Date: 01-18-2002

Case Style: The Procter & Gamble Company, et al. v. Amway Corporation, et al.

Case Number: 00-20127

Judge: Jerry E. Smith

Court: United States Court of Appeals for the Fifth Circuit

Plaintiff's Attorney: Unknown

Defendant's Attorney: Unknown

Description: P&G manufactures and distributes numerous household products. Since the late 1970's and early 1980's, rumors of links to Satanism have circulated throughout the United States. A common version alleges that P&G's president admitted to worshiping Satan on a television talk show and that a portion of P&G's profits goes to the church of Satan. The rumor has circulated in the form of voicemail messages and printed fliers. P&G alleges that Amway and its distributors started or spread the rumor in the 1980's and began spreading it again in the mid- 1990's. Rather than suing Amway in the 1980's, P&G worked with Amway's corporate headquarters to stop the rumor. In 1995, however, the rumor resurfaced when Randy Haugen, an Amway Distributor, forwarded it to other Amway distributors via an internal telephone messaging system. Haugen served on the ADAC and was a very successful Amway distributor with a network of distributors throughout Utah, Nevada, Texas, Mexico, and Canada.

The rumor spread rapidly. Some distributors printed fliers containing the rumor and circulated them to consumers. P&G offered evidence that the number of Satanism rumors increased substantially in the states in which the majority of Haugen's distributors live.

Within days of learning that the rumor was false, Haugen sent out a short retraction on the voice messaging system. Shortly thereafter, an Amway representative contacted Haugen and delivered a copy of a P&G "truth kit," which explains that the rumor is false. Using the kit, Haugen sent out a second and more detailed retraction, but the rumor continued to spread for some time.

Amway's distributors make money both from selling Amway products to the general public and from recruiting other distributors. Newly recruited distributors become "downline" distributors who earn commissions for the "upline" distributors who recruited them. More senior and profitable distributors sell their products predominately to downline distributors rather than to consumers. There is high turnover among the more junior distributors. The most elite and profitable distributors rely on the sale of motivational tools rather than Amway products to earn large profits.

P&G alleged that this structure constitutes an illegal pyramid scheme and gave upline distributors a possible motive to repeat the rumor to the downline distributors because it might affect the ability to recruit distributors and sell Amway products. The relationship of Amway distribution network to Ja-Ri, ADAC, and Internet remains a bit murky, but P&G unearthed evidence that the four entities have close ties.

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In 1995, P&G filed a federal suit in Utah, alleging that Haugen, Freedom Associates, Inc., and Freedom Tools, Inc., circulated the Satanism rumor; P&G later joined Amway, Randy Walker, and Walker International Network as defendants. In 1996, P&G filed a second amended complaint alleging defamation, common law unfair competition, violations of the Utah Truth in Advertising Act, tortious interference, negligent supervision, and violations of the Lanham Act § 43(a), 15 U.S.C. § 1125(a), and vicarious liability. P&G then filed a third amended complaint alleging that Amway is an illegal pyramid and alleging fraud and product disparagement; the district court dismissed that complaint in 1997. Later in 1997, P&G filed a fourth amended complaint to assert fraud and disparagement claims, which the Utah court denied as untimely.

On the day after the dismissal in Utah, P&G sued Haugen, Amway, ADAC, Ja-Ri, Internet, and other parties in Texas federal court, alleging that the defendants had (1) spread the Satanism rumor, (2) disparaged P&G's Crest toothpaste, and (3) harmed P&G's sales by luring people into Amway's illegal pyramid scheme as distributors. The complaint asserted various causes of action, including common law fraud, violations of the Lanham Act § 43(a), violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 28 U.S.C. § 1962(c)-(d), and violations of the Texas Business and Commerce Code § 16.29.

The Texas district court granted Amway's Fed. R. Civ. P. 12(b)(6) motion dismissing the RICO claim because P&G had not alleged reliance on Amway's alleged predicate acts of mail and wire fraud. The court held that P&G lacked standing to bring its § 43(a) claim based on Amway's illegal pyramid scheme and that the statute of limitations had expired for the fraud claim. This dismissal eliminated Internet as a party to the suit, because P&G had asserted only the Lanham Act illegal pyramid scheme against Internet.

The remaining claims and parties went to trial. At the close of P&G's case, Amway moved for judgment as a matter of law ("j.m.l."). The court granted j.m.l. and dismissed the § 43(a) claim against Amway, Walker, and Haugen based on the res judicata effect of the Utah final judgment. The Texas court dismissed the § 43(a) claim for disparagement against the remaining defendants because the First Amendment requires, and the plaintiffs had failed to present, evidence of "actual malice." The court also dismissed the Texas Business and Commerce Code § 16.29 claim and all remaining claims. P&G appealed the decision on the merits.

The district court then issued three orders imposing sanctions on P&G by shifting attorneys' fees and costs. It granted sanctions to Ja-Ri in the form of all attorneys' fees expended after April 1999 (the "Ja-Ri sanctions order"), citing § 1927 as its authority for shifting fees. The court granted a fees motion in favor of ADAC, citing its authority under § 1927 and 15 U.S.C. § 1117 (the "ADAC sanctions order"). The court granted Internet's motion for all attorney's fees under §§ 1117 and 1927 (the "Internet sanctions order"). P&G brought the instant appeal to challenge the sanctions orders.

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Click the case caption above for the full text of the Court's opinion.

According to § 1927, a district court may shift reasonable fees to "any attorney" "who so multiplies the proceedings in any case unreasonably and vexatiously."(4) The court can shift fees only to counsel, not to parties.

The district court must find that the sanctioned attorney multiplied the proceedings both "unreasonably" and "vexatiously." FDIC v. Calhoun, 34 F.3d 1291, 1297 (5th Cir. 1994). This requires "evidence of bad faith, improper motive, or reckless disregard of the duty owed to the court." Edwards v. Gen. Motors Corp., 153 F.3d 242, 246 (5th Cir. 1992). Section 1927 only authorizes shifting fees that are associated with "the persistent prosecution of a meritless claim." Browning v. Kramer, 931 F.2d 340, 345 (5th Cir. 1991) (citation omitted) (internal quotation omitted). The courts often use repeated filings despite warnings from the court, or other proof of excessive litigiousness, to support imposing sanctions. Nat'l Ass'n of Gov't Employees v. Nat'l Fed'n of Fed. Employees, 844 F.2d 216, 224 (5th Cir. 1988). To prevent the courts from dampening "the legitimate zeal of an attorney in representing her client," Browning v. Kramer, 931 F.2d 340, 344 (5th Cir. 1991), we have interpreted § 1927 as penal and construed it in favor of the sanctioned party, FDIC v. Connor, 20 F.3d 1376, 1384 (5th Cir. 1994).The district court must make detailed factual findings when imposing large sanctions in a complex case with an extensive record.(6) The court must (1) identify sanctionable conduct and distinguish it from the reasons for deciding the case on the merits,(7) (2) link the sanctionable conduct to the size of the sanctions,(8) and (3) differentiate between sanctions awarded under different statutes.(9) Specific findings permit effective appellate review of the validity and amount of fees. Browning, 931 F.2d at 346.

To shift the entire cost of defense, the claimant must prove, by clear and convincing evidence, that every facet of the litigation was patently meritless, Nat'l Ass'n of Gov't Employees, 844 F.2d at 223, and counsel must have lacked a reason to file the suit and must wrongfully have persisted in its prosecution through discovery, pre-trial motions, and trial, Lewis v. Brown & Root, Inc., 711 F.2d 1287, 1292 (5th Cir. 1983), clarified on reconsideration, 722 F.2d 209 (5th Cir. 1984).

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The Lanham Act provides that "[t]he court in exceptional cases may award reasonable attorney's fees to the prevailing party." 15 U.S.C. § 1117(a). The prevailing party must demonstrate the exceptional nature of the case by clear and convincing evidence. CJC Holdings, Inc. v. Wright & Lato, Inc., 979 F.2d 60, 65 (5th Cir. 1992). This court rarely has interpreted the requirements for a prevailing defendant to recover fees under section 1117(a), so we briefly review the relevant legal principles, relying on decisions from other jurisdictions.Several courts have held that a party can recover under § 1117(a) only for work performed in connection with claims filed under the Lanham Act.(10) A court should permit recovery for work on non-Lanham Act claims only if "the Lanham Act and non-Lanham Act claims are so intertwined that it is impossible to differentiate between work done on claims." Gracie, 217 F.3d at 1069-70 (citations omitted). Limiting the scope of § 1117(a) comports with the background rule in America--the prevailing party usually cannot recover fees absent statutory authority. Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 247 (1975).

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The sanctions orders in favor of Ja-Ri, ADAC, and Internet share two common, fatal flaws. First, the district court shifted fees and costs under § 1927 to P&G rather than to its counsel. Second, the court failed to specify which statute authorized shifting which fees, to separate the vexatious conduct or exceptional features from its reasons for deciding the claims on the merits, or identify the link between the objectionable conduct or exceptional claims and the fee award's size. Standing alone, these errors justify vacating and remanding. To provide guidance on remand, however, we review the propriety of the individual sanctions orders.

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The ADAC sanctions order contains the same language justifying sanctions under § 1927, without any further explanation. The ADAC sanctions order, however, differs from the Ja-Ri sanctions order in two important ways. First, the court also identified § 1117(a) as a vehicle for shifting fees and costs. Second, the court shifted ADAC's entire costs for defending the litigation, from start to finish, thus imposing $307,002.96 in sanctions.

The Internet sanctions order emphasizes that the district court had only P&G's Lanham Act illegal pyramid claim before it at summary judgment. The sanctions order then explains that the court disposed of that claim at summary judgment because P&G lacked standing to bring the claim. The Internet sanctions order concludes that "for all the above-mentioned reasons," P&G unreasonably and vexatiously multiplied the proceedings and acted in bad faith. The court shifted total costs and fees of $128,176.53 based on these findings.

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Click the case caption above for the full text of the Court's opinion.

Outcome: The orders appealed from are VACATED and REMANDED for further proceedings as appropriate.

Plaintiff's Experts: Unknown

Defendant's Experts: Unknown

Comments: E-mail suggested corrections, comments and/or corrections to: Kent Morlan

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