Opinion
NOT FOR PUBLICATION
Argued and Submitted at Sacramento, California: November 20, 2009
Appeal from the United States Bankruptcy Court for the Eastern District of California. Honorable Michael S. McManus, Bankruptcy Judge, Presiding. Bk. No. 01-25334. Adv. No. 01-02219-A.
Before MARKELL, MONTALI and JURY, Bankruptcy Judges.
MEMORANDUM
INTRODUCTION
After several years of litigation and two trips to the Ninth Circuit Court of Appeals, the appellee herein, Entrepreneur Media, Inc. (" EMI"), obtained a final, non-appealable judgment against appellant and debtor Scott Smith (" Smith") for intentional infringement of EMI's trademarks. While the trademark infringement litigation was pending, Smith had filed for bankruptcy under chapter 7 of the Bankruptcy Code. EMI thereafter sought to have its final judgment declared nondischargeable under § 523(a)(6).
Unless otherwise indicated, all section references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, as enacted and promulgated prior to the effective date (October 17, 2005) of the relevant provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, April 20, 2005, 119 Stat. 23. All " Rule" references are to the Federal Rules of Bankruptcy Procedure, and all " Civil Rule" references are to the Federal Rules of Civil Procedure.
Applying the doctrine of issue preclusion, the bankruptcy court concluded that the federal district court's factual findings in the trademark infringement litigation conclusively established all but one of the elements for nondischargeability under § 523(a)(6). As to the sole unresolved issue of " just cause or excuse, " the bankruptcy court held a trial, after which it found that Smith had not acted with just cause or excuse. Consequently, the bankruptcy court entered a judgment determining that Smith's debt arising from his intentional trademark infringement was nondischargeable.
We conclude that the bankruptcy court properly applied the doctrine of issue preclusion and that the bankruptcy court's findings that Smith acted without just cause or excuse were not clearly erroneous. Accordingly, we AFFIRM the bankruptcy court's judgment of nondischargeability.
Smith also separately challenges a minute order of the bankruptcy court, entered on February 1, 2007, discharging a prior sua sponte Order to Show Cause regarding the potential dismissal of EMI's denial of discharge complaint and the potential imposition of sanctions against EMI. Smith asserts that, pursuant to Rule 9011, the bankruptcy court erred in not imposing monetary sanctions against EMI in furtherance of the Order to Show Cause. We conclude that Smith lacks standing to appeal the bankruptcy court's denial of sanctions. Accordingly, we DISMISS Smith's appeal of the February 1, 2007 minute order.
FACTS
EMI publishes a magazine named " Entrepreneur" and holds a trademark on that name. Smith published a magazine named " Entrepreneur Illustrated." EMI contacted Smith, asserted that the name of Smith's magazine infringed on EMI's mark, and demanded that Smith stop using that name; Smith refused.
1. The Trademark Infringement Litigation
Following Smith's refusal, in 1998, EMI commenced a lawsuit against Smith in federal district court, alleging trademark infringement, unfair competition and counterfeiting. Entrepreneur Media, Inc. v. Smith, Case No. CV 98-3607 FMC (Ctx)(C.D. Cal. 1998). By way of its complaint, EMI sought, among other things, " an order directing Smith to account and disgorge to plaintiff any and all profits derived by reason of said acts of infringement and unfair competition complained of herein." First Amended Complaint (March 24, 1999) at 14:24-14:26. The district court granted summary judgment to EMI, but the Ninth Circuit reversed in part and remanded for trial. Entrepreneur Media, Inc. v. Smith, 279 F.3d 1135 (9th Cir. 2002). According to the Ninth Circuit, the district court correctly determined as a matter of law that the manner in which Smith used the name " Entrepreneur Illustrated" on the cover of his magazine constituted trademark infringement. Id . at 1152-53. However, the Ninth Circuit also concluded that there were genuine issues of triable fact as to all of the other instances of alleged trademark infringement. Id . It remanded the case to the district court, which then held a bench trial. At the conclusion of the trial, the district court determined that Smith had intentionally committed trademark infringement.
The district court entered findings of fact and conclusions of law (hereinafter, " District Court Findings and Conclusions"), which describe in detail EMI's business and trademarks. As set forth in the District Court Findings and Conclusions, EMI had been continuously using the mark ENTREPRENEUR in connection with its magazine, Entrepreneur, since at least 1978. EMI also had been using the mark ENTREPRENEUR on its website, entrepreneur.com. District Court Findings and Conclusions at 1:22-1:27. The district court found that EMI had duly registered under United States trademark laws a number of incontestable trademark registrations for a number of different marks, including the mark ENTREPRENEUR. The district court noted that the registration of the marks generally entitled EMI to their exclusive use. Id . at 2:8-2:27.
According to the district court, EMI was well known for its magazines and online services, especially for Entrepreneur magazine, which had a paid U.S. circulation of approximately 550, 000, based on subscriptions and newsstand sales, and a total audience of approximately 2 million readers per issue. In addition, entrepreneur.com had approximately 2-3 million visitor sessions each month. The district court further noted EMI's efforts to promote its products and services, by sending out complimentary copies of its magazines to the media, by advertising, by promoting events featuring small businesses, and by way of entrepreneur.com. Id . at 1:28-2:7, 2:28-3:4.
The following findings of the district court enumerate Smith's business history, the events leading up to his infringement of EMI's marks and the infringement itself:
10. In 1995, defendant Scott Smith dba EntrepreneurPR (" Smith" or " Defendant") started a business called ICON Publications, which promoted small businesses. In 1997, ICON created a magazine that featured articles about small businesses, which was distributed to members of the media so that the media could report on the companies within the featured articles.
11. ICON Publications' magazine was entitled Yearbook of Small Business Icons.
12. As part of Entrepreneur's efforts to promote small businesses, in or about December 1996, Entrepreneur listed ICON Publications on Entrepreneur's " Small Business Links" pages of Entrepreneur's website, and provided a direct link to Smith's website, iconpub.com.
13. Smith sent out letters to his clients touting iconpub.com's selection on Entrepreneur's Small Business Links page.
14. Shortly after iconpub.com was selected to appear on Entrepreneur's Small Business Links page, Smith decided to change the name of his company, magazine, and domain name.
15. Smith was familiar with Entrepreneur and its services. In addition, Smith conducted a trademark search that revealed Entrepreneur's federal registrations for the mark ENTREPRENEUR.
16. In soliciting customers for his yearbook, Smith often represented that he was affiliated or associated with Entrepreneur magazine in order to persuade people to sign up for his services.
17. In October 1997, Smith changed the name of his company to EntrepreneurPR, the name of his magazine to Entrepreneur Illustrated, and his domain name to entrepreneurpr.com.
18. Press releases on [Entrepreneur's] masthead concerning ICON's yearbook publication were distributed by [Smith]. At the bottom of the page is a list of characteristics, which includes the phrase, " PR firm: EntrepreneurPR." The clear import of this phrase was the implication that [Smith] had been hired as the public relations firm for [Entrepreneur].
19. Thereafter, Smith printed on his web site statements Entrepreneur made about his former company, magazine, and domain name.
20. Smith's new company name and magazine were prominently featured on his website, located at entrepreneurpr.com.
21. Smith sent out his publication of Entrepreneur Illustrated to thousands of members of the media four times each year.
22. Smith featured on his web site Entrepreneur's registered design mark SMALL BUSINESS SQUARE after being expressly told he did not have permission to do so.
23. The marks ENTREPRENEUR, on the one hand, and ENTREPRENEURPR, ENTREPRENEUR ILLUSTRATED and ENTREPRENEURPR.COM are substantially similar in appearance, sound and meaning in that the dominant portion of all the marks is identical - " entrepreneur."
24. Entrepreneur and Smith both use their marks in connection with identical goods and services, in that the marks are all used in connection with magazines featuring articles about small businesses, as well as on the Internet. In addition, Entrepreneur offers public relations services on its website through its partnership with PR Newswire, which services are substantially similar to Smith's public relations services.
25. Entrepreneur and Smith's marketing channels overlap, since both entities target small businesses, send their publications free of charge to the media, and use the Internet to market and advertise their services.
26. There is substantial evidence that EntrepreneurPR's clients believed there was a relationship between Entrepreneur and EntrepreneurPR, which constitutes evidence of factual confusion.
27. Many witnesses, whom the Court found to be very credible, testified that they believed, when they were solicited by Smith, that defendant was associated with Entrepreneur Media or Entrepreneur Magazine, or that the two publications were the same. They testified that they were led to believe that by signing up for defendant's services, they would be featured in Entrepreneur Magazine. They were almost uniform in their position that they would not have paid any money to defendant had they known he was not connected with plaintiff. Defendant Smith denied the allegations of all of those witnesses. His testimony in that, and many other respects, was not credible.
28. The court accepts the testimony of plaintiff's expert, who calculated defendant's net profit throughout the period of infringement at $544,998, plus interest of $124,658, representing total profits of $669,656.
Id. at 3:5 - 5:16.
Several of the District Court Findings and Conclusions either explicitly reference the court's determination that Smith's infringement was intentional or grant relief that is predicated on intentional infringement:
17. With full knowledge of Entrepreneur's prior rights to the mark ENTREPRENEUR, Smith selected EntrepreneurPR for his business name, Entrepreneur Illustrated for the title of his magazine, and entrepreneurpr.com for his domain name. " When the alleged infringer knowingly adopts a mark similar to another's, reviewing courts presume that the defendant can accomplish his purpose: that is, that the public will be deceived. " Entrepreneur Media, 279 F.3d at 1148 [emphasis in original]. In addition, Smith's conduct establishes that he intended to trade off of Entrepreneur's goodwill. Smith's intent to deceive the public is " strong evidence of a likelihood of confusion." Id . at 1150.
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22. In a case, such as this, when a party deliberately infringes another's trademarks, damages should be awarded. Indeed, " where trademark infringement is deliberate and willful both the trademark owner and the buying public are slighted if a court provides no greater remedy than an injunction." Playboy Enters., Inc. v. Baccarat Clothing Co., 692 F.2d 1272, 1276 (9th Cir. 1982).
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24. Plaintiff is entitled to recover the profits derived by defendant through its infringing use of plaintiff's trademark, in the amount of $669,656. The court finds this damage award to be adequate to compensate plaintiff for the harm, and will not treble the damages.
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26. A case is " exceptional" such that an award of attorneys' fees is appropriate if the case involves deliberate or willful infringement. Gucci Am., Inc. v. Rebecca Gold Enters., Inc, 802 F.Supp. 1048, 1050-51 (S.D.N.Y. 1992). As set forth above, this case involves intentional infringement, and therefore is an exceptional case. Accordingly, this court awards Entrepreneur reasonable attorneys' fees under 15 U.S.C. [§ ] 1117(a), to be fixed following submission of a fee application.
Id . at 9:1-9:9, 10:2-10:7, 10:14-10:17, 10:26-11:4.
On July 10, 2003, the district court entered judgment against Smith (the " Judgment") permanently enjoining him from infringing upon EMI's trademarks. The Judgment awarded EMI monetary damages of $669,656, based on its determination at trial of the net profits that Smith derived from his infringement. Shortly thereafter, the district court entered an order awarding to EMI attorney fees in the amount of $680,895, and costs in the amount of $39,267.46, based on the court's finding " that Smith had intentionally infringed upon Entrepreneur's trademark . . . ." Order Granting Plaintiff's Motion For Attorneys' Fees And Related Costs (Aug. 13, 2003) at 2:10-2:11. Smith again appealed to the Ninth Circuit, which affirmed the district court's judgment in 2004. Entrepreneur Media, Inc. v. Smith, 101 Fed.Appx. 212 (9th Cir. 2004).
2. The Bankruptcy Court Litigation
Meanwhile, in 2001, during the pendency of Smith's first appeal to the Ninth Circuit, Smith filed a petition under chapter 7 of the bankruptcy code. Within weeks of the bankruptcy filing, EMI commenced an adversary proceeding generally objecting to debtor's discharge under § 727 and also seeking a determination that Smith's indebtedness to EMI was nondischargeable under § 523. In relevant part, EMI alleged that Smith's indebtedness arising from his infringement of EMI's trademarks constituted a debt for willful and malicious injury to EMI's property, nondischargeable under § 523(a)(6).
In 2005, after the conclusion of the trademark infringement litigation, the bankruptcy court, Judge Dorian presiding, heard and ultimately denied the parties' cross-motions for summary judgment in the adversary proceeding. In relevant part, the bankruptcy court held that issue preclusion could be applied to establish most but not all of the elements for nondischargeability under § 523(a)(6). The bankruptcy court pointed to the four factors that must be found in order to declare an injury malicious. Citing to Murray v. Bammer (In re Bammer), 131 F.3d 788 (9th Cir.1997), the bankruptcy court identified the maliciousness factors as: " (1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse." Summary Judgment Order (Aug 11, 2009) at 2:7-2:8 (emphasis in original). According to the bankruptcy court, issue preclusion did not apply here to the " just cause or excuse" factor because that factor had neither been actually litigated or necessarily decided in the trademark infringement litigation. Id . at 4:11-5:14.
Even though the bankruptcy court denied summary judgment, the bankruptcy court issued a separate order pursuant to Rule 7056 (incorporating Civil Rule 56(d)) setting forth facts without substantial controversy (the " Civil Rule 56(d) Order"), which contained virtually all of the findings of fact rendered by the district court in the trademark infringement litigation.
The only district court findings of fact that the bankruptcy court did not include at all in its Civil Rule 56(d) Order were the district court findings numbered 26 and 27. According to the bankruptcy court, these two findings were " essentially commentary on the evidence as opposed to clear statements of facts." Id . at n.3; see also Id . at n.1. However, the bankruptcy court ultimately ruled after trial in 2008 that all of the district court's findings and conclusions bound the parties in the nondischargeability litigation. See Findings of Fact and Conclusions of Law (March 11, 2009) at 2:8-2:12.
According to the Civil Rule 56(d) Order, all of the facts listed therein were " deemed established in this action for all purposes, including for purposes of trial . . . ." Id . at 1:27-2:2 (footnote omitted).
In 2007, the bankruptcy court bifurcated EMI's claims based on § 727 from its claims based on § 523. In December 2007, a different bankruptcy judge, Judge McManus, took over from Judge Dorian as presiding judge and tried the § 727 claims first. After denying all relief under EMI's § 727 claims, the court tried EMI's § 523(a)(6) claim in June 2008.
EMI originally had another claim for relief, this one under § 523(a)(4), but the parties stipulated to dismissal of this claim before the trial on the § 523(a)(6) claim.
During the summary judgment proceedings before Judge Dorian, the parties addressed the issue of the preclusive effect of the district court rulings. Smith conceded that he was precluded from arguing the willfulness prong under the § 523(a)(6) claim by virtue of the rulings in the trademark infringement litigation. However, in the pretrial proceedings before Judge McManus leading up to trial on the § 523(a)(6) claim, the preclusive effect of the district court's rulings came up repeatedly. Among other things, Smith argued that he should not be precluded from trying the issue of his subjective state of mind - that he neither harbored the subjective intent to injure EMI's property, nor did he subjectively believe that such injury was substantially certain to occur. According to Smith, the trademark infringement action did not deal with his intent to injure EMI, so he should be able to offer any evidence relevant to that issue. Hearing Transcript (Oct. 23, 2007) at 28:16-29:12. The bankruptcy court disagreed. According to Judge McManus, Judge Dorian's prior summary judgment ruling meant that all issues other than " just cause or excuse" had been conclusively determined by the trademark infringement litigation. Hearing Transcript (Jan. 16, 2008) at 18:2-18:22, 27:13-27:23. Judge McManus acknowledged to Smith that much or all of what he wanted to introduce at trial as evidence regarding his state of mind might be relevant to the " just cause or excuse" issue, but the judge also cautioned Smith that he could not offer that same evidence to show that he subjectively believed that his conduct was innocent - that he believed that he was not infringing EMI's marks. According to Judge McManus, Smith's state of mind evidence needed to be tied to some theory that could prove just cause or excuse. Id . at 18:14-18:22, 47:20-48:7. With those limitations in mind, Judge McManus directed the parties to streamline their pretrial statements, and ultimately, the court's May 2008 pretrial order limited the parties to the sole issue of " whether defendant acted with 'just cause or excuse' such that his actions were not 'malicious'" . Pretrial Order (May 13, 2008) at 4:25 - 4:26. See also Minute Order (June 23, 2008) at p. 1 (" the issues at trial are limited to whether the defendant acted with just cause or excuse such that his infringement of the plaintiff's intellectual property was not willful and malicious. This will be established, largely, by Mr. Smith's testimony as to his motivations and state of mind.")
After a trial on the issue of just cause or excuse, at the direction of the bankruptcy court, the parties provided posttrial briefs on the impact, if any, of a recently-decided Ninth Circuit case, Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 702 (9th Cir. 2008). Smith again argued that the trademark infringement litigation did not conclusively determine that he subjectively intended to injure EMI's property, and the bankruptcy court again disagreed. The bankruptcy court applied the findings and conclusions from the trademark infringement litigation and the Civil Rule 56(d) Order and determined that all of the debt arising from the trademark infringement litigation was nondischargeable under § 523(a)(6).
The bankruptcy court also made a new and independent finding that " Smith willfully committed trademark infringement against EMI." Findings of Fact and Conclusions of Law (March 11, 2009) at 2:22-2:24. According to the bankruptcy court, " [t]his injury to EMI's property was deliberate and intentional." Id . (Emphasis added). In making this finding, the bankruptcy court expressly relied on the district court's findings in the trademark infringement litigation. There is no indication in the bankruptcy court's finding of intentional injury that it relied on the evidence presented during the trial on " just cause and excuse."
The court entered judgment on March 13, 2009, and Smith timely appealed.
3. The Order To Show Cause
Smith has also appealed from a February 1, 2007 order discharging an Order to Show Cause. On August 14, 2006, during the pretrial proceedings leading up to the trial of the § 727(a) claims, the bankruptcy court sua sponte issued an Order to Show Cause. According to the Order to Show Cause, EMI had alleged in its complaint claims under § 727(a), but had failed to state in its pretrial statement " that any evidence will be offered in support of such claims. . . ." Order to Show Cause (Aug. 14 2006), at 1:23-1:24. The show cause order threatened EMI with $10 million in monetary sanctions, as well as dismissal of the § 727(a) claims.
Both parties later amended their pretrial statements, and the bankruptcy court held a four-day trial on the § 727(a) claims, ultimately ruling in favor of Smith as to all of these claims. At a subsequent hearing on the Order to Show Cause, the bankruptcy court concluded that EMI had satisfied the concerns of the court when it amended its pretrial statement, and that Smith had not been prejudiced or harmed in any way by EMI's delay in addressing the § 727(a) claims. Hearing Transcript (Feb. 1, 2007) at 158-69. Accordingly, the court issued its February 1, 2007 order discharging the prior Order to Show Cause.
ISSUES
1. Did the bankruptcy court properly preclude Smith from relitigating the issue of willfulness?
2. Did the trademark infringement judgment conclusively establish that EMI was harmed by Smith's intentional trademark infringement?
3. Did the bankruptcy court shift the burden of proof to Smith, thereby improperly imposing on him the burden to establish that his trademark infringement liability was dischargeable?
4. Is § 523(a)(6) applicable to liability arising from willful trademark infringement?
5. Did the bankruptcy court err when it found that Smith acted without just cause or excuse?
6. Does Smith have standing to challenge the bankruptcy court's denial of sanctions against EMI under rule 9011?
STANDARDS OF REVIEW
The bankruptcy court's determination that issue preclusion applies presents a mixed question of law and fact where the legal issues predominate, so we review this determination de novo. Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 823 (9th Cir. BAP 2006), aff'd, 506 F.3d 956 (9th Cir. 2007).
We review findings of fact under the clearly erroneous standard and conclusions of law de novo. Rule 8013; United States v. Gould (In re Gould), 401 B.R. 415, 412 (9th Cir. BAP 2009).
To reverse the bankruptcy court's factual findings under the clearly erroneous standard, we must have " a definite and firm conviction that a mistake has been committed." In re Brooks-Hamilton, 400 B.R. 238, 245 (9th Cir. BAP 2009).
DISCUSSION
1. Section 523(a)(6) - Elements, Factors and Definitions
A debt is nondischargeable under § 523(a)(6) if it results from debtor's willful and malicious injury to another or to the property of another. Thus, there are three elements:
(1) willfulness; (2) maliciousness and (3) injury. These terms are not defined in the statute, but they have been defined in subsequent case law.
A debtor willfully injures another if he subjectively intends to injure him, or subjectively believes that harm is substantially certain to occur. Carrillo v. Su (In re Su), 290 F.3d 1140, 1143-45 (9th Cir. 2002).
An injury is malicious if it " involves '(1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse.'" Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 702, 706 (9th Cir. 2008)(citation omitted).
As discussed below, the application in this case of the first three factors for maliciousness is straightforward. The bankruptcy court held trial on the fourth factor, " just cause or excuse, " and found that Smith acted without just cause or excuse, so we pause here to consider this factor.
The leading Ninth Circuit cases on just cause or excuse are Jett v. Sicroff (In re Sicroff), 401 F.3d 1101 (9th Cir. 2005), and Murray v. Bammer (In re Bammer), 131 F.3d 788 (9th Cir. 1997). Rather than defining what is just cause or excuse, these two cases defined what is not just cause or excuse. Sicroff held that, where the debtor intentionally defamed another, the debtor's self-professed goal to protest the closure of his university's geography department did not constitute just cause or excuse. Sicroff, 401 F.3d at 1106-07. Similarly, Bammer held that, where the debtor intentionally committed fraud in an attempt to facilitate his mother's felonious embezzlement scheme, his subjective intent to act out of compassion for his mother, and to not personally receive any monetary benefit from the fraud, did not constitute just cause or excuse. Bammer, 131 F.3d at 792-93.
The final element under § 523(a)(6) is injury. In Suarez v. Barrett (In re Suarez), 400 B.R. 732 (9th Cir. BAP 2009), we held that the definition of injury under § 523(a)(6) includes more than just compensatory damages, that intentional conduct which necessarily caused identifiable harm can satisfy the injury prong of § 523(a)(6), even if no compensatory damages were proven, found or awarded. Id . at 738-40.
With these standards, factors and definitions in mind, we turn to our discussion of the issues raised by this appeal.
2. The Bankruptcy Court Properly Precluded Smith From Relitigating the Issue of Willfulness.
The bankruptcy court ruled that the findings in the trademark infringement litigation barred Smith, under the doctrine of issue preclusion, from relitigating the issue of willfulness.
The doctrine of issue preclusion applies in dischargeability litigation. Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991). Garner held that " . . . a bankruptcy court could properly give collateral estoppel effect to those elements of the claim that are identical to the elements required for discharge and that were actually litigated and determined in the prior action." Id.
The application of issue preclusion to a prior federal judgment is determined by federal law. FDIC v. Daily (In re Daily), 47 F.3d 365, 368 (9th Cir. 1995); Frankfort Digital Servs., Ltd. v. Neary (In re Reynoso), 315 B.R. 544, 551 (9th Cir. BAP 2004). For preclusive effect to apply:
" (1) the issue at stake must be identical to the one alleged in the prior litigation; (2) the issue must have been actually litigated in the prior litigation; and (3) the determination of the issue in the prior litigation must have been a critical and necessary part of the judgment in the earlier action."
Reynoso, 315 B.R. at 551 (quoting Clark v. Bear Stearns & Co., Inc., 966 F.2d 1318, 1320-21 (9th Cir. 1992)).
a. Critical And Necessary
In this case, the district court's findings concerning Smith's intent to infringe were a critical and necessary part of the district court's judgment. When, as in the original district court action, there is no proof of direct competition between the infringer and the owner of the trademark, intent to infringe must be proven to obtain a disgorgement of defendant's profits. See Maier Brewing Co. v. Fleischmann Distilling Corp., 390 F.2d 117, 123-124 (9th Cir. 1968) (affirming award of defendants' profits based on district court finding that defendants " knowingly, wilfully and deliberately infringed" plaintiff's trademark).
Where trademark infringement is deliberate and willful, this court has found that a remedy no greater than an injunction " slights" the public. This standard applies, however, only in those cases where the infringement is " willfully calculated to exploit the advantage of an established mark." The intent of the infringer is relevant evidence on the issue of awarding profits and damages and the amount.
Lindy Pen Co., Inc. v. Bic Pen Corp., 982 F.2d 1400, 1405 (9th Cir. 1993) (citations omitted and emphasis added). See also Bandag, Inc. v. Al Bolser's Tire Stores, Inc., 750 F.2d 903 (Fed. Cir. 1984) (reversing damages award in part because there was no evidence that infringement therein was done with the intent to trade off of the plaintiff's goodwill). Similarly, intent to infringe plays a pivotal role where the owner of the trademark seeks to recover attorneys' fees. See Earthquake Sound Corp. v. Bumper Indus., 352 F.3d 1210, 1216-17 (9th Cir. 2003). These cases establish that Smith's subjective intent to infringe was an essential component of the trademark infringement litigation.
b. Actually Litigated
In addition, Smith's intent to infringe was actually litigated. Smith's intent to infringe is alleged in EMI's First Amended Complaint, is raised repeatedly in the district court's pretrial conference order, and was the subject of several of the district court's findings of fact and conclusions of law, both as statements of evidentiary fact supporting the determination of intent to infringe, and as statements of ultimate fact that Smith's infringement was intentional, deliberate, knowing and willful.
c. Identical Issues
There is one remaining factor to consider: whether the intent issue is identical in both actions. Smith asserts that the intent issue litigated and determined in the trademark infringement litigation is not the same as that raised by EMI's § 523(a)(6) claim.
To resolve this issue, we must identify precisely what state of mind is sufficient to constitute willful injury under § 523(a)(6), and also determine whether the trademark infringement litigation involved that same state-of-mind issue.
The Supreme Court has held, in the context of medical malpractice, that it is insufficient under § 523(a)(6) to show that the debtor's conduct was intentional and that the injury was negligently or recklessly inflicted; rather, the plaintiff must show that the debtor inflicted the injury intentionally. Kawaauhau v. Geiger, 523 U.S. 57, 61-62, 118 S.Ct. 974, 977, 140 L.Ed.2d 90 (1998). Thus, in order to decide whether the intent issue in the trademark litigation and in the § 523(a)(6) action is identical, we must consider whether the district court's findings that Smith subjectively intended to infringe on EMI's trademarks and subjectively intended to trade off of EMI's goodwill mean the same thing as Smith subjectively desired to injure EMI's property.
In trademark infringement litigation, we believe that intentional infringement is tantamount to intentional injury under bankruptcy law. Unlike in In re Geiger, where the debtor had committed medical malpractice, and In re Su, where the debtor had recklessly sped through a red light, it is impossible to separate the " conduct" of trademark infringement from the " injury" of trademark infringement when considering the defendant's intent. In other words:
Performing a medical procedure and driving an automobile are activities that can be executed intentionally, but in a manner that is reckless or negligent with regard to the outcome. On the other hand, activities such as filing a frivolous lawsuit . . . or infringing a copyright . . . do not have uncertain or variable outcomes. While a medical procedure can result in either healing or harm, and a physician may cause harm by negligence, copyright infringement is a categorically harmful activity.
Star's Edge, Inc. v. Braun (In re Braun), 327 B.R. 447, 450-51 (Bankr. N.D. Cal. 2005).
Like intentional copyright infringement, intentional trademark infringement is a " categorically harmful activity." The seminal Ninth Circuit case on intentional trademark infringement, Maier Brewing Co., 390 F.2d at 121-23, discusses in detail the harm caused by trademark infringement. In the course of this discussion, the Maier court refers to the intentional trademark infringer as someone who desires to " gain the value of an established name of another, " id. at 123, and who " poaches upon the commercial magnetism of the [trademark registrant's] symbol." Id . at 122. According to Maier, the intentional infringer wants to " reap the benefits of the trademark he has stolen." Id . at 123.
Maier's progeny similarly talk about the subjective desire of intentional trademark infringers to take the value and benefits of the trademark owner's goodwill and use them for their own benefit. See e.g., Lindy Pen, 982 F.2d at 1405 (explaining that intentional trademark infringement must be " willfully calculated to exploit the advantage of an established mark."); Playboy Enters., Inc. v. Baccarat Clothing Co., Inc., 692 F.2d 1272, 1274 (9th Cir. 1982) (explaining the need for an economic deterrent against " the profit maximizing entrepreneur who engages in trademark piracy.").
Simply put, the intent to infringe and the intent to deprive the mark's owner of the value and benefit of his property are opposite sides of the same coin. In other words, when someone intentionally infringes on the copyright or trademark of another, they subjectively desire to harm property belonging to the mark's owner - that is, they seek to deprive the mark's owner of the benefit and value of his or her property.
On this issue, Smith relies on Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 702 (9th Cir. 2008). According to Smith, Barboza establishes that a finding of willfulness in infringement litigation is not the same thing as a finding of willfulness in an action under § 523(a)(6). Barboza does not help Smith. In fact, in Barboza, the Ninth Circuit had the opportunity to quash the notion of intentional copyright infringement as a categorically harmful activity, but it did not do so.
In Barboza, the plaintiff brought a nondischargeability action under § 523(a)(6) based on a prior federal court judgment of copyright infringement. However, in the prior copyright litigation it was impossible to tell whether the jury specifically found that the defendants intentionally infringed or merely were reckless, as mere reckless conduct was sufficient to support a claim for willful copyright infringement, and the jury's verdict didn't say precisely what they found. Consequently, the Ninth Circuit held that the finding of willful copyright infringement did not preclude litigation of the willfulness issue in the subsequent action under § 523(a)(6). Id . at 709. In short, the prior copyright litigation in Barboza failed to conclusively establish intent to injure simply because there was no specific finding of intent to infringe; rather, the infringement might only have been reckless. According to the Ninth Circuit, the BAP erred in its decision in Barboza, 347 B.R. 369 (9th Cir. BAP 2008), by implying malice from the bankruptcy court's finding of willfulness. Notably, the Ninth Circuit acknowledged the BAP's characterization of copyright infringement as a " categorically harmful activity" (545 F.3d at 704), but did not point to any error in that characterization.
In contrast to Barboza, the district court explicitly found here that Smith intended to infringe and intended to exploit EMI's goodwill for his own benefit, and these findings were essential before the district court could order disgorgement of Smith's profits and award EMI its attorneys' fees. Accordingly, we hold that the district court's findings on intent in the trademark infringement litigation were made against the same legal standard of intent as presented here in EMI's action under § 523(a)(6).
Based on the reasoning set forth above, we conclude that the bankruptcy court did not err in precluding Smith from relitigating the issue of willfulness.
3. The Trademark Infringement Judgement Conclusively Established That EMI Was Harmed By Smith's Intentional Trademark Infringement.
Smith argues that EMI was not harmed by his intentional trademark infringement and that the trademark infringement litigation did not establish any harm to EMI or its property. According to Smith, intentional trademark infringement might deceive or confuse the public, but it does not necessarily harm the trademark owner. Smith's contention is contrary to Ninth Circuit law. The Ninth Circuit cases on intentional trademark infringement cited in section two, above, explained that intentional trademark infringement is inherently harmful to the property interests of the trademark owner. See e.g. Maier, 390 F.2d at 121-23; Playboy, 692 F.2d 1272, 1274-75. That explains why those cases held that, even when a trademark owner cannot prove direct competition or direct damages in the form of their own lost profits, it still may be appropriate in cases of intentional infringement to award statutory damages equal to the profits obtained by the infringer as a result of its infringing conduct. Id . Here, in the district court's findings and conclusions, the district court made express reference to the harm to EMI and the disgorgement of Smith's profits as compensating EMI for that harm:
24. Plaintiff is entitled to recover the profits derived by defendant through its infringing use of plaintiff's trademark, in the amount of $669,656. The court finds this damage award to be adequate to compensate plaintiff for the harm, and will not treble the damages.
District Court Findings And Conclusions at 10:14-10:17.
In essence, Smith confuses the concept of harm or injury with the concept of the existence and amount of direct damages. Because direct damages can be difficult to prove and difficult to quantify in infringement actions, Congress has provided for the possibility of statutory damages awards. See Braun, 327 B.R. at 450-52. Further, any liability duly imposed as a direct, but-for result of the defendant's nondischargeable conduct constitutes a nondischargeable debt, regardless of whether the liability reflects the actual damages incurred by the plaintiff. See Cohen v. de la Cruz, 523 U.S. 213, 220 118 S.Ct. 1212, 1217, 140 L.Ed.2d 341 (1998)(holding nondischargeable under § 523(a)(2)(A) treble damages based on debtor's fraudulent conduct); Suarez v. Barrett (In re Suarez), 400 B.R. 732, 738-39 (9th Cir. BAP 2009)(applying Cohen holding to affirm bankruptcy court's determination under § 523(a)(6) that attorneys' fees and costs were nondischargeable, even though there was no award of compensatory damages.); Papadakis v. Zelis (In re Zelis), 66 F.3d 205, 208-09 (9th Cir. 1995)(holding that sanctions imposed for filing a frivolous appeal were nondischargeable because the filing of the appeal necessarily harmed the respondents, even though they were not awarded any compensatory damages).
Accordingly, the trademark infringement litigation conclusively established that Smith injured EMI's property interests.
4. The Bankruptcy Court Did Not Shift The Burden of Proof to Smith.
To succeed in an action under § 523(a), the creditor must prove the elements of that claim by a preponderance of the evidence. Grogan v. Garner, 498 U.S. at 291, 111 S.Ct. at 661. Meanwhile, in a trademark infringement action, a claim of intentional trademark infringement must be proven by clear and convincing evidence. Collegenet, Inc. v. XAP Corp., 483 F.Supp.2d 1058, 1065 (D. Or. 2007)(stating that " [a] finding of willful misconduct under the Lanham Act must be supported by clear and convincing evidence."). As explained in Grogan, the clear and convincing standard is a higher standard of proof than the preponderance of the evidence standard, and where the issues were subject to an equal or greater standard of proof in the prior litigation, those issues are eligible for issue preclusion in the subsequent litigation if the other elements for issue preclusion are met. Grogan 498 U.S. at 284-85, 111 S.Ct. at 658.
Smith claims that the bankruptcy court shifted the burden of proof from EMI to Smith. The record does not support this claim. The record reflects that the bankruptcy court applied the doctrine of issue preclusion and determined that the findings of fact from the trademark infringement litigation conclusively established the willfulness prong of § 523(a)(6), as well as the first three of the four elements of the maliciousness prong. See Barboza, 545 F.3d at 706 (" (1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse.").
We already have addressed the propriety of the bankruptcy court's application of issue preclusion to the willfulness prong. Smith does not argue in his opening brief in any meaningful way that the bankruptcy court erred in applying issue preclusion to the first three elements of the maliciousness prong. Nor have we independently found any error in this application. The district court specifically found a wrongful act (infringement) and specifically found that Smith did this wrongful act intentionally (intentional infringement). In addition, based on the case law and reasoning set forth in section two above, we conclude, as a matter of law, that intentional trademark infringement necessarily causes injury (categorically harmful activity). Thus, we perceive no error in the bankruptcy court's application of issue preclusion to the first three elements of the maliciousness prong.
Similarly, the bankruptcy court did not shift the burden of proof regarding the just cause or excuse element. The record demonstrates that the bankruptcy court held trial on this element, and took into consideration both the findings in the Civil Rule 56(d) Order and the evidence offered by both parties at trial, before it rendered its finding on the just cause or excuse issue. Smith here confuses EMI's burden of persuasion - which the bankruptcy court always placed on EMI - with Smith's need to come forward with evidence after EMI's initial proffer satisfied the prima facie standard for finding liability. Here EMI introduced sufficient evidence to prove its case, and the bankruptcy court determined that Smith's evidence did not change that result.
In sum, the bankruptcy court did not preclude litigation of this issue, nor did it improperly shift the burden of proof to Smith; rather, the bankruptcy court drew reasonable inferences from the adopted findings and the evidence presented at trial to make its factual determination that Smith acted without just cause or excuse. We see no error in the bankruptcy court's process, nor in the result it reached.
5. Section 523(a)(6) Can Be Applied To Liability Arising From Willful Trademark Infringement.
Smith argues that, based on his plain-language reading of § 523(a)(6), liability arising from intentional trademark infringement is beyond the scope of the statute. Under Smith's construction, liability arising from any intentionally tortious conduct is not covered by the express terms of the statute. Smith cites to no authority interpreting § 523(a)(6) in this narrow manner, nor are we aware of any.
The United States Supreme Court has stated that " § 523(a)(6)'s formulation triggers in the lawyer's mind the category 'intentional torts, '" Geiger, 523 U.S. at 61-62, 118 S.Ct. at 977, and the Ninth Circuit has held that actions under § 523(a)(6) generally arise from conduct sounding in tort rather than contract. Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1206-07 (9th Cir. 2001). It also is settled law that actions for trademark infringement sound in tort. Polar Bear Productions, Inc. v. Timex Corp., 384 F.3d 700, 720 (9th Cir. 2004).
In short, Smith's claim regarding the scope of § 523(a)(6) is wholly without merit. Liabilities arising from intentional trademark infringement are within the scope of debts covered under § 523(a)(6).
6. The Bankruptcy Court's Finding That Smith Acted Without Just Cause Or Excuse Is Not Clearly Erroneous.
Smith challenges the bankruptcy court's finding that Smith acted without just cause or excuse. Specifically, Smith asserts that this finding is in part based on the bankruptcy court's allegedly inaccurate finding that " Smith never sought, or received, any legal advice regarding the propriety of adopting his infringing names." Findings of Fact and Conclusions of Law (March 13, 2009) at 3:26-3:27. Smith relies on the testimony of Ilene Goldstein Block and Jeffrey S. Kravitz to support his point. We have reviewed Ms. Goldstein's direct testimony, and it does not support Smith's point. In fact, it supports the court's finding. Ms. Goldstein specifically stated in her revised direct testimony: " While Mr. Smith told me that he was going to change the name of his business to EntrepreneurPR and the name of his publication to Entrepreneur Illustrated, Mr. Smith did not seek my legal opinion regarding those name changes. Furthermore, I did not give Mr. Smith any legal advice regarding those name changes." Revised Direct Testimony of Ilene Goldstein Block (June 26, 2008) at 3:6-3:10.
Similarly, Mr. Kravitz's testimony does not support Smith's point. According to Mr. Kravitz, his representation of Smith did not begin until 2000, well after Smith's 1997 adoption of the business name EntrepreneurPR and the magazine name Entrepreneur Illustrated. Direct Testimony of Jeffrey Kravitz (June 26, 2008) at 1:26-2:12. In short, Smith points us to no evidence in the record inconsistent with the bankruptcy court's finding that he did not seek or obtain any legal advice regarding the name changes in question before adopting the new names.
More broadly, Smith appears to assert that the bankruptcy court should have drawn the inference from the evidence he presented that he acted with just cause and excuse. Assuming without deciding that the bankruptcy court reasonably could have drawn this inference, the bankruptcy court as the trier of fact instead drew the inference from the totality of the evidence in the record that Smith acted without just cause or excuse. " If two views of the evidence are possible, the trial judge's choice between them cannot be clearly erroneous." Hansen v. Moore (In re Hansen), 368 B.R. 868, 874-75 (9th Cir. BAP 2007)(citing Anderson v. Bessemer City, 470 U.S. 564, 573-575, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985)). On the entire record, we cannot say that the bankruptcy court's choice of inferences was implausible. Thus, we conclude that the bankruptcy court did not err in finding that Smith acted without just cause or excuse.
7. Smith Lacks Standing To Challenge The Bankruptcy Court's Denial Of Sanctions Against EMI Under Rule 9011.
Having addressed all of the issues raised by Smith concerning the bankruptcy court's nondischargeability judgment, we turn our attention to Smith's separate challenge of the bankruptcy court's decision to not sanction EMI in furtherance of an Order to Show Cause issued on August 14, 2006. The bankruptcy court discharged the show cause order without imposing any sanctions against EMI. According to Smith, the bankruptcy court abused its discretion by not imposing sanctions pursuant to Rule 9011.
Prior to considering the merits of Smith's challenge, we must consider whether Smith has standing to appeal. Only a " person aggrieved" has standing to appeal. In re Fondiller, 707 F.2d 441, 442-43 (9th Cir.1983). " Whether an appellant is a 'person aggrieved' for purposes of appealing an order of the bankruptcy court is a factual finding." Paine v. Dickey (In re Paine), 250 B.R. 99, 104 (9th Cir. BAP 2000). (citing Duckor Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.), 177 F.3d 774, 777 (9th Cir. 1999)). See also Int'l Ass'n of Firefighters v. City of Vallejo (In re Vallejo), 408 B.R. 280, 299 (9th Cir. BAP 2009)(" The oft-cited rationale for this restrictive approach to bankruptcy appellate standing is the concern that if appellate standing is not limited, bankruptcy litigation will become mired in endless appeals brought by the myriad parties who are indirectly affected by every bankruptcy court order.").
" Only persons who are directly and adversely affected pecuniarily by an order have standing to appeal the order. A person is 'directly and adversely affected pecuniarily' if the order would 'diminish the debtor's property, increase his burdens, or detrimentally affect his rights.'" Paine, 250 B.R. at 104 (quoting Fondiller, 707 F.2d at 442-43). Each party must establish its standing on appeal. Vallejo, 408 B.R. at 288-99. When appellant does not factually establish that it is a person aggrieved, dismissal of the appeal for lack of standing is appropriate. See e.g. In re Cosmopolitan Aviation Corp., 763 F.2d 507, 513-14 (2nd Cir. 1985), partially overruled on other grounds, Pioneer Investment Services Co. v. Brunswick Associates Limited Partnership, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993).
In assessing Smith's standing, we start with the complete text of the Order to Show Cause, which was issued sua sponte by Judge Dorian:
ORDER TO SHOW CAUSE
TO PLAINTIFF ENTREPRENEUR MEDIA, INC., ITS ATTORNEYS OF RECORD AND OTHER PARTIES IN INTEREST:
It appearing that plaintiff alleged claims in its complaint herein pursuant to 11 U.S.C. § 727 (a) seeking a denial of defendant's discharge, and it further appearing that the pre-trial statement submitted by plaintiff fails to state that any evidence will be offered in support of such claims, and it further appearing that defendant's discharge has been withheld for more than five years because of plaintiffs claims under § 727, thereby impairing defendant's fresh start,
YOU ARE HEREBY ORDERED TO APPEAR AND SHOW CAUSE on September 13, 2006, at 11:00 a.m., in Courtroom 28, Seventh Floor, United States Courthouse, 501 " I" Street, Sacramento, California, and show cause why the claims stated in the complaint herein pursuant to § 727(a) should not be dismissed and why sanctions in the amount of $10,000,000.00 should not be ordered against plaintiff and its attorneys pursuant to 11 U.S.C. § 105(a) and Federal Rule of Bankruptcy Procedure 9011.
IT IS FURTHER ORDERED that opposition to the court's proposed action shall be in writing and filed no later than September 6, 2006.
Order to Show Cause (August 14, 2006).
After the issuance of the show cause order, both parties amended their pretrial statements, trial was held before Judge McManus, and a judgment was entered in favor of Smith on the § 727(a) claims. On February 1, 2007, the bankruptcy court held a hearing on the show cause order. At the hearing, Judge McManus interpreted the court's order as being essentially to encourage EMI and its attorneys to comply with their duty to prosecute the § 727(a) claims. Hearing Transcript (Feb. 1, 2007) at 158-62. The court further noted that EMI had complied with the show cause order by amending its pretrial statement, that a four-day trial had been held on the § 727(a) claims, and that there was no evidence whatsoever of prejudice or harm to Smith resulting from EMI's initial failure to address the § 727(a) claims in its pretrial statement. Id . at 163-64. Based on this reasoning, the court discharged the Order to Show Cause without imposing any sanctions. Id . at 167-69.
On October 30, 2009, Smith filed in the BAP Clerk's Office a motion for sanctions against EMI and others. By separate order to be issued concurrently with the issuance of this Memorandum Decision, we are denying Smith's sanctions motion.
Tellingly, the Order to Show Cause did not state that the court was considering awarding sanctions payable to Smith. At the February, 1, 2007 hearing, the court confirmed that the order did not contemplate any award payable to Smith: " You know, this - - we're talking about money that would go to the Treasury, not to the parties." Id . at 169. Moreover, the Order to Show Cause did not provide or allow for any role for Smith or his counsel in the show cause proceedings. Smith confirmed this at the February 1, 2007 hearing: " Yes, but may I just indicate to the Court that [Judge Dorian] not only didn't entertain response from us for the OSC, he precluded any response."
Perhaps most fatally, under Rule 9011, on which Smith relies, monetary sanctions may not be awarded to a party when the bankruptcy court initiates the Rule 9011 proceedings; such sanctions only may be so awarded when the party brings its own motion under Rule 9011. See Rule 9011(c)(2); In re Deville, 280 B.R. 483, 494 (9th Cir. BAP 2002), aff'd, 361 F.3d 539 (9th Cir. 2004). Notably, if Smith had desired to seek a compensatory award of sanctions under Rule 9011 based on EMI's filing of the § 727(a) claims, he could have filed his own motion to that effect, but the record reflects that he did not do so.
Under these circumstances, Smith has not established that he has any standing on appeal to challenge the bankruptcy court's denial of sanctions under Rule 9011. Accordingly, we must DISMISS Smith's appeal of the bankruptcy court's February 1, 2007 order discharging the Order to Show Cause.
While the Order to Show Cause also referenced 11 U.S.C. § 105(a), apparently referring to the court's inherent authority to sanction parties, the Order provided no indication whether EMI was being charged with bad faith conduct, or any particularized statement setting forth any alleged bad faith conduct. Under these circumstances, the Order was insufficient to serve as basis for inherent authority sanctions, and it would have been an abuse of discretion if the bankruptcy court had granted inherent authority sanctions based on this order. See generally ( Price v. Lehtinen ) In re Lehtinen, 564 F.3d 1052, 1060-61 (9th Cir. 2009)(acknowledging requirement of particularized notice of alleged bad faith conduct), cert. denied, 130 S.Ct. 739, 175 L.Ed.2d 515, 78 U.S.L.W. 3065, 78 U.S.L.W. 3310, 78 U.S.L.W. 3319 (2009) (No. 09-113). In any event, Smith did not challenge the denial of sanctions under 11 U.S.C. § 105(a), so he has waived that argument.
CONCLUSION
For all of the reasons set forth above, we AFFIRM the bankruptcy court's judgment determining that Smith's debt arising from his intentional trademark infringement is nondischargeable. In addition, we DISMISS for lack of standing Smith's appeal of the bankruptcy court's February 1, 2007 minute order.
Finally, were we to reach the merits, our review of the record reveals no abuse of discretion in the bankruptcy court's discharge of the order following the conclusion of the trial regarding the denial of Smith's discharge under § 727.