Depositions and Wrongful Profits in Infringement Cases: Cornering Your Prey with Rule 30(b)(6)
Originally published online at mondaq.com
By Ronald D. Coleman
Not every trademark infringement case ends at the preliminary injunction stage. Nor are injunctions the only relief available to aggrieved holders of valuable trademark rights. These two ideas are closely related because a trademark dispute that is hurtling (or crawling) toward adjudication on the merits is usually fueled by the expectation of either monetary damages or an award of attorneys’ fees at the end of the line.
The predominant measure of damages in an unfair competition case is an award based on the defendant’s profits. This is rationalized either as a yardstick of sales that should have gone to the markholder, or as an award for unjust enrichment. 5 McCarthy on Trademarks (McCarthy) 40:57 at 30-101 (4th ed. 2000). The latter rationale is worth keeping in mind. Considering the equitable genesis of the claim for an accounting of profits, most courts have held that some level of wrongful intent usually must be demonstrated by the markholder. See, e.g., Banff, Ltd. v. Colberts, Inc., 996 F.2d 33 (2d Cir. 1993). This rule seems to have held fast despite the obvious appeal of the first, albeit somewhat less elegant, argument – namely that an accounting for infringer’s profits is a straightforward damages claim, arising in law and not equity. See McCarthy id. at 30-111.
‘A Heavy Club’
Given the equitable hue of the claim as well as the sensitivity of the topic of “wrongful profits,” the prosecution of a wrongful profits claim can serve as a heavy club for plaintiffs in an infringement case. Besides the possibility of recovery and its value in settlement negotiations, such a claim is a bear in discovery. It legitimately the door to the discovery of all sorts of “bad acts” and other equitable considerations that, in a straightforward commercial context, would likely be inadmissible at trial and, hence, that much easier to avoid disclosing at the pretrial stage. Considering that wrongful infringers often have much to hide in the operation of their businesses, aggressive discovery of their profits — regardless of the likelihood of recovery — can be the lever for a favorable settlement without regard to the outcome of an injunction application.
Anyone who has ever swung a big club knows that such a weapon is only useful if the prey is cornered. Luckily, Rule 30(b)(6) of the Federal Rules of Civil Procedure, properly applied, can do the cornering. Rule 30(b)(6) requires the designation of a corporate representative to testify on the record as to any topic or topics germane to the litigation set forth in the 30(b)(6) notice. The purpose of the Rule is to avoid the situation where a corporate party’s position on facts relevant to a litigation cannot be evinced through a deposition. The discovery of sales and profit information is perfectly suited to the 30(b)(6) device, regardless of the size of the defendant organization. Like every procedural device, however, this Rule only if judges are prepared to do more than manage cases and, from time to time, actually use their own big sticks to require compliance with the rules of discovery.
No More Guessing
Historically, no single person was likely to have enough information to speak for a corporation. Adversaries had to guess which person, within an organization, could answer as to a given topic. Under 30(b)(6), however, on notice a corporation or other entity’s obligation is to designate a person or persons who will speak for the corporation, beyond their own personal knowledge. C. Wright, A. Miller & R. Marcus, Federal Practice & Procedure: Civil 2d § 2103 (1994) (Wright & Miller) at 30; see also United States v. J.M. Taylor, 166 F.R.D. 356, 361 (M.D.N.C. 1996). The premise of Rule 30(b)(6) is that adversaries of a corporate party are entitled to straight answers from a single, cogent source about the claims that party is asserting. “It is both the privilege and the duty of the corporation to designate who speaks for it.” 8A Wright & Miller at 11, n. 2, cited in Hi-Plains Elevator Machinery, Inc. v. Missouri Cereal Processors, Inc., 571 S.W.2d 273, 277 (Mo. Ct. App. 1978). Thus, the Rule contemplates that parties receive the legal benefits of deposition answers given on behalf of and attributable to the corporation.
To say that a deponent designated pursuant to Rule 30(b)(6) truly speaks “for the corporation” is to contrast his or her deposition with that of a “mere corporate employee,” J.M. Taylor, supra, id., citing Wright & Miller. The J.M. Taylor court explained that an employee’s statement made “for the corporation” is no more than “a statement of the corporate person,” subject to explanation, elucidation or even alteration by other testimony. Id, citing W. R. Grace & Co. v. Viskase Corp., No. 90C5383, 1991 WL 211647 (N. D. Ill. 1991).
In contrast, a statement by the designee under Rule 30(b)(6) is a statement against interest under Fed. R. Evid. 804(b)(3), and binding against the corporation. J.M. Taylor, citing Ierardi v. Lorillard, Inc., No. 90-7049, 1991 WL 158911 at *3 (E.D. Pa. 1991). For this reason, a party cannot seek to avoid producing a 30(b)(6) witness by claiming that any particular person has already been deposed, in his or her individual capacity, on a given topic. To do so is to deprive the discovering party of a legitimate benefit bestowed by the Rule.
If the person designated by the corporation does not have personal knowledge of the matters set out in the deposition notice, the corporation is obligated to prepare the designees so that they may give knowledgeable and binding answers for the corporation. Id; accord Dravo Corp. v. Liberty Mut. Ins. Co., 164 F.R.D. 70, 75 (D. Neb. 1995). In other words, the designee under the Rule is required to “study” the facts beyond his or her personal knowledge, to the full extent of the topic for regarding which he has been designated to testify under the Rule. If knowledge of the topic in the 30(b)(6) notice must be gleaned from internal documentation, information in the record, and facts obtained from others — anything available to the corporation — the designating corporate litigant is obligated to prepare its deponent with these materials. Id. at 361-62. It follows that a corporation is bound promptly to provide a substitute if it becomes apparent during the course of a deposition that the witness is deficient. Marker v. Union Fidelity Life Ins. Co., 125 F.R.D. 121 (D.C.N.C. 1989).
Therefore, a 30(b)(6) deposition notice on an infringing defendant spares the markholder the process of either guessing, or taking “discovery depositions” to determine, which officer or employee of the defendant knows what how many units of infringing articles were sold, and what price. The defendant is responsible to produce a person who is, by virtue of being presented, the official corporate spokesman on the topic of sales or profits, and who is responsible to analyze the contents of the books and records that are available in order to answer those questions.
And what if the designated person claims not to know the answers to these critical questions? Fed. R. Civ. P. 37(a) allows a party to apply for “an order compelling disclosure or discovery . . .”Among the discovery deficiencies for which a court may proceed under this Rule are failure to respond to proper discovery demands or providing “an evasive or incomplete disclosure, answer, or response.” Id. Defendants who do not provide fact witnesses to speak for the corporate entity on the subject of damages will have fallen far short of the legal standard under 30(b)(6), and under Rule 37 an order compelling an appropriately-prepared witness is proper.
“First-hand knowledge” is not a criterion in the questioning of a 30(b)(6) witness. Nor is the lack of first-hand knowledge a legitimate response to a question that reasonably follows from the 30(b)(6) notice. Therefore, the courts have held that an “I don’t know” answer given to a question within the bounds of the 30(b)(6) notice is a ground for sanctions, because producing an unprepared witness at a 30(b)(6) deposition is tantamount to a non-appearance. Resolution Trust Corp. v. Southern Union Co., 985 F.2d 196, 197 (5th Cir. 1993). Sanctions for such failure to properly prepare a 30(b)(6) designee may range from imposition of costs to default. See, J.M. Taylor, 166 F.R.D. at 363; Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68, 78 (S.D.N.Y. 1991); Thomas v. Hoffman-La Roche, Inc., 126 F.R.D. 522, 524-25 (N.D. Miss. 1989); cf., United States v. Massachusetts Industrial Finance Ag’cy, 162 F.R.D. 410 (D. Mass. 1995).
Seeking Sanctions
The 30(b)(6) deposition is such an effective tool that many willful infringers will do just about anything to avoid complying with it. In anticipation of resistance, markholder’s counsel should lay the groundwork for an eventual sanction of one sort or another in the event that the information sought is not forthcoming. It is critical to make a record at an appropriately early point in the proceedings, so that, failing that rare occurrence — a successful discovery motion — the stage can be set for a later motion in limine or at least a trial objection. Markholder’s counsel will want a ruling that bars the defendant from offering fact witnesses to rebut any evidence the markholder may proffer of defendant’s profits from infringement, based on the infringer’s failure to answer these questions at deposition.
Fleshing out the failure to comply with 30(b)(6) on a sanctions motion, though such motions are ill-appreciated by the courts, may aid in that future application. That is because markholder’s counsel is making a clear record that itself gives the recalcitrant party ample opportunity to cure the deficiency and that puts it on notice that the markholder will move, at trial, for exclusion of any testimony from the infringer on that topic. (Presumably, the magistrate will not issue a ruling on trial evidence at this stage.) Along the same lines, it may even be appropriate to sketch out in correspondence before the deposition exactly what the deposing party expects to elicit at the deposition, perhaps with reference to some of the authority cited above.
Admittedly, as is so often the case, it is at this juncture that the rubber frequently meets the road. Research on this topic reveals that, time and time again, federal judges and magistrates will not pull the switch on meaningful sanctions for violations of this standard of preparation. There seems to be little judicial appreciation either for the significant tactical incentive prevaricating parties have to evade answering precisely the sort of questions appropriate for a 30(b)(6) deposition, or the costs and fees incurred by the noticing party in preparing for such a deposition. This money is wasted, along with significant time during the discovery period, when the suddenly forgetful bookkeeper or other designee is produced at the 30(b)(6) deposition solely, and improperly, to say “I don’t know” or “I would have to have my records in front of me to answer that one.” As the cases cited above make clear, those records were supposed to be mined before the deposition so the reasonable questions asked could be answered. Do not be surprised if, time and again, answers to the key questions at the heart of wrongful profits are evaded and judges refuse to help.
At the very least, however, markholders’ counsel will be able to argue that any evidence that the markholder develops should not be subject to rebuttal by the same entity that, in pretrial proceedings, would not submit its own theory from a fact (not an expert) witness on direct questioning. Such an argument can even be made at the summary judgment level. Failing all judicial assistance, the “I don’t know” response from a corporate designee at a 30(b)(6) deposition at least makes a zinger of a cross examination impeachment. Properly enforced, however — and it does happen from time to time – Rule 30(b)(6) should do much, much more: It should get a markholder the numbers it is entitled to, to make its case for an award based on an infringer’s profits.