Opinion
No. 02 Civ. 7575 (GEL)(KNF).
January 28, 2005
REPORT and RECOMMENDATION
TO THE HONORABLE GERARD E. LYNCH, UNITED STATES DISTRICT JUDGE
I. INTRODUCTION
In this action, plaintiff Philip Morris USA Incorporated ("Philip Morris") alleged trademark infringement, trademark dilution, false advertising, unfair competition and other violations of the Lanham Trade-Mark Act, 15 U.S.C. §§ 1114 et seq., as well as violations of analogous state law, against the defendant, Otamedia Limited ("Otamedia"), an Internet cigarette vendor operating in Switzerland. By Judgment and Order dated January 27, 2003 ("Judgment"), United States District Judge Allen G. Schwartz directed that a default judgment be entered against the defendant and that the plaintiff's request for injunctive relief be granted. Judge Schwartz then referred the matter to the undersigned for resolution of discovery disputes, enforcement of the Judgment and an assessment of damages, if any, including attorneys' fees.
Philip Morris served and filed an application for an award of damages and attorneys' fees on March 12, 2004, and a supplemental memorandum of law in support of the instant application on October 5, 2004. The defendant has not provided to the Court any writings in opposition to the plaintiff's inquest submissions.
In a letter to the Court dated April 15, 2004, Carl Messina of Otamedia requested an extension of the time in which to respond to Philip Morris's application for damages, until after entry of the court's ruling in the domain-name transfer proceeding. See infra. However, no writings opposing the application were submitted.
Plaintiff avers that it is entitled to $177.2 million in damages. Additionally, plaintiff contends that the amount of its damage award should be trebled, to $531.6 million, because the defendant's infringing conduct was willful. The plaintiff also seeks $60,391.62 in attorneys' fees incurred in connection with prosecuting this action. For the reasons set forth below, I recommend that plaintiff be awarded $173,734,291.62: $57,891,300 in damages, trebled to $173,673,900, and $60,391.62 in attorneys' fees.
II. BACKGROUND AND FACTS
Based on plaintiff's submissions, the complaint filed in the instant action — the allegations of which, perforce of defendant's default, must be accepted as true, except those relating to damages, see Cotton v. Slone, 4 F.3d 176, 181 (2d Cir. 1993); Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992) — and the Court's review of the entire court file maintained in this action, the following findings of fact are made:
Philip Morris, a corporation formed and existing under the laws of the state of Virginia, has its principal place of business at 120 Park Avenue, New York, New York. Philip Morris manufactures and sells cigarettes, including the famous Marlboro brand, in the United States. Otamedia, a corporation formed and existing under the laws of Belize, has its principle place of business in Switzerland. In 2002, Philip Morris learned that Otamedia was using Philip Morris's registered trademarks to advertise and sell Philip Morris brand cigarettes, manufactured for sale outside the United States, over the Internet through Otamedia's websites, located at www.yesmoke.com andwww.yessmoke.com. On August 15, 2002, Philip Morris sent a cease and desist letter to Otamedia, but received no response. Thereafter, on September 19, 2002, Philip Morris filed the instant complaint alleging trademark infringement, trademark dilution, false advertising, unfair competition and other violations of the Lanham Trade-Mark Act, 15 U.S.C. §§ 1114, et seq., as well as violations of analogous state law. The complaint requested injunctive relief, damages and attorneys' fees.
On January 21, 2003, counsel for Otamedia informed the court that Otamedia had elected not to answer or otherwise respond to the complaint. Philip Morris then moved for a default judgment. As noted above, Judge Schwartz granted the motion for a default judgment and directed that Otamedia be enjoined from "using or licensing the use of . . . the Philip Morris USA Marks. . . ." In addition, Otamedia was ordered, among other things, to "cease advertising and offering for sale Philip Morris USA Gray Market Cigarettes to consumers in the United States on the Internet" and to "cease supplying cigarettes, fulfilling orders for, drop shipping, and/or facilitating the importation in the United States of Philip Morris USA Gray Market cigarettes for any other website customer or affiliates, or any member of its 'affiliate program.'"
"Gray market cigarettes" are Philip Morris brand cigarettes which are manufactured to be sold abroad but imported into the United States without Philip Morris's permission.
According to Philip Morris, following entry of the Judgment, Otamedia continued to ship large quantities of Philip Morris brand cigarettes into the United States each month, knowing that the shipments were in violation of that ruling. Consequently, following reassignment of this case to the assigned district judge, Philip Morris sought to modify the Judgment to require Otamedia to transfer to Philip Morris ownership of the Internet domain names "yesmoke.com" and "yessmoke.com." In an Opinion and Order dated August 19, 2004, the court granted that application.See Philip Morris USA, Inc. v. Otamedia Limited, 331 F. Supp. 2d 228 (S.D.N.Y. 2004).
Philip Morris now seeks to recover as damages the $177.2 million in profits that Otamedia earned by virtue of its infringing conduct, as measured by the amount of its revenue during the period September 2002 through August 2004. Additionally, Philip Morris contends that the amount of damages should be trebled, to $531.6 million, because Otamedia's infringing conduct was willful. Philip Morris also seeks $60,391.62 in attorneys' fees.
In support of its application for damages, Philip Morris has submitted, among other things, the declarations of Cameron Meierhoefer ("Meierhoefer"), Vice President of Analytics, and James Larrison ("Larrison"), Vice President of Corporate Development, of comScore Networks, Inc. ("comScore"), a consumer research company. Philip Morris contends that, because Otamedia has refused to comply with discovery requests regarding its actual revenues derived from the sale of illegally imported cigarettes, it has been forced to use comScore as an independent source of information regarding those sales and revenues.
According to Meierhoefer, comScore provides "Internet audience measurement services" similar to the television audience measurement services performed by Nielsen Media Research. Using a randomly selected and demographically balanced panel of approximately 1.5 million consumers, 1 million of whom are located in the United States, comScore captures data regarding their Internet viewing, buying and other behavior. In September 2003, counsel for Philip Morris contracted with comScore to acquire comScore's data on Otamedia's sales of cigarettes in the United States. Pursuant to that contract, comScore researched and analyzed Internet user visits to, and purchases made from, Otamedia's yesmoke.com website, based on data collected from its United States-based panelists during a 13-month period from September 2002 to September 2003. Subsequently, comScore researched and analyzed Internet user visits to, and purchases made from, Otamedia's yesmoke.ch website, based on data collected from its United States-based panelists during the period from September 2003 to January 2004. Drawing on these data, and using standard statistical techniques for extrapolating the data to the United States population, comScore estimated Otamedia's total sales of Philip Morris brand cigarettes to United States customers for each month for a 17-month period from September 2002 through January 2004. According to comScore's research, during that time period, Otamedia sold an estimated 8,594,800 cartons of Philip Morris brand cigarettes, generating estimated revenues of $131.5 million from consumers in the United States.
Since September 2003, Internet users have been redirected to Otamedia's yesmoke.ch website. As the court explained in its August 2004 Opinion and Order, the ".ch" extension signifies that the domain name is registered in Switzerland; "ch" stands for Confederation Helvetique. See Philip Morris, 331 F. Supp. 2d at 235 n. 8.
Larrison, in a declaration annexed to plaintiff's supplemental memorandum of law, has provided additional information concerning comScore's procedures, including recruitment, data collection, raw data quality control, sample selection and projections. According to Larrison, when a panelist is recruited, comScore obtains demographic information about that individual, including, e.g., the individual's gender, race and household income, to ensure that the comScore panel, as a whole, is representative of the Internet population as a whole. The panelists then install in their computers comScore's proprietary tracking software which routes each panelist's Internet access through comScore's own computers, called "proxy servers." The proxy servers monitor the web pages visited by each panelist and the information exchanged between the panelist and the various websites visited, and collect information about advertisements seen and products purchased, including the price of each product.
According to Larrison, comScore's data collection system is designed to extract information from up to 30,000 merchant sites on the Internet. Quality control procedures, such as checks for unusual quantities and duplicate transactions, ensure that the system is collecting information accurately and completely. Additionally, comScore's automatic data quality checks are complemented by human testing through teams of shoppers who make Internet purchases and then record them manually. These purchases are then compared to the data collected by the system to make sure the two sets of data agree. Data that are identified as invalid, that is, duplicatory, fraudulent, unrepresentative, or commercial, is excluded from comScore's data sample.
After raw data collected from the panelists has been converted to a standard format, the data are weighted to ensure that each sample is representative of United States Internet use in the population as a whole. comScore uses standard statistical methodology to do this. Thus, any statistical projection made through the observation of a portion of a population is based on representative sampling; if a sample of the population is representative of the population as a whole, it can be concluded that, within a certain margin of error, the behavior of the sample will mirror the population as a whole. According to Larrison, comScore uses a very large sample, about 1.5 million Internet users, 1 million of whom are in the United States, to make its projections.
Larrison provides the following example to illustrate the process of weighting: "if women were underrepresented in our sample by 10 percentage points (i.e., there were only 40% women in our sample instead of 50%), the data associated with women in the sample would be weighted by a factor of 1.25. Thus, a woman's purchase of a book on Amazon.com . . . would then be weighted as 1.25 books."
After weighting factors are applied to each individual computer and household in the panel, comScore projects the data collected from the sample to the Internet universe as a whole; each person, household and computer is assigned a specific "projection factor," that is, a multiplier applied to the data collected. Given that the total United States Internet population is approximately 150 million persons (comScore performs "universe enumeration surveys" to estimate the total United States Internet population), each of the 1 million United States panelists in comScore's sample would represent 150 persons. With respect to the instant litigation, Larrison emphasizes that there is no single projection factor that can be given to the Court because the projections of sales of Philip Morris brand cigarettes are made up of millions of individual weightings and multiplications. Nevertheless, according to Larrison, the kind of projections made by comScore are a common feature of all sampling methodology.
Larrison avers that, using the sample and projections described in his declaration, comScore was able to estimate that Otamedia sold $177.2 million worth of Philip Morris brand cigarettes between September 2002 and August 2004. This estimate reflects projections from observed actual sales of Philip Morris brand illegally imported cigarettes in the amount of $385,942 during that time period.
The increase in comScore's estimate of the amount of Otamedia's sales — over its previous estimate of $131.5 million — reflects the inclusion of data collected between January and August 2004.
Philip Morris contends that, as objective, non-party evidence, the comScore information is inherently credible. For example, Larrison avers comScore's estimates of the sales by websites with sales volumes comparable to the sales by yesmoke.ch were verified when comScore's clients reviewed their actual sales data. In addition, according to Meierhoefer, comScore's clients include major financial institutions, large retailers and media companies and comScore's technologies and statistical extrapolations are relied upon by the Wharton School of Business at the University of Pennsylvania in its examinations of Internet usage patterns.
Additional information concerning Otamedia's sales of Philip Morris brand cigarettes was provided by, inter alia, Jennifer Urbany ("Urbany") of the law firm Arnold Porter LLP ("Arnold Porter"), attorneys for the plaintiff. Urbany avers that from February 2003 until February 2004 she served as a link between investigators from Investigative Group International ("IGI") who were retained to purchase cigarettes from Otamedia's website on Philip Morris's behalf, Philip Morris's outside counsel, including Arnold Porter, and Philip Morris's Brand Integrity Department. According to Urbany, after entry of the Judgment against Otamedia, IGI investigators located in the United States continued to make purchases of Philip Morris brand cigarettes from Otamedia-affiliated websites and directly from Otamedia itself. Urbany states further that, although the amount of damages sought by Philip Morris against Otamedia appears large, it represents "a small fraction" of Philip Morris's annual net revenues from domestic tobacco sales; for example, in 2002, those revenues were $18,877,000,000.
III. CONCLUSIONS OF LAW
A default judgment in an action establishes liability, but is not a concession of damages. See Cappetta v. Lippman, 913 F. Supp. 302, 304 (S.D.N.Y. 1996) (citing Flaks v. Koegel, 504 F.2d 702, 707 [2d Cir. 1974]). Damages must be established by the plaintiff in a post-default inquest. See id. In conducting an inquest, the court need not hold a hearing "as long as it [has] ensured that there was a basis for the damages specified in the default judgment." Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir. 1997). The court may rely on affidavits or documentary evidence in evaluating the fairness of the sum requested. See Tamarin v. Adam Caterers, Inc., 13 F.3d 51, 54 (2d Cir. 1993).
Under the Lanham Trade-Mark Act, a plaintiff who has established trademark infringement is entitled, subject to the principles of equity, to recover "(1) defendant's profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action." 15 U.S.C. § 1117(a). A court may award damages in an amount up to three times the amount proved and may adjust a recovery based on profits upward or downward as it deems just. Any recovery, whether of damages or profits, is intended to constitute compensation and not a penalty. See id.
"In order to recover an accounting of an infringer's profits, a plaintiff must prove that the infringer acted in bad faith."Int'l Star Class Yacht Racing Ass'n v. Tommy Hilfiger, U.S.A., Inc., 80 F.3d 749, 753 (2d Cir. 1996); see also Bambu Sales, Inc. v. Ozak Trading Inc., 58 F.3d 849, 854 (2d Cir. 1995) (holding that a plaintiff seeking to recover an infringer's profits by way of an accounting must prove that infringer acted with willful deception). However, in assessing a defendant's profits, a plaintiff is required to prove defendant's sales only; the defendant must establish any costs or deductions claimed.See 15 U.S.C. § 1117(a).
Furthermore, if a defendant's actual sales cannot be determined with precision, because the defendant fails to produce satisfactory evidence of those sales, the court may rely on indirect and circumstantial evidence in calculating profits. See Louis Vuitton S.A. v. Spencer Handbags Corp., 756 F.2d 966, 973 (2d Cir. 1985); Deering, Milliken Co. v. Gilbert, 269 F.2d 191, 193 (2d Cir. 1959). In such a case, "[t]he plaintiff need only establish a basis for a reasoned conclusion; the court may then extrapolate from the available evidence to determine the amount of the recovery." Aris Isotoner Inc. v. Dong Jin Trading Co., Inc., No. 87 Civ. 890, 1989 WL 236526, at *6 (S.D.N.Y. Sept. 22, 1989); see also Louis Vuitton S.A., 756 F.2d at 973;Deering, Milliken, 269 F.2d at 193; Fournier v. Erickson, 242 F. Supp. 2d 318, 827-28 (S.D.N.Y. 2003).
The Lanham Trade-Mark Act also provides for treble damages against an infringer who intentionally uses a trademark knowing it to be counterfeit. Thus, "[u]nder the amended statute, absent 'extenuating circumstances,' federal courts are expected, and not merely authorized to 'enter judgment for three times such profits or damages, whichever is greater, together with a reasonable attorney's fee.'" Fendi S.A.S. Di Paola Fendi E Sorelle v. Cosmetic World, Ltd., 642 F. Supp. 1143, 1147 (S.D.N.Y. 1986) (quoting 15 U.S.C. § 1117[b]).
Defendant's Profits
Philip Morris seeks an award of Otamedia's profits arising from the sale of illegally imported cigarettes in the United States. An accounting for profits is warranted in this case because Otamedia was a willful infringer. Given the content of Otamedia's website, which demonstrates its intention to sell, among other things, Philip Morris brand cigarettes to customers in the United States, it is likely that Otamedia was aware of its infringing conduct prior to receipt of the plaintiff's August 2002 cease and desist letter. However, that communication constituted actual notice to the defendant of the plaintiff's trademark rights.See Guess? Inc. v. Gold Ctr. Jewelry, 997 F. Supp. 409, 411-12 (S.D.N.Y. 1998). Moreover, Otamedia has persistently defied the Judgment entered against it in January 2003. Significant evidence of defendant's intentionally infringing conduct was presented at the hearing held by the court in connection with the domain-name transfer proceeding. See Philip Morris, 331 F. Supp. 2d at 233-37 ("The Court finds . . . that a substantial percentage, and very likely a majority, of [Otamedia's] cigarette sales consist of gray market Philip Morris cigarettes and therefore violate the Judgment. The evidence overwhelmingly supports these findings."). Furthermore, the Court also takes note of the defendant's failure to appear in this action, which illustrates its indifferent attitude toward the applicable trademark law and from which willfulness can be inferred. See Aris Isotoner, 1989 WL 236526, at *5. The Court concludes, therefore, that defendant's conduct was wilful and that an accounting for profits is appropriate.
Damage Award
As noted above, the defendant failed to provide any evidence of its actual revenue derived from the sale of Philip Morris brand cigarettes. Therefore, plaintiff relied on comScore as an independent source of information regarding those revenues. The Court finds that plaintiff's submissions establish that comScore's data are credible. comScore engages in research of the type described here as part of its regular business operations and counts among its clients such reputable institutions as the Wharton School of Business, Microsoft and Ford Motor Company.
Plaintiff's initial damages application relied upon comScore's projections, based on raw data obtained from one million comScore panelists, to estimate Otamedia's sales of illegally imported cigarettes to the United States Internet population as a whole. Subsequently, plaintiff submitted documentation describing comScore's methodology in more detail and providing new projections reflecting the interval since the filing of Philip Morris's original damages application. As noted, based on its updated projections, comScore estimated that Otamedia sold $177.2 million worth of Philip Morris brand cigarettes between September 2002 and August 2004. The basis for these projections was actual sales of Philip Morris brand cigarettes in the amount of $385,942 during the same period. Plaintiff contends that, as an alternative approach to calculating damages, the Court may look to and extrapolate from comScore's raw data. Thus, given comScore's estimate that there are 150 million Internet users in the United States, so that each of the 1 million United States panelists in comScore's sample would represent 150 persons, it can be inferred that Otamedia has sold at least $57,891,300 ($385,942 × 150) worth of Philip Morris cigarettes in the United States since September 2002.
Although Larrison has provided additional information regarding comScore's methodology, that methodology remains a trade secret. Thus, according to Larrison, "there is no single 'projection factor' that can be given to the Court . . . the projections of sales of Philip Morris branded cigarettes are made up of millions of individual weightings and multiplications." Moreover, the court, in ruling on Philip Morris's request for a domain-name transfer, noted that, because comScore had declined to disclose its methodology, the Court could not "adequately assess the reliability of comScore's methods for projecting likely total sales from the actual purchases made by its panel members."Philip Morris, 331 F. Supp. 2d at 243. Consequently, the court declined to rely on comScore's projections of Otamedia's sales of Philip Morris cigarettes in the United States and determined to draw its conclusions, instead, from comScore's raw data. See id. Accordingly, the plaintiff having establish a basis for a reasoned conclusion about the amount of Otamedia's infringing sales, the Court, extrapolating from the available evidence, determines that an appropriate amount of damages in this case is $57,891,300. Furthermore, for the reasons set forth above, the Court finds that defendant's infringing conduct was intentional and that no extenuating circumstances mitigate that conduct. Therefore, treble damages and attorneys' fees are appropriate in this case. Accordingly, the Court finds that plaintiff is entitled to enhanced damages in the amount of $173,673,900.
The defendant bears the burden of proving any costs or other deductions from the gross revenues. Since Otamedia has provided no basis from which the Court can determine the amount of any costs or deductions, they are not a factor in the calculation of damages in this case.
Attorneys' Fees
When fixing a reasonable rate for attorney fees, it is appropriate for a court to consider and to apply the prevailing market rates in the relevant community for similar legal work of lawyers of reasonably comparable skill, experience and reputation. See Blum v. Stenson, 465 U.S. 886, 895 n. 11, 104 S. Ct. 1541, 1547 n. 11 (1984). In addition, it is permissible for a court to rely upon its own knowledge of private firm hourly rates in deciding what reasonable attorney fees are in the community. Miele v. N.Y. State Teamsters Conf. Pens. Retirement Fund., 831 F.2d 407, 409 (2d Cir. 1987).
In the Second Circuit, a party seeking an award of attorney fees must support that request with contemporaneous time records that show, "for each attorney, the date, the hours expended, and the nature of the work done." New York State Ass'n for Retarded Children, Inc. v. Carey, 711 F.2d 1136, 1154 (2d Cir. 1983). Attorney fee applications that do not contain such supporting data "should normally be disallowed." Id. at 1154.
In prosecuting this action against Otamedia, plaintiff engaged the service of the law firm Arnold Porter. Leslie Wharton, Esq., an attorney with that firm, submitted an affidavit to the Court setting forth: (a) the names of the attorneys who worked on this matter; (b) the professional experience of those persons; (c) the number of hours each attorney or paralegal devoted to this action and the nature of the work each person performed; and (d) the hourly rate at which each was compensated.
According to plaintiff's counsel, the contemporaneous time records submitted by Arnold Porter to the Court in support of the instant application for attorneys' fees do not reflect attorney time billed to Philip Morris by co-counsel at the law firm Heller, Ehrman, White McAuliffe, or attorney time spent on this lawsuit by in-house counsel at Philip Morris. Additionally, plaintiff's counsel avers that the time records provided to the Court do not include any attorneys' fees billed to Philip Morris for legal services performed in connection with this litigation after January 2003, even though counsel continued to provide such services to the plaintiff after that date.
Contemporaneous time records for the relevant law firm personnel also were submitted to the Court. The time records indicate that, during the period September 2002 through January 2003, plaintiff incurred attorney fees through the work performed by the following law firm personnel:
Leslie Wharton — 73.8 hr @ $416.50 per hour in 2002; $457.20 per hour in 2003;
Roberta Horton — 20.5 hr @ $365.50 per hour in 2002; $401.40 per hour in 2003;
Rebecca Nassab — 24.9 hr @ $272 per hour in 2002;
John Sheesley — 62.3 hr @ $140.25 per hour in 2002; $153.90 in 2003;
Frank Pasquale — 24.7 hr @ $181.80 per hour in 2003.
Based upon the nature of the case, the Court's review of the submissions by plaintiff, which outline the services performed by counsel, and the Court's understanding of the hourly rates charged by private law firms in the community, the Court concludes that $60,391.62 in attorneys' fees were reasonably incurred by Philip Morris in this action.
IV. RECOMMENDATION
For the reasons set forth above, I recommend an award to the plaintiff of $173,734,291.62: $57,891,300 in damages, trebled to $173,673,900, and $60,391.62 in attorneys' fees.
* * *
Plaintiff shall serve a copy of this Report and Recommendation upon the defendant and submit proof of service to the Clerk of Court.
V. FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from service of this Report to file written objections. See also, Fed.R.Civ.P. 6. Such objections, and any responses to objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the chambers of the Honorable Gerard E. Lynch, 500 Pearl Street, Room 803, New York, New York, 10007, and to the chambers of the undersigned, 40 Centre Street, Room 540, New York, New York, 10007. Any requests for an extension of time for filing objections must be directed to Judge Lynch. FAILURE TO FILE OBJECTIONS WITHIN TEN (10) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See Thomas v. Arn 474 U.S. 140 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir. 1992); Wesolek v. Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir. 1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983).