintiff asserting an action
against NecksGen in Georgia. NecksGen marketed the NecksGen device on its
website (www.necksgen.com), which in most material ways mirrors the website
used to market and sell the DefNder device. (Id. at Exs. 8, 10, 11). Although
NecksGen does not directly sell the NecksGen device in Georgia, it had been
offered for sale in Georgia by Raceday Safety Company. 9 (Mar. 12, 2013,
Hr’g Tr. at 11).
On June 13, 2012, Plaintiff filed its Motion for an Order to Show Cause [38]
on the grounds that Plaintiff became
aware that Mr. Heath is seeking to evade this Court’s Order by
offering for sale in the United States a device no more than colorably
different from the originally accused DefNder G70 device through the
manufacture and sale of a head and neck device known as the
“NecksGen” (“NecksGen device”) by his corporation NecksGen, Inc.
(“NecksGen”), Mr. Heath’s successor company to Defendant KHE.
(Pl.’s Mem. in Supp. of its Mot. at 1-2). In the motion, Plaintiff sought an order
from the Court requiring NecksGen and Heath to show why they should not be
held in contempt of the Consent Order and why injunctive and monetary relief
should not be granted to Plaintiff for Heath and NecksGen’s knowing violation of
9

Heath asserts that Raceday Safety is not authorized to sell the NecksGen device
and that he does not know how Raceday Safety acquired the NecksGen device for
sale. (Mar. 12, 2013, Hr’g Tr. at 12).

7

the Court’s Consent Order. (Id. at 1-2, 22-25; Pl.’s Mot. for an Order to Show
Cause at 2).
On February 8, 2013, the Court issued its Order for NecksGen and Heath to
Show Cause why it should not be found in contempt. A hearing on Plaintiff’s
show cause motion was held on March 12, 2013, at which Plaintiff, NecksGen, and
Heath presented evidence and argument on: (1) whether NecksGen is bound by the
Consent Order; (2) whether the NecksGen device is no more than colorably
different from the DefNder device; and (3) whether NecksGen and Heath should
be held in contempt for violating the Consent Order. The Court also allowed the
parties to submit written memoranda after the hearing.
The Court entered the May 30th Order after considering the parties’
submissions and the evidence presented at the March 12, 2013, hearing. In the
May 30th Order the Court found, under both the “no more than colorably
different” standard as applied in patent law and the common understanding of the
terms agreed to by the parties in this case, that the NecksGen device is no more
than colorably different than the DefNder G70 device. The Court further found
that Heath and NecksGen, being bound by the Consent Order, knowingly violated
the Agreement and the Consent Order by manufacturing, selling and offering the
NecksGen device and thus were in contempt of the Consent Order.

8

The Court also determined that consent decrees are enforced through the
trial court’s civil contempt power and that the Court has broad discretion in
fashioning relief for civil contempt.10 Reynolds v. Roberts, 207 F.3d 1288, 1298
(11th Cir. 2000); McGregor v. Chierico, 206 F.3d 1378, 1385 n.5 (11th Cir. 2000)
(citing United States v. City of Miami, 195 F.3d 1292, 1298 (11th Cir. 1999)). The
Court noted that an award of sanctions may serve either to (1) coerce the
contemnor to comply with a court order, or (2) compensate a party for losses
suffered as a result of the contemnor’s act. See McGregor, 206 F.3d at 1385 n.5.
Sanctions may be imposed to coerce the contemnor to comply with a court’s order,
but may not be so excessive as to be punitive in nature. In re Application to
Adjudge Trinity Indus., 876 F.2d 1485, 1493 (11th Cir. 1989) (citing United States
v. United Mine Workers, 330 U.S. 258, 303 (1947); Florida Steel Corp. v. NLRB,
648 F.2d 233, 239 (5th Cir. 1981); and Lance v. Plummer, 353 F.2d 585, 592
(5th Cir. 1965) cert. denied 384 U.S. 929 (1965)).

10

Because this is a contempt proceeding, rather than a patent infringement case,
the Court is not bound by the remedy provisions of the patent statute, although the
Court is not prohibited from using patent infringement provisions and principles in
considering a remedy in a contempt proceeding. See Dow Chem. Co. v. Chem.
Cleaning, Inc., 434 F.2d 1212, 1214-15 (5th Cir. 1970) (“In dealing with a civil
contempt proceeding the district court [is] not bound by the provisions of Title 35,
U.S.C. § 284.”).
9

In establishing an amount to impose, the Court acknowledged that it must
consider several factors, “including the character and magnitude of the harm
threatened by continued contumacy, the probable effectiveness of any suggested
sanction in bringing about compliance, and the amount of the contemnor’s
financial resources and consequent seriousness of the burden to him.” Id. (citing
United Mine Workers, 330 U.S. at 303).
Plaintiff here requests the Court to award Plaintiff its lost profits, to disgorge
any of Defendants’ profits resulting from the sale of the NecksGen device, and
award Plaintiff its attorneys’ fees and costs incurred to enforce the Consent Order.
Plaintiff also requests the Court to double the award to it because NecksGen
willfully and knowingly violated the Consent Order. (See Pl.’s Hr’g Br. [48] at
21-23). Plaintiff requested that Defendants be required to produce certain financial
information for Plaintiff’s use in determining Defendants’ NecksGen sales in
violation of the Consent Order.
In the May 30th Order, the Court found it appropriate to consider an award
of Plaintiff’s lost profits to compensate Plaintiff for losses it suffered as a result of
Defendants’ contemptuous conduct. See Howard Johnson Co., v. Khimani,
892 F.2d 1512, 1518-19 (11th Cir. 1990); Dow Chem., 434 F.2d at 1214. The
Court observed that the ultimate sanction amount depended, at least in part, on the

10

level of sales of the NecksGen device and required Defendants to produce to
Plaintiff certain sales information to help determine the amount, if any, of
Plaintiff’s lost profits. The Court required Plaintiff to submit to the Court
documentation of its lost profits caused by the sale of the NecksGen device from
August 22, 2011, to the date of the May 30th Order.11 The Court further noted that
an award of reasonable attorneys’ fees incurred in seeking contempt for violation
of the Court’s Consent Order was appropriate in this action.
The Court has found, and the December 13, 2013, hearing confirmed, that
clear and convincing evidence supports that the Consent Order was valid and
lawful (a finding Defendants have not contested), that it was clear, definitive, and
unambiguous—including the “no more than colorably different” standard for
violation of the Consent Order agreed to by Heath—and that Heath clearly and
unambiguously had the ability to comply with the Consent Order entered. See
McGregor, 206 F.3d at 1383. In determining the sanction to impose, the Court
11

To the extent Defendants now question whether the Court found, by clear and
convincing evidence, that Defendants violated the Consent Order, the Court notes
this standard was applied throughout the May 30th Order, and the evidence
presented at the December 12, 2013, hearing further supports, that Defendants’
Consent Order violations were calculated, including because the testimony shows
that Heath was aware of the patent claims that presented infringement problems to
his design, that he tried —albeit unsuccessfully—to design around them, and that
he declined for economic reasons to obtain a legal opinion whether his design
violated Plaintiff’s patent claims. The sale of the NeckGen device was shown, by
clear and convincing evidence, to violate the Consent Order.
11

considers the harm caused by Defendants’ noncompliance, the probable
effectiveness of the sanction, Defendants’ financial resources and the burden of the
sanction, and the willfulness of Defendants’ conduct in violating the Consent
Order. See In re Chase & Sanborn Corp., 872 F.2d 397, 401 (11th Cir. 1989).
Thus, the Court now determines the sanction to be imposed for Defendants’
violation of the Consent Order.
II.

DISCUSSION
A.

Lost Profits as a Sanction

The parties do not dispute that, to be awarded its lost profits as a civil
contempt sanction, Plaintiff “must prove a causal relation between [the sale of the
NecksGen device] and its loss of profits.” See Crystal Semiconductor Corp. v.
TriTech Microelec. Int’l, Inc., 246 F.3d 1336, 1353 (Fed. Cir. 2001). “In others
words, the burden rests on [Plaintiff] to show a reasonable probability that ‘but for’
the [NecksGen sales, Plaintiff] would have made the infringer’s sales.” Id.
Plaintiff is not required to show causation to a certainty, rather only that there was
a reasonable probability that Plaintiff would have made the sales that Defendants
made of the NecksGen device. See Am. Seating Co. v. USSG Group, Inc.,
514 F.3d 1262, 1268 (Fed. Cir. 2008); BIC Leisure Prods., Inc. v. Windsurfing

12

Int’l Inc., 1 F.3d 1214, 1218 (Fed. Cir. 1993).12 A plaintiff may satisfy the “but
for” test by showing: (1) demand for its product; (2) the absence of non-infringing
substitutes; (3) it had the manufacturing and marketing capability to exploit the
demand; and (4) the amount of profit it would have made from the diverted sales.
See Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156
(6th Cir. 1978); Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1545 (Fed. Cir.
1995) (applying Panduit criteria).
In a two-supplier market, “it is reasonable to assume, provided the patent
owner has the manufacturing and marketing capabilities, that it would have made
the infringer’s sales.” Micro Chem. v. Lextron, Inc., 318 F.3d 119, 1122 (Fed. Cir.
2003). The two-supplier test thus “collapses the first two Panduit factors into one”
and requires a plaintiff to show:
1) the relevant market contains only two suppliers, 2) its own
manufacturing and marketing capability to make the sales that were
diverted [to the other supplier], and 3) the amount of profit it would
have made from these diverted sales.
Id.; see also Golden Blount, Inc. v. Robert H. Peterson Co., 438 F.3d 1354
(Fed. Cir. 2006). In the two-supplier test, a plaintiff must first identify the relevant
market, and the market analysis must take into account whether there are devices
12

The parties rely on cases from the Federal Circuit to show what is required for
Plaintiff to prove its lost profits. These authorities provide a persuasive analytical
framework to evaluate whether lost profits should be awarded in this case.
13

or substitutes similar in physical and functional characteristics to the plaintiff’s
device alleged to have been infringed. Crystal Semiconductor, 246 F.3d at 1356.
The plaintiff must show there is only one other supplier of devices or substitutes
similar in physical and functional characteristics such that there are only two
suppliers in the relevant market.
1.

The relevant market

Plaintiff argues that the relevant market is “the patented invention” and “also
includes other devices or substitutes similar in physical and functional
characteristics to the patented invention,” excluding “alternatives ‘with disparately
different prices or significantly different characteristics.’” See Micro Chem.,
318 F.3d at 1124 (quoting Crystal Semiconductor, 245 F.3d at 1356). Plaintiff
argues the market here consists of only “yoke-style head and neck support” devices
and “does not include head and neck supports that do not utilize a yoke-style
restraint or that are not certified for use in racing events.” (Pl.’s Decl. and Supp.
Docs. Evidencing Lost Profits [87] at 6). Plaintiff conclusorily asserts that “simple
observation of head and neck supports that do not utilize a yoke-style restraint
demonstrates that they exhibit significantly different characteristics from the
patented invention in design, comfort, and function.” Id.

14

Defendants disagree. They claim that there are more than two suppliers in
the market into which Plaintiff sells its patented device because there are a variety
of devices that meet the SFI Foundation, Inc. (“FSI”) head and neck support device
standard, SFI 38.1, for use in high-performance racing vehicles. (Defs’ Resp. [89]
at 8). To support their contention, Defendants submit a list from SFI showing
eight (8) head and neck support devices that meet the SFI 38.1 standard, including
the Simpson R3 Device, Simpson R3 Rage Device, Simpson Hybrid Pro Device,
Simpson Hybrid Pro Rage Device, Simpson Hybrid/Hybrid Rage Device, Simpson
Hybrid X Device, the NecksGen Device, and Plaintiff’s device.13 (Id. at Ex. 3
[89.3]). Defendants also submit Jim Little’s September 2012 survey comparing
head and neck restraint systems “currently of interest to the market,” which, in
addition to those identified on the SFI list, includes three (3) other manufacturers
of head and neck support devices. (Id. at Ex. 4 [89.4]). Plaintiff discounts that
these other SFI 38.1 certified devices are included in the relevant market because
they are not “yoke-style” support systems. Plaintiff offers no evidence that these
other devices are not sufficiently similar in physical and functional characteristics
to Plaintiff’s patented device to exclude them from the relevant market.

13

The Leatt Brace MRX Device was not available for sale during the time period
relevant to this action. (Dec. 13, 2013, Hr’g Tr. at 51:13-16).
15

It is undisputed that there are at least eight (8) head and neck support
systems certified under SFI 38.1 for use in high-performance racing vehicles. That
the NecksGen device is the only “yoke-style” device like Plaintiff’s is not
sufficient to show that only two devices, and therefore only two suppliers, exist in
the relevant market here. The relevant market includes “devices or substitutes
similar in physical and functional characteristics to the patented invention,”
excluding “alternatives ‘with disparately different prices or significantly different
characteristics.’” Micro Chem., 318 F.3d at 1124 (quoting Crystal Semiconductor,
246 F.3d at 1356). The test is not one of duplication of characteristics as Plaintiff
suggests. That is, the market is not limited to only those that duplicate the
characteristics of the patented device. It also includes those that are “similar in
physical and functional characteristics” such that they may be considered by
purchasers as alternatives to the patented device. Id. (emphasis added). Aware of
this relevant market argument offered by Defendants, Plaintiff failed to offer, at the
December 13, 2013, hearing or anywhere else in the record, sufficient or reliable
evidence to show that Plaintiff’s and the NecksGen devices differ significantly in
physical and functional characteristics from the other SFI 38.1 certified devices.
The relevant market thus may consist of at least eight (8) head and neck support
systems, which are supplied by Plaintiff, Defendants, and at least one additional

16

supplier. Plaintiff has failed to meet its burden to show that the two-supplier test
applies in this action.
2.

Demand and price elasticity

Plaintiff also did not present evidence that a sale of the NecksGen device
necessarily would have been a sale by Plaintiff. The evidence presented showed
that Plaintiff’s device was materially more expensive than the NecksGen device,
with the NecksGen device selling for $599 and Plaintiff’s “most popular” device
selling for $645-$695. Plaintiff’s denial of sale analysis is based solely on the
testimony of Norman Morgan, who merely stated his assumption and who
produced no market analysis, or even an analysis of NecksGen’s sales, to show the
impact of sales of the NecksGen device on Plaintiff’s sales.14 Importantly, there
also is no analysis that, in the absence of NecksGen devices, purchasers would
only consider Plaintiff’s device and not the other SFI 38.1 certified devices as a
head and neck restraint option. Plaintiff did not conduct a price comparison or
price elasticity analysis, and there simply is no credible evidence that all sales of
14

Morgan, Plaintiff’s only evidence on its lost profits claim, conceded the
shortcomings of his device demand analysis. At the December 13, 2013, hearing,
he was asked: “Did you make any effort to analyze the demand for the products as
a function of price?” (Dec. 13, 2013, Hr’g Tr. at 59:8-9). Morgan answered: “I
did not do an analysis of that, no.” (Id. at 59:10). He also acknowledged he had
not done any analysis of the interchangeability of demand for the NecksGen device
and Plaintiff’s device. (Id. at 60:21-61:3). He admitted he had done no study of
customer preference of yoked versus non-yoked devices. (Id. at 64:5-7).
17

NecksGen devices necessarily would have been sales of Plaintiff’s device, even
though it is sold at a significantly higher retail price.15 Plaintiff fails to satisfy the
first two criteria of the Panduit test to support its claim for lost profits.
3.

Manufacturing and marketing capability

Plaintiff also did not present sufficient evidence to show that it had the
manufacturing and marketing capability to make the sales that were allegedly
diverted from Plaintiff to Defendants. Plaintiff claims it was at all times able to
meet sales orders for its products and, even if not immediately, it was able to
satisfy an order within approximately 30 days. Morgan testified, however, that
there were times when Plaintiff’s devices were not available for significant
periods, sometimes more than 30 days, and that he had not analyzed the impact
15

Morgan offers the following simplistic, self-serving conclusory statement in his
declaration:
The HANS device is a yoke-style device. Having invented and
created the motorsports head and neck restraint (HNR) business, the
HANS device had been the only yoke-style device on the market for
many years. Non-yoke-style HNR devices are available. Until the
KHE/DefNder/NecksGen device entered the market, HANS had
100% of the yoke-style HNR business.
(Morgan Decl. [87.3] ¶ 9). He later states that “[a] person purchasing a NecksGen
device has selected a yoke-type HNR, thus eliminating the non-yoke-style devices
from consideration.” (Id. ¶ 10). From this unsupported, simplistic reasoning
without any market, price elasticity or consumer preference research, Morgan
concludes, and Plaintiff adopts his supposition, that at issue here is a two-product
market. The Court finds Morgan’s “analysis” syllogistically flawed and his
ultimate conclusion unrealistic and unpersuasive.
18

that this inability to fill orders had, then or now, on purchaser buying conduct.
(Dec. 13, 2013, Hr’g Tr. at 61:4-62:10). Morgan admitted further that Plaintiff’s
lost profit theory was for “every sale [it] lost was directly the result of the sales by
the defendant.” (Id. at 63:7-11). The Court then asked: “And it is always a one-toone correlation. But you don’t know that for sure, do you? For example, if there is
a supply problem, you don’t know what percentage of those people would say I’m
not going to wait three to four weeks?” Morgan responded: “No, I have no way of
knowing that.” (Id. at 63:12-17). Morgan also confirmed that he had “no study to
know what percentage of those sales [of cheaper, non-NecksGen models] go to
other manufacturers or other people,” and acknowledged he had not conducted any
studies of customer purchasing conduct. (Id. at 63:25-64:2). Plaintiff simply fails
to provide any analysis showing customer response to inventory shortages and,
specifically, whether availability would cause a purchaser to buy a device other
than one manufactured by Plaintiff.
Plaintiff has not submitted evidence to support the demand for its product
and absence of a non-infringing substitute in the relevant market—and certainly
has not shown the existence of a two-supplier market—or the level of its sales that
reasonably may have been displaced by sales of the NecksGen device. Plaintiff
has, on several levels, failed to meet its burden to show that it suffered lost profits

19

or, assuming that it did, the amount of profits that were lost. For these reasons, the
Court does not have a sufficient basis to award lost profits as a sanction for
Defendants’ violation of the Consent Order.
B.

A Reasonable Royalty as a Sanction

In light of Plaintiff’s failure to support its claim for lost profits as a sanction,
the Court considers whether there is an alternative means of determining a
sanctions award that would respond to damage Plaintiff suffered as a result of
Defendants’ sale of devices prohibited by the Consent Order. Like the parties have
done in this matter, the Court considers authority for awarding damages in a patent
infringement case. Section 284 of Title 35 addresses remedies for patent
infringement, and provides:
Upon finding for the claimant the court shall award the claimant
damages adequate to compensate for the infringement, but in no event
less than a reasonable royalty for the use made of the invention by the
infringer, together with interest and costs as fixed by the court.
When the damages are not found by a jury, the court shall assess
them. In either event the court may increase the damages up to three
times the amount found or assessed. Increased damages under this
paragraph shall not apply to provisional rights under section 154(d) of
this title.
The court may receive expert testimony as an aid to the determination
of damages or of what royalty would be reasonable under the
circumstances.
35 U.S.C. § 284. “The methodology of assessing and computing damages under

20

35 U.S.C. § 284 is within the sound discretion of the district court.” TWM Mfg.
Co. v. Dura Corp., 789 F.2d 895, 898 (Fed. Cir. 1986).
Where actual damage is not capable of being calculated, the Court must
determine a reasonable royalty. Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d
1075, 1078 (Fed. Cir. 1983). “The royalty may be based upon an established
royalty, if there is one, or if not, upon the supposed result of hypothetical
negotiations between the plaintiff and defendant.” Rite-Hite, 56 F.3d at 1554.16
Where it is difficult to determine the reasonable royalty because the information
available from the patent infringer is inadequate, the Court estimates a royalty
using the best available evidence and resolves doubts against the infringer. See
Sensonics, Inc. v. Aerosonic Corp., 81 F.3d 1566, 1572 (Fed. Cir. 1996); Lam, Inc.
v. Johns-Manville Corp., 718 F.2d 1056, 1065 (Fed. Cir. 1983).
The Court has determined that sales of the NecksGen devices were in
violation of the Consent Order and that Defendants are required to be sanctioned
for this conduct. While Plaintiff failed to present sufficient evidence for the Court
to determine any lost profits Plaintiff may have suffered, the undisputed evidence
does show the number of NecksGen devices sold by Defendants and the price at
16

When setting a reasonable royalty, courts often look to the factors identified in
Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970),
modified and aff’d, 446 F.2d 295 (2d Cir. 1971). See Powell v. Home Depot
U.S.A., Inc., 663 F.3d 1221, 1239-40 & n.3 (Fed. Cir. 2011).
21

which those sales were made. There also is in the record evidence that Plaintiff
licenses to foreign manufacturers the right to practice its patent and for which
Plaintiff receives, in return, a twelve percent (12%) royalty on sales. (Dec. 13,
2013, Hr’g Tr. at 64:16-22; 65:19-22). A reasonable royalty is an appropriate
alternate means to determine a remedy for infringement of a patent, and in this
case, violation of the Consent Order, including because a royalty reasonably
approximates the loss caused to Plaintiff as a result of Defendants’ sale of products
that were no more than colorably different than the product for which Plaintiff held
its patent. Here, an established royalty rate is available to approximate royalties
owed. Rite-Hite, 56 F.3d at 1554.17
A sanction in the form of a royalty takes into account “the character and
magnitude of the harm threatened by continued contumacy, the probable
effectiveness of any suggested sanction in bringing about compliance, and the
amount of the contemnor’s financial resources and consequent seriousness of the
burden to him. Trinity Indus., 876 F.2d at 1493-1494 (citing United Mine
Workers, 330 U.S. at 303).18 Here, Defendants have provided evidence that they
sold 4,201 NecksGen devices before discontinuing their sale. Defendants sold the
17

Defendants suggested the reasonable royalty damage theory as the one the Court
should employ in this case. (Defs’ Resp. [89] at 13-16).
18
The Court notes that Defendants suggested that, if a sanction is to be imposed,
one based on a royalty would be manageable—albeit difficult—for them.
22

devices for $599 each, and thus sale of the NecksGen device generated revenues
for Defendants of approximately $2,516,399. Applying a twelve percent (12%)
royalty rate to this aggregate sales figure, the Court determines that $301,967 is a
reasonable amount to compensate Plaintiff for Defendants’ sale of the NecksGen
device in violation of the Consent Order.19 Based on the testimony of Defendant
Heath and Rachael Lewis, an accountant for Defendants and whose testimony the
Court finds credible and compelling, the Court determines that the royalty amount
calculated produces a sanction that is consistent with Defendants’ financial
resources and which does not impose an unreasonable or unrealistic burden on
Defendants. Put another way, a royalty will compensate Plaintiff for past sales by
imposing a sanction amount that considers Defendants’ economic resources and
ability to pay the sanction imposed.20
In imposing a sanction based on lost sales, the Court finds persuasive
evidence has been presented—and Defendants have not really contested—that the
sale of the NecksGen device did cause Plaintiff to lose sales. Real harm was
caused by Defendants’ noncompliance with the Consent Order. The amount of the
19

Plaintiff claims that the twelve percent royalty rate is not the rate at which it
would license its technology for sales of devices in the United States. Plaintiff,
however, elected not to present any reasonable royalty evidence and, on the record
here, the Court is limited to the twelve percent rate.
20
The Court also believes the royalty will have the concomitant effect of deterring
Defendants from further violations of the Consent Order.
23

sanction to represent this harm—which the Court observes is less than, likely
materially, the lost profits actually suffered by Plaintiff, but which Plaintiff was
ultimately unable to prove—is tailored to Defendants’ ability to pay the amount
imposed considering their financial circumstances, and is sufficient to address the
willfulness of their violating conduct. See Chase & Sanborn, 872 F.2d at 401.
C.

Enhanced Damages

Plaintiff has not included in it submissions any legal authority or a factual
basis for awarding enhanced damages and, even if it had, the Court would not
award them. The decision to sell the NecksGen device after entry of the Consent
Order was made entirely by Defendant Heath. The Court has heard his testimony
now on two occasions—at the March 12 and December 13, 2013, hearings. Heath
testified that he made his decision to sell the competing NecksGen device
believing that he had designed around Plaintiff’s patent claims and thus, he
thought, the device was more than colorably different than Plaintiff’s device.
Heath reached this conclusion without consulting a lawyer or other expert and he
was motivated, in some substantial part, by his belief that he was bringing a better
and safer design to the sport of racing. Heath’s decision-making process was
fundamentally flawed, negligent and, arguably, irresponsible. The Court, however,

24

does not find that he acted maliciously or recklessly and thus finds enhanced
damages are not appropriate.
D.

Attorneys’ Fees and Expenses

An award of attorneys’ fees is an appropriate sanction response for civil
contempt. See, e.g. Shaefer Fan v. J&D Mfg., 265 F.3d 1282, 1290 (Fed. Cir.
2001); FTC v. Leshin, 618 F.3d 1221, 1237 (11th Cir. 2010). A finding of
willfulness is not a prerequisite to awarding attorneys’ fees in a civil contempt
action. Sizzler Family Steak Houses v. Western Sizzlin Steak House, Inc.,
793 F.2d 1529, 1535-36 (11th Cir. 1986). The Court found in its May 30th Order,
and the subsequent submissions and hearing have confirmed, that an award of
attorneys’ fees is proper and required in this action.
Plaintiff submitted its Attorneys’ Fee Request seeking attorneys’ fees in the
aggregate amount of $280,428.50 and expenses in the amount of $9,170.04. The
fees claimed are facially unreasonable for a case that turned on the interpretation of
the single phrase in the Agreement and Consent Order at issue in this litigation.
That the fees claimed are beyond what any firm reasonably could charge is
disclosed by a review of the fee elements. In this relatively straightforward
interpretation of, essentially, one part of one line in the Agreement and Consent

25

Order, Plaintiff employed the services of eight (8) lawyers.21 Their hourly rates
ranged from $285 to $725 per hour, with most of the time billed by lawyers with
hourly rates between $440 and $485 per hour. A total of 589.8 hours were billed
by five (5) lawyers to draft, file and conduct less than a one-day hearing on a
motion to show cause, to draft written submissions on sanctions, and to attend a
half-day hearing on sanctions. On the preparation of its motion to show cause
alone, 74.3 hours were billed to prepare Plaintiff’s supporting memorandum [40],
for which about $30,000 was charged. The memorandum consisted of 25 pages.
Plaintiff’s Reply [43] was prepared using the services of five lawyers, who billed
50.9 hours to prepare a memorandum consisting of 10 pages, at a cost of
approximately $20,800. The hours expended reflect the significant inefficiency
that results often in large law firms which unreasonably staff straightforward cases
and bill at well-above market rates that are inconsistent with the market for legal
services of the straightforward nature involved in this contempt proceeding. 22

21

Actually, nine lawyers billed time to this matter. Plaintiff even billed .7 hours
of time by a senior patent lawyer whose billing rate is $725 per hour.
22
This action was brought originally as a patent infringement case by patent
lawyers in a specialty patent firm. It appears that when the case became a routine
civil action to enforce a consent decree and interpret agreed-upon language in the
Settlement Agreement, the firm continued to bill at its patent attorney billing rates
and did not adjust them to reflect the more ordinary legal services being provided.
26

That inefficiencies exist is evidenced by the following examples of the
statements submitted for review:
 For April 2012, Plaintiff’s counsel billed $28,797 in time for
services on this matter including: 35 hours to research and draft
Plaintiff’s initial submission. This lawyer always billed in hour
and half-hour increments, not once recording his time more
precisely in tenths of an hour. His drafting work alone totaled
$20,250.
 On July 18, 2012, four different lawyers billed time to consider,
draft and revise Plaintiff’s Reply Brief. Total billing that month
was $22,659.
 On February 20, 2013, these lawyers collectively billed 19.5 hours
working on the same brief.
 On March 11, 2013, the day before the hearing in this matter at
which Plaintiff presented one witness, 6 lawyers billed 35.7 hours,
valued at $15,627, to prepare for the hearing. A few days before,
on March 8, one of these lawyers recorded 13 hours (again in a
round hour amount) for a fee of $6,305 to “prepare for contempt
hearing.”
(See generally Pl.’s Attorneys’ Fee Request at Ex. 2 [67.3]).
The Court determines that a reasonable attorneys’ fees award requires a
significant reduction in hours to reflect the reasonable time that was required to
litigate the issues in this case and a reduction in hourly rates to reflect that this
essentially was non-patent litigation. Based on the Court’s experience in billing
matters in private practice and in reviewing attorneys’ fees and expenses submitted

27

for approval by the Court, the Court determines that the total fees that may
reasonably be awarded in this action, based on an average hourly rate of $400, are
$120,000.23 Thus, the total attorneys’ fees and expenses reasonable to be awarded
in this case is $129,170.04.
III.

CONCLUSION
Having found that Defendants shall be sanctioned for their violation of the

Consent Order and in imposing the sanction that it has, the Court has been careful
to calculate the sanction amount so that it deters future violation of the Consent
Order. The evidence well-establishes Heath’s intention to remain a retailer of
restraint devices and his propensity to proceed to market without careful or
reasonable evaluation of a product’s potential to infringe the intellectual property
interests of others and, specifically, those of the Plaintiff.24 The Court, in imposing
this sanction, also has evaluated Defendants’ resources and whether the sanction
imposed constitutes an unreasonable burden on Defendants. Defendants expressed
their ability to pay sanctions based on a royalty calculation and attorneys’ fees,
provided they are appropriately reduced from the amount claimed, and the Court
further independently determined that the sanctions imposed, even when the
23

The Court determines that expenses claimed in the amount of $9,170.04 are
reasonable and adequately documented.
24
Deterrence of further violation of the Consent Order will be a byproduct of the
sanction awarded in this case.
28

royalty and attorneys’ fees amounts are aggregated, does not impose an
unreasonable financial burden on Defendants, who have shown to be innovative
and resourceful parties. Accordingly, and for all the reasons stated above,
IT IS HEREBY ORDERED that Defendants shall be jointly and severally
liable for sanctions in the amount of $301,967.00.
IT IS FURTHER ORDERED that Defendants shall be jointly and
severally liable for attorneys’ fees and expenses in the amount of $129,170.04.

SO ORDERED this 6th day of January, 2014.

29