Australian Gold, Inc. v. Hatfield

F I L E D
United States Court of Appeals
Tenth Circuit

February 7, 2006
PUBLISH
Elisabeth A. Shumaker
UNITED STATES COURT OF APPEALS Clerk of Court

TENTH CIRCUIT

AUSTRALIAN GOLD, INC.;
ADVANCED TECHNOLOGY
SYSTEMS, INC.; ETS, INC.,

Plaintiffs - Appellees,
v.

BRENDA HATFIELD; MARK
HATFIELD; MATTHEW HATFIELD;
PALM HARBOR TANNING &
DISTRIBUTING, INC., doing
business as Miti-Fine Tan & Tone; No. 03-6218
INTERNET MARKETING GUYS;
BUBBA’S TANNING SALON;
INTERNET MARKETING GUYS
TANNING SALON; JOANNA
HATFIELD; TAN TIME, INC.;
QUALITY TANNING &
DISTRIBUTING L.L.C., doing
business as United Domain
Management,

Defendants - Appellants.

Appeal from the United States District Court
for the Western District of Oklahoma
(D.C. No. 02-CV-143-C)

Jack S. Dawson, Miller Dollarhide, Oklahoma City, Oklahoma (James A.
Scimeca, Mark S. Edmondson, Miller Dollarhide, Oklahoma City, Oklahoma, with
him on the briefs), for Defendants-Appellants.
Michael A. Wukmer, Ice Miller, Indianapolis, Indiana (Scott D. Matthews, Ice
Miller, Indianapolis, Indiana; D. Kent Meyers, Crowe & Dunlevy, P.C., Oklahoma
City, Oklahoma, with him on the brief), for Plaintiffs-Appellees.

Before EBEL, Circuit Judge, TYMKOVICH, Circuit Judge, and BROWNING,
District Judge. *

EBEL, Circuit Judge.

This case stems from Defendants’ unauthorized resale over the internet of

indoor tanning lotions manufactured and distributed by Plaintiffs. Plaintiffs sued

Defendants for trademark infringement, false advertising, and tortious

interference with the contracts between Plaintiffs and their distributors.

Defendants filed this appeal after a jury awarded Plaintiffs over $5 million in

compensatory and punitive damages.

In this appeal, Defendants assert that the district court erred in denying

Defendants’ motion for judgment as a matter of law on Plaintiffs’ claims.

Defendants also challenge the district court’s jurisdiction to consider Plaintiffs’

state-law tortious interference claim, the entry of an injunction barring

Defendants from selling Plaintiffs’ products over the internet or using Plaintiffs’

*
Honorable James O. Browning, District Court Judge, United States
District Court for the District of New Mexico, sitting by designation.

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trademarks in connection with Defendants’ Web sites, and the imposition of

sanctions on Defendants for discovery abuses.

Exercising jurisdiction pursuant to 28 U.S.C. § 1291, we affirm the

judgment of the district court.

BACKGROUND

I. Plaintiffs

Plaintiffs are three related businesses that manufacture and distribute

indoor tanning lotions. Plaintiff Australian Gold, Inc., manufactures Australian

Gold and Caribbean Gold tanning lotions and owns all trademarks related to those

two brands. Plaintiff Advanced Technology Systems, Inc., manufactures Swedish

Beauty tanning lotions and owns all trademarks related to that brand. Plaintiff

ETS, Inc., is the exclusive distributor of Australian Gold, Caribbean Gold, and

Swedish Beauty indoor tanning lotions and related products (“Products”). 1

Approximately fifty to sixty percent of the 25,000 tanning salons in the

United States carry Products. ETS does not distribute Products directly to these

tanning salons, but rather contracts with independent distributors who in turn sell

Products to salons. Indeed, in order to contract with ETS, these independent

1
Australian Gold, Inc., distributes some of its outdoor products—what
might commonly be referred to as sunscreen or suntan lotion—itself, rather than
through ETS. In certain places, these outdoor products can be purchased off the
shelf, without any consultation. However, it is indoor tanning products, not
outdoor products, that are at issue in this lawsuit.

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distributors must agree to market, distribute, or sell Products only to “a tanning

salon or hair and beauty care salon” that “offers indoor tanning and instruction of

the use of Products as an on-premises service.” Since 2001, these agreements

have generally prohibited distributors from selling Products over the internet or

selling Products to anyone else who will sell them to the general public over the

internet. 2 Plaintiffs enforce the integrity of these agreements by attempting to

stem the flow of Products to businesses other than tanning salons, and have spent

over $1 million on such efforts.

All the distributors with whom ETS contracts also must participate in

training programs, make their sales associates available to Plaintiffs twice each

year for training, and hold two seminars to train salons on the proper use of

Products. In 2003, Plaintiffs spent $1.5 million on training, using some 600

presentations to reach over 20,000 people employed by distributors and salons.

Plaintiffs emphasize training in part because a consumer’s use of the wrong

product could cause an adverse reaction, which could harm Plaintiffs’ prospects

for follow-on sales. Training also makes distributors and salon owners aware of

2
Because Defendants’ alleged interference with ETS’s contracts continued
after 2001, we need not examine the pre-2001 agreements that ETS and Advanced
Technology Systems made with distributors in order to address the tortious
interference issue at stake in this appeal.

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“up-selling” possibilities: Customers who purchase indoor tanning lotion may also

purchase body spray, moisturizers, and facial products.

II. Defendants

Defendants resell Products over the internet without Plaintiffs’

authorization. Husband and wife Mark and Brenda Hatfield; their son, Matthew;

and Matthew’s wife, Joanna, all play a role in their business. The other named

Defendants—Palm Harbor Tanning and Distributing, Inc.; Internet Marketing

Guys, Inc.; Bubba’s Tanning Salon; Internet Marketing Guys Tanning Salon; Tan

Time, Inc.; and Quality Tanning & Distributing LLC d/b/a/ United Domain

Management—are all businesses created by the Hatfields through which the

Hatfields have resold Products over the internet.

Because the Hatfields were aware that Plaintiffs objected to the sale of

Products on the internet, the Hatfields concealed their activities. For example, by

switching the original name of the business from “The Internet Marketing Guys”

to “Palm Harbor Tanning and Distributing” to make it appear that it was operating

a tanning salon, the Hatfields could purchase Products from an ETS-authorized

distributor without being detected by Plaintiffs. Moreover, the Hatfields used

fictitious names to register the multiple Web sites that they used to sell Products.

The Hatfields also used other fictitious business names—including Yukon Tan,

Tulsa Tanning Supply, Oklahoma Tanning, Internet Marketing Guys Tanning

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Salon, and Bubba’s Tanning Salon—to place orders from ETS-authorized

distributors who had been warned not to sell to the Hatfields. Finally, in an effort

to appear to be legitimate purchasers of Products, the Hatfields stated to at least

one supplier that they operated a network of ten tanning salons, when in fact they

did not.

Defendants initially obtained Products from ETS-authorized distributors

who violated their distributor agreements with ETS by supplying Products to

Defendants. One such ETS-authorized supplier was AETS. During the seven-

month tanning season, Defendants placed orders with AETS for $10,000-$18,000

worth of tanning supplies—of which forty to fifty percent were Products—three

times per week. During the five-month offseason, Mark Hatfield on average

placed orders for $5,000-$8,000 worth of Products once or twice per week.

In 2003, ETS discovered this activity and terminated its contract with

AETS. Defendants then turned to an anonymous supplier of Products who sold

Products to the Hatfields out of a van for cash only. Each of the Hatfields’ cash

transactions with this supplier was worth more than $24,000; one exceeded

$64,000.

The Hatfields used up to seven Web sites to sell Products to the general

public. The Web sites displayed pictures and descriptions of Products and used

Plaintiffs’ trademarks. The Hatfields also used Plaintiffs’ trademarks in the

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metatags of their Web sites. 3 Further, Defendants paid a company called

Overture.com for an “Overture Premium Listing” for “Australian Gold” and

“Swedish Beauty,” guaranteeing that one of Defendants’ Web sites would be

among the first three listed if either of Plaintiffs’ trademarks was used in an

internet search query.

Once customers arrived at the Hatfields’ Web sites, they could buy lotions

from a variety of manufacturers, not just Plaintiffs. Moreover, beginning in

October or November 2002 and ending in January 2003, Defendants removed

Products from their Web sites altogether. However, during this time, Defendants

continued to use the trademarks “Australian Gold” and “Swedish Beauty” on the

metatags for their Web sites to attract customers to the Web sites, and to pay

Overture.com for a premium placement if either trademark was used in a search

query.

III. Plaintiffs’ Lawsuits against Defendants

Plaintiffs uncovered Defendants’ actions in January 2001. After notifying

Defendants that they objected to the sale of Products over the internet, Plaintiffs

A metatag is a part of a Web site that is not seen by the public, but is read
3

by search engine web browsers and later used by the browsers to classify the Web
site. Metatags are used to increase the probability that a Web site will be seen by
a customer who has typed a particular search query into his or her search engine.
See Deborah F. Buckman, Annotation, Initial Interest Confusion Doctrine under
Lanham Trademark Act, 183 A.L.R. Fed. 553.

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filed suit in an Indiana state court against The Internet Marketing Guys. The

Internet Marketing Guys failed to answer the complaint, and the court entered a

default judgment against the company. 4

Plaintiffs brought this suit in Oklahoma state court in December 2001, and

Defendants removed the case to federal court shortly thereafter. In their amended

federal-court complaint, Australian Gold and Advanced Technology Systems

alleged that Defendants infringed upon their respective trademarks. Australian

Gold and Advanced Technology Systems also asserted claims against Defendants

for false advertising and for unfair competition under state law. ETS alleged that

Defendants interfered with ETS’s agreements with various distributors and that

Defendants engaged in a civil conspiracy to breach those agreements.

The court granted summary judgment in favor of Brenda and Joanna

Hatfield on Plaintiffs’ claims of trademark infringement and false advertising.

Plaintiffs proceeded to trial on their other claims. At trial, Defendants moved for

judgment as a matter of law on all the claims after Plaintiffs rested and at the

close of all evidence. The district court granted Defendants’ motion as to

4
Neither party argues on appeal that res judicata or collateral estoppel
applies in this suit, and we therefore do not address the issue. See Franklin Sav.
Corp. v. United States (In re Franklin Sav. Corp.), 385 F.3d 1279, 1286 (10th Cir.
2004) (“[R]es judicata is not a jurisdictional bar; it is an affirmative
defense . . . .”) (quotation omitted), cert denied, 126 S. Ct. 337 (2005).

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Plaintiffs’ claims of unfair competition. However, the district court allowed the

remaining claims to go to the jury.

The jury returned a verdict in Plaintiffs’ favor. Australian Gold and

Advanced Technology Systems were awarded damages of $325,000 and $125,000,

respectively, on their trademark infringement claims. Australian Gold and

Advanced Technology Systems were also awarded damages of $35,000 and

$15,000, respectively, on their false advertising claims. ETS was awarded

damages of $500,000 on its interference claims. In addition, the jury found that

each Defendant engaged in a conspiracy to interfere with ETS’s contracts with

distributors. The jury also awarded punitive damages against all Defendants in

connection with the tortious interference and conspiracy claims: $1 million

against both Mark and Matthew Hatfield, $320,000 against Brenda Hatfield,

$350,000 against Joanna Hatfield; $780,000 against Palm Harbor; and $780,000

against Quality Tanning. Finally, the district court enjoined Defendants from

selling Products over the internet, displaying Plaintiffs’ trademarks on the

internet, or using Plaintiffs’ trademarks in the metatags or html code for their

Web sites.

This appeal from Defendants followed.

DISCUSSION

I. Subject Matter Jurisdiction

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We review de novo whether subject matter jurisdiction is proper in this

case. Kinross v. Utah Railway Co., 362 F.3d 658, 660 (10th Cir. 2004). Because

removal of the case from state court to federal court was permissible under 28

U.S.C. §§ 1441 and 1332, we hold that proper subject matter jurisdiction exists. 5

Title 28, United States Code § 1441(a) provides that “any civil action

brought in a State court of which the district courts of the United States have

original jurisdiction . . . may be removed by the defendant . . . to the district court

of the United States for the district and division embracing the place where such

action is pending.” In this case, 28 U.S.C. § 1332 provided the district court with

the original jurisdiction necessary to support removal under § 1441(a). The

parties to this lawsuit are diverse: Plaintiffs are Indiana corporations with their

principal places of business in Indiana, and the named Defendants are Oklahoma

citizens, and this case satisfies § 1332’s amount-in-controversy requirement.

Defendants argue that Plaintiffs’ naming of ten alleged co-conspirator

“John Does” in the complaint barred the removal of ETS’s state-law claim for

tortious interference to federal court because the unknown citizenship of the

“John Does” destroyed complete diversity. This contention is without merit.

5
Because we resolve this matter based on 28 U.S.C. §§ 1441 and 1332, we
need not consider Plaintiffs’ contention that 28 U.S.C. § 1367 would have
allowed ETS to bring its state-law tortious interference claim in federal court
originally, and thus render removal appropriate. We also do not address
Plaintiffs’ argument that removal was permissible under § 1441(c).

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Title 28, United States Code § 1441(a) provides that “[f]or purposes of removal

under this chapter, the citizenship of defendants sued under fictitious names shall

be disregarded.” While we have not construed this portion of § 1441(a), other

courts have held that “John Does” are disregarded for purposes of removal on the

basis of diversity of citizenship. See Howell ex rel. Goerdt v. Tribune Entm’t

Co., 106 F.3d 215, 218 (7th Cir. 1997) (“[N]aming a John Doe defendant will not

defeat the named defendants’ right to remove a diversity case if their citizenship

is diverse from that of the plaintiffs.”); Alexander v. Electronic Data Sys. Corp.,

13 F.3d 940, 948 (6th Cir. 1994) (“It is clear that ‘Jane Doe’ is a fictitious name;

no such real person was ever named, and plaintiff never identified the alleged

person . . . . Section 1441(a) compels that this ‘named’ defendant be disregarded

for purposes of diversity jurisdiction.”). We join these other circuits in holding,

consistent with the text of 28 U.S.C. § 1441(a), that the citizenship of “John Doe”

defendants should be disregarded when considering the propriety of removal

under 28 U.S.C. §§ 1441(a) and 1332.

Because 28 U.S.C. §§ 1441(a) and 1332 together permitted Defendants to

remove this suit to the district court, the district court did not err in exercising

jurisdiction over this case.

II. Tortious Interference with Contract

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We review a district court’s denial of a party’s motion for judgment as a

matter of law de novo, applying the same standard as the district court and

construing the evidence in the light most favorable to the nonmoving party. See

O’Neal v. Ferguson Constr. Co., 237 F.3d 1248, 1252 (10th Cir. 2001).

“Judgment as a matter of law is appropriate only if the evidence points but one

way and is susceptible to no reasonable inferences which may support the

opposing parties’ position.” Elliot v. Turner Constr. Co., 381 F.3d 995, 1005

(10th Cir. 2004).

Defendants argue that the district court erred in denying their motion for

judgment as a matter of law on ETS’s claim for tortious interference with contract

because (1) the contracts with which Defendants allegedly interfered were illegal,

(2) Defendants acted neither maliciously nor wrongfully, and (3) Plaintiffs did not

present evidence of damages for tortious interference. These arguments are

without merit.

A. Legality of the Distributorship Agreements

“The right to recover for the unlawful interference with the performance of

a contract presupposes the existence of a valid enforceable contract.” Ellison v.

An-Son Corp., 751 P.2d 1102, 1106 (Okla. Ct. App. 1987) (quotation omitted).

The agreements between ETS and its distributors provide that “ETS may also

terminate this Agreement . . . after . . . Distributor’s and/or Subdistributor’s

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failure to comply with any suggested price for Products that is announced from

time to time by ETS.” Defendants argue that this provision in ETS’s agreements

with its distributors makes those contracts per se invalid under the Sherman Act

as vertical price-fixing agreements, and thus that the agreements cannot form the

basis of a valid tortious interference claim.

Under the Sherman Act, 15 U.S.C. § 1,

[i]ndependent action is not proscribed. A manufacturer . . . generally
has a right to deal, or refuse to deal, with whomever it likes, as long
as it does so independently. . . . [T]he manufacturer can announce its
resale prices in advance and refuse to deal with those who fail to
comply. And a distributor is free to acquiesce in the manufacturer’s
demand in order to avoid termination.

Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 761 (1984) (citations

omitted); see also Systemcare, Inc. v. Wang Labs. Corp., 117 F.3d 1137, 1143-44

(10th Cir. 1997) (reh’g en banc).

In this case, ETS’s distributor agreements are the sort of “independent

action[s]” that Monsanto condones. The agreements specifically state that “ETS

does not request and will not accept Distributor’s agreement to comply with any

such suggested price, and nothing herein shall be deemed to constitute

Distributor’s agreement with ETS as to the resale price for Products that

Distributor may charge.” Thus, the agreements are ETS’s unilateral statements of

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the terms on which it will deal with distributors, and as such are permissible

under Monsanto. 6

Therefore, the alleged illegality of ETS’s agreements with its distributors

does not establish that the district court erred in denying Defendants’ motion for

judgment as a matter of law on ETS’s tortious interference claim. This is because

ETS’s agreements are in fact legal.

B. Maliciousness and Wrongfulness

To recover on a tortious interference claim under Oklahoma law, a plaintiff

must establish that “the interference was malicious and wrongful, and that such

interference was neither justified, privileged nor excusable.” Morrow Dev. Corp.

v. Am. Bank & Trust Co., 875 P.2d 411, 416 (Okla. 1994) (emphasis omitted). It

is lawful to “interfere with the contractual relations of another if [this is done] by

fair means, if [it is] accompanied by honest intent, and if [it is done] to better

one’s own business and not to principally harm another.” Del State Bank v.

Salmon, 548 P.2d 1024, 1027 (Okla. 1976).

Defendants argue that they were entitled to judgment as a matter of law on

ETS’s tortious interference claim because Plaintiffs did not prove that Defendants

acted with malice. However, there was sufficient evidence that Defendants’

6
Defendants’ reliance on Dr. Miles Medical Co. v. John D. Parke & Sons
Co., 220 U.S. 373 (1911), is misplaced, for that case involved concerted action by
a supplier and distributors to set prices. See Monsanto, 465 U.S. at 761.

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conduct might have been malicious and wrongful to justify submitting this issue

to the jury. In an effort to undermine ETS’s distribution channels, Defendants

concealed their activities from Plaintiffs; used fictitious names to register their

activities; changed the name of their business to make it appear to suppliers to be

a legitimate tanning salon; ordered products using a fake business name; and

dishonestly stated to suppliers that they had a network of ten salons. Defendants

boasted that they had “the balls and $ to stand up to ETS,” and stated that their

“suppliers [were] protected” from ETS. Defendants knew that their actions were

not allowed under ETS’s agreements with its distributors, yet Defendants

undertook such actions anyway.

A simple recitation of the sum of Defendants’ actions reveals that they

were not “fair means . . . accompanied by honest intent.” Id. In any event, all the

evidence does not clearly indicate that Defendants’ behavior was not malicious, as

would be required to support Defendants’ motion for judgment as a matter of law.

Defendants rely on two cases that rejected claims similar to this one for the

proposition that Defendants’ resale of Products did not demonstrate malice.

However, those cases are distinguishable from the case at bar. In Sebastian

International, Inc. v. Longs Drug Stores Corp., 53 F.3d 1073 (9th Cir. 1995) (per

curiam), “[n]othing in the record suggest[ed] that [the defendant] did anything

more than stock and resell genuine . . . products lawfully acquired on the open

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market.” Id. at 1076 (emphasis added). Similarly, in Matrix Essentials, Inc. v.

Cosmetic Gallery, Inc., 870 F. Supp. 1237 (D. N.J. 1994), aff’d, 85 F.3d 612 (3d

Cir. 1996), the “defendants did not commit tortious acts, such as fraud.” Id. at

1248. By contrast, in this case Defendants purchased Products using deceptive

means, not the open market, relying on tortious acts like using a fake name and

dishonestly stating that they operated a network of ten salons to purchase

Products.

Thus, the district court did not err in denying Defendants’ motion for

judgment as a matter of law on ETS’s tortious interference claim. The evidence

at trial was such that a reasonable jury could find that Defendants acted with

malice.

C. Damages for Tortious Interference

In order to recover on a tortious interference claim under Oklahoma law, a

plaintiff must show “[t]hat damage was proximately sustained as a result of the

complained-of interference.” Mac Adjustment, Inc. v. Property Loss Research

Bureau, 595 P.2d 427, 428 (Okla. 1979). Such damages might include “the

pecuniary loss resulting to the [plaintiff] from the failure of the third person to

perform the contract,” “consequential losses for which the interference is a legal

cause,” and “emotional distress or actual harm to reputation, if they are

reasonably to be expected to result from the interference.” Restatement (Second)

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of Torts, §§ 766, 774A (1979). Because in this case Defendants have not

challenged the amount of the verdict against them, if a jury reasonably could have

inferred based on the evidence presented at trial that ETS suffered any measurable

damages, then the district court did not err in submitting ETS’s tortious

interference claim to the jury. See Elliot, 381 F.3d at 1005.

Plaintiffs did present some evidence at trial from which the jury could have

inferred the damages that ETS suffered. As noted above, Defendants obtained

Products from AETS, one of ETS’s distributors, from at least 2001 through 2003.

Partly as a result of AETS’s diversion of Products to Defendants, ETS terminated

its contract with AETS. Thus, partly as a result of Defendants’ interference, ETS

lost the value of the legitimate sales it had been making to AETS. One of ETS’s

contracts with AETS provided that AETS was required to purchase $200,000 of

Products. Thus, the jury could have inferred based on this contract what the value

of AETS’s legitimate sales may have been.

Moreover, the evidence supported the claim that because Defendants made

Products widely available over the internet, the value of each independent

distributorship may have decreased. Distributors no longer could exercise as

much control over the flow and price of Products as they otherwise might have.

Because the value of each distributorship may have decreased, ETS may not have

been able to negotiate agreements with individual distributors on terms as

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favorable as it once might have. As noted above, Plaintiffs introduced evidence

of AETS’s minimum purchase requirements at trial. Thus, there was some

evidence from which the jury could infer ETS’s damages.

Finally, Plaintiffs offered evidence of approximately $1 million worth of

expenses that ETS incurred protecting its distribution channels by combating the

distribution of Products over the internet. Plaintiffs also offered testimony that

ETS undertook these efforts in part because (1) sales over the internet undercut

chances for add-on sales and upgrades, which occurred more frequently with face-

to-face service in salons; (2) sales over the internet undercut ETS’s commitment

to salons and distributors that Products would only be made available to

consumers through salons, threatening ETS’s continued relationships with those

entities; and (3) consumers who purchased Products over the internet might buy a

lotion that did not work well for them, making follow-on sales less likely than

they would be if Products were sold only in salons. Thus, ETS’s expenditures

combating product diversion amount to mitigation damages—that is, damages

incurred as a result of attempting to minimize other types of damages.

For these reasons, the evidence on damages, when viewed in the light most

favorable to Plaintiffs, is not so one-sided that it supports Defendants’ motion for

judgment as a matter of law. None of Defendants’ three contentions indicate that

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the district court erred in denying Defendants’ motion for judgment as a matter of

law on ETS’s tortious interference claim.

III. Lanham Act Claims

Defendants argue that the district court erred in denying Defendants’

motion for judgment as a matter of law on Plaintiffs’ Lanham Act claims because

Plaintiffs did not present evidence of a likelihood of consumer confusion,

Defendants’ activities were shielded by the first sale doctrine, and Plaintiffs did

not present evidence of damages sufficient to support their Lanham Act claims.

Defendants’ arguments are without merit.

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A. Likelihood of Confusion

“The unauthorized use of ‘any reproduction, counterfeit, copy, or colorable

imitation’ of a registered trademark in a way that ‘is likely to cause confusion’ in

the marketplace concerning the source of the different products constitutes

trademark infringement under the Lanham Act.” Universal Money Ctrs., Inc. v.

AT&T Co., 22 F.3d 1527, 1529 (10th Cir. 1994); see 15 U.S.C. § 1114(1)(a)-(b).

The party alleging infringement has the burden of proving likelihood of

confusion. See Universal Money Ctrs., 22 F.3d at 1530. Ordinarily, to prevail on

a trademark infringement claim, a plaintiff must demonstrate that a defendant’s

use of the trademark is likely to cause consumers to believe either that the

plaintiff is the source of the defendant’s products or services (direct confusion),

or alternatively, that the defendant is the source of the plaintiff’s products or

services (reverse confusion). See id.

In this case, we recognize another variant of potential confusion: “initial

interest confusion.” Initial interest confusion results when a consumer seeks a

particular trademark holder’s product and instead is lured to the product of a

competitor by the competitor’s use of the same or a similar mark. See Buckman,

183 A.L.R. Fed. 553. Even though the consumer eventually may realize that the

product is not the one originally sought, he or she may stay with the competitor.

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Id. In that way, the competitor has captured the trademark holder’s potential

visitors or customers. Id.

Even if the consumer eventually becomes aware of the source’s actual

identity, or where no actual sale results, there is nonetheless damage to the

trademark. This damage can manifest itself in three ways: (1) the original

diversion of the prospective customer’s interest to a source that he or she

erroneously believes is authorized; (2) the potential consequent effect of that

diversion on the customer’s ultimate decision whether to purchase caused by an

erroneous impression that two sources of a product may be associated; and (3) the

initial credibility that the would-be buyer may accord to the infringer’s

products—customer consideration that otherwise may be unwarranted and that

may be built on the strength of the protected mark, reputation and goodwill. See

BigStar Entm’t, Inc. v. Next Big Star, Inc., 105 F. Supp. 2d 185 (S.D.N.Y. 2000).

The federal courts, though not using the phrase “initial interest confusion,”

have acknowledged the potential for such confusion for decades. See, e.g.,

Grotrian, Helfferich, Schulz, Th. Steinweg Nachf. v. Steinway & Sons, 523 F.2d

1331 (2d Cir. 1975). Initial interest confusion in the internet context derives from

the unauthorized use of trademarks to divert internet traffic, thereby capitalizing

on a trademark holder’s goodwill. See Nissan Motor Co. v. Nissan Computer

Corp., 378 F.3d 1002, 1018 (9th Cir. 2004) (holding that initial interest confusion

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occurs when a defendant uses a plaintiff’s trademark in a way calculated to

capture a consumer’s attention and divert the consumer to the defendant’s own

Web site), cert. denied, 125 S. Ct. 1825 (2005); Brookfield Commc’ns, Inc. v.

W. Coast Entm’t Corp., 174 F.3d 1036, 1061-65 (9th Cir. 1999) (holding that the

defendant’s use of a trademark in a Web site’s metatags allowed the defendant to

benefit improperly from the goodwill associated with the mark); Promatek Indus.,

Ltd. v. Equitrac Corp., 300 F.3d 808, 814 (7th Cir. 2002) (affirming the grant of a

preliminary injunction preventing the defendant from using the plaintiff’s

trademark as a metatag in the defendant’s Web site); see also Gov’t Employees

Ins. Co. v. Google, Inc., 330 F. Supp. 2d 700, 701, 706 (E.D. Va. 2004) (holding

that the auction of trademarked terms to the highest bidder states a cause of action

under the Lanham Act).

In this case, as noted above, Defendants used Plaintiffs’ trademarks on

Defendants’ Web sites. Defendants also placed Plaintiffs’ trademarks in the

metatags of Defendants’ Web sites. Further, Defendants paid Overture.com to list

Defendants in a preferred position whenever a computer user searched for

Plaintiffs’ trademarks. All of these actions were attempts to divert traffic to

Defendants’ Web sites. While viewing Defendants’ Web sites, consumers had the

opportunity to purchase Products, but also to purchase lotions from Plaintiffs’

competitors. Moreover, Defendants continued to use the trademarks to divert

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internet traffic to their Web sites even when they were not selling Products.

Thus, Defendants used the goodwill associated with Plaintiffs’ trademarks in such

a way that consumers might be lured to the lotions from Plaintiffs’ competitors.

This is a violation of the Lanham Act.

We evaluate Plaintiffs’ claim for initial interest confusion according to the

six-prong test we announced in Sally Beauty Co. v. Beautyco, Inc., 304 F.3d 964

(10th Cir. 2002). We look at (1) the degree of similarity between the marks; (2)

the intent of the alleged infringer in adopting the mark; (3) evidence of actual

confusion; (4) similarity of products and manner of marketing; (5) the degree of

care likely to be exercised by purchasers; and (6) the strength or weakness of the

marks. Id. at 972. No one factor is dispositive, and likelihood of confusion is a

question of fact. Id. at 972.

In this case, the degree of similarity of the marks weighed heavily in favor

of Plaintiffs, since the trademarked terms were identical to the terms used by

Defendants. The intent of the infringer in adopting the mark also weighed in

favor of Plaintiffs. Here the Hatfields deliberately used the trademarks to drive

internet traffic to their own Web sites, where they sold both Products and lotions

from Plaintiffs’ competitors.

Moreover, the similarity of products and manner of marketing weighed in

favor of Plaintiffs. The trademarked terms were tanning-related, just like the

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products offered on Defendants’ website were. Further, the degree of care likely

to be exercised in purchasing Products weighed in favor of Plaintiffs because

Plaintiffs’ low-cost products were subject to impulse purchases. See id. at 975.

Finally, the strength of the trademarks weighed in favor of Plaintiffs.

Approximately fifty to sixty percent of the tanning salons in the United States

carry Plaintiffs’ trademarked Products. The substantial volume of sales of

Products, both through Defendants’ Web sites and through traditional salons,

speaks to the strength of the trademarks.

However, Plaintiffs did not offer any direct evidence of actual confusion,

so that factor weighs in favor of Defendants. Moreover, Defendants attempted to

prevent actual confusion by placing disclaimers on their Web sites—though

because these disclaimers do not tie particular trademarks to particular holders,

the disclaimers are inadequate. 7 More importantly, “a defendant’s website

7
A disclaimer on one of Defendants’ Web sites provides:

DiscountTanningLotion and it’s [sic] affiliated salons are
independent distributors. DiscountTanningLotion and it’s [sic]
affiliates are not associated with and do not represent any
manufacturer or any distributor of any products displayed on it’s [sic]
Web sites. We are a licensed salon promoting & advising on
professional products for personal consumers.
(continued...)

- 24 -
disclaimer, proclaiming its real source and disavowing any connection with its

competitor, cannot prevent the damage of initial interest confusion, which will

already have been done by the misdirection of consumers looking for the

plaintiff’s websites.” Buckman, 183 A.L.R. Fed. 553. In any event, even if this

one factor does weigh in favor of Defendants, one factor alone is not dispositive

of the likelihood of confusion. See Sally Beauty Co., 304 F.3d at 972.

Because the evidence at trial on likelihood of confusion did not point only

in favor of Defendants, the district court did not err in denying Defendants’

motion for judgment as a matter of law.

B. The First Sale Doctrine

7
(...continued)
A disclaimer on another of Defendants’ Web sites provides:

AbetterTan.com, Quality Tanning and Distributing, L.L.C. and their
affiliated tanning salons are not associated with, affiliated with nor
do we represent any manufacturer or distributor of any products
displayed on it’s [sic] Web sites. AbetterTan.com, Quality Tanning
and Distributing, L.L.C. and their affiliated tanning salons are not
approved by nor authorized by any manufacturer or distributor to sell
any of the products displayed on it’s [sic] Web sites. . . .

© Copyright 1999, 2000, 2001, 2002 AbetterTan.com, All rights
reserved.
All other copyrights and trade marks are the property of their
respective owners.

- 25 -
Because in general “the right of a producer to control distribution of its

trademarked product does not extend beyond the first sale of the product[,]

[r]esale by the first purchaser of the original article under the producer’s

trademark is neither trademark infringement nor unfair competition.” Sebastian

Int’l, 53 F.3d at 1074. “It is the essence of the ‘first sale’ doctrine that a

purchaser who does no more than stock, display, and resell a producer’s product

under the producer’s trademark violates no right conferred upon the producer by

the Lanham Act.” Id. at 1076. “When a purchaser resells a trademarked article

under the producer’s trademark, and nothing more, there is no actionable

misrepresentation under the statute.” Id.

However, the first sale doctrine does not protect resellers who use other

entities’ trademarks to give the impression that they are favored or authorized

dealers for a product when in fact they are not. See D 56, Inc. v. Berry’s Inc.,

955 F. Supp. 908, 910-20 (N.D. Ill. 1997) (addressing a defendant’s use of a

plaintiff’s trademark and promotional materials in the defendant’s store displays

and advertising). In this case, Defendants’ use of Plaintiffs’ trademarks on the

internet was such an act. Defendants’ intentional use of Plaintiffs’ trademarks on

Defendants’ Web sites, in the metatags for the Web sites, and with Overture.com

constitutes more than merely displaying and stocking trademarked items. See Eli

Lilly & Co. v. Natural Answers, Inc., 233 F.3d 456, 465 (7th Cir. 2000). Thus,

- 26 -
Defendants’ actions were indicative of an intent to cause consumer confusion, and

are not shielded by the first sale doctrine. See id.

C. Damages for Lanham Act Claims

In order to recover damages on a Lanham Act claim, a “plaintiff must prove

[that he or she] has been damaged by actual consumer confusion or deception

resulting from the violation.” Brunswick Corp. v. Spinit Reel Co., 832 F.2d 513,

525 (10th Cir. 1987). “Actual consumer confusion may be shown by direct

evidence, a diversion of sales or direct testimony from the public, or by

circumstantial evidence such as consumer surveys.” Id. “Although the quantum

of damages . . . must be demonstrated with specificity, courts may engage in some

degree of speculation in computing the amount of damages, particularly when the

inability to compute them is attributable to the defendant’s wrongdoing.” Id.

(quotation omitted).

In this case, Australian Gold and ATS clearly suffered damages as a result

of Defendants’ actions. Because Defendants sold Products over the internet,

Australian Gold and ATS lost the opportunities for up-selling that came when

Products were sold in salons by trained professionals. Plaintiffs’ trademarks were

used to lure customers to Web sites that advertised their competitors’ products.

Doubtless some consumers purchased those competitors’ products, especially

during the period that Products were not available on the Web sites. Plaintiffs

- 27 -
faced the potential for lawsuits and diminution of Products’ reputation as

consumers bought Products over the internet without receiving instruction on

which Products were the best fit for their needs or on how safely to apply the

Products.

There is little evidence of the quantum of such damages in the record.

However, here again Defendants have not challenged the amount of the verdict

against them, so if a jury reasonably could have inferred based on the evidence

presented at trial that Plaintiffs suffered any measurable amount of damages, then

the district court did not err in submitting Plaintiffs’ Lanham Act claims to the

jury. See Elliot, 381 F.3d at 1005. Evidence of the value of Defendants’ sales

provides information from which a jury could have inferred Plaintiffs’ damages.

Evidence admitted at trial established that Defendants’ sales of Products for the

three months preceding trial were over $350,000, and that Defendants’ overall

sales in 2002 were more than $2 million. Thus, there was some evidence at trial

of the value of Defendants’ sales of Products and Defendants’ sales of the lotions

of Plaintiffs’ competitors.

Evidence of the value of Defendants’ sales of Products, together with

evidence as to the price of those Products that was also admitted, provided some

information from which a jury could determine the value of Plaintiffs’ lost up-

selling possibilities. The value of Defendants’ sales of lotions from Plaintiffs’

- 28 -
competitors provides an upper boundary for the value of diverted sales. See

Spinit Reel Co., 832 F.2d at 525. Though this is clearly a case in which some

“degree of speculation” is necessary in computing the amount of damages, that

fact is not enough to justify granting judgment as a matter of law to Defendants

on Plaintiffs’ Lanham Act claims, particularly since the need for speculation is

attributable in part to Defendants’ poor recordkeeping. See id.

Thus, Plaintiffs introduced some evidence at trial of the damages that they

sustained as a result of Defendants’ Lanham Act violations, making submission of

the issue to the jury appropriate. None of Defendants’ three contentions indicate

that the district court erred in denying Defendants’ motion for judgment as a

matter of law on Plaintiffs’ Lanham Act claims.

IV. Injunctive Relief

We review a district court’s decision to issue a permanent injunction for an

abuse of discretion. Harolds Stores, Inc. v. Dillard Dep’t Stores, Inc., 82 F.3d

1533, 1555 (10th Cir. 1996). Under this standard, we accept the district court’s

factual findings unless they are clearly erroneous and review the court’s

application of legal principles de novo. Id.

In this case, the district court’s injunction states:

1. Defendants . . . are enjoined from offering for sale, selling,
advertising, distributing or marketing Plaintiffs’ products via
the Internet or to the general public, or violating the 2001 and

- 29 -
2002 Agreements or Subdistributorship Agreements in any
other way.

2. Defendants . . . are further enjoined from displaying any of the
Plaintiffs’ trademarks or names on the Internet, using any of
Plaintiffs’ names and trademarks in the html code or
displaying any false or misleading statements on any of their
websites.

Defendants argue that Plaintiffs had no right to an injunction on ETS’s tortious

interference claim or the trademark infringement claims of Australian Gold and

Advanced Technology Systems. Defendants also argue that the injunction granted

on the trademark infringement claims was overly broad, and that a disclaimer

would adequately remedy any potential confusion. Neither of Defendants’

contentions is meritorious.

A. Tortious Interference Claim

Under Oklahoma law, injunctive relief is not warranted where a plaintiff

has a “plain, speedy, and adequate remedy at law.” Powell Briscoe, Inc. v. Peters,

269 P.2d 787, 791 (Okla. 1954) (quotation omitted). However, in Bitterman v.

Louisville & N.R. Co., 207 U.S. 205 (1907), the Supreme Court affirmed the

issuance of an injunction restraining ticket brokers from dealing in

nontransferable railroad tickets, despite the fact that the railroad could have taken

action against the individuals who sold the nontransferable tickets to the brokers.

The court noted:

- 30 -
The contention that . . . there was no right to resort to equity because
there was a complete and adequate remedy at law to redress the
threatened wrongs when committed is . . . devoid of merit. From the
nature and character of the non-transferable tickets, the number of
people to whom they were issued, the dealings of the defendants
therein and their avowed purpose to continue such dealings in the
future, the risk to result from mistakes in enforcing the forfeiture
provision and the multiplicity of suits necessarily to be engendered if
redress was sought at law, all establish the inadequacy of a legal
remedy and the necessity for the intervention of equity.

Id. at 225. Bitterman makes clear that ETS’s right under its agreements with its

many distributors to terminate those relationships if the distributors violate the

agreements—by, for example, selling Products to Defendants—does not provide

ETS with a “plain, speedy, and adequate remedy.” Thus, the district court did not

abuse its discretion in imposing an injunction that addressed Defendants’ tortious

interference with contract. 8

B. Lanham Act Claims

Under the Lanham Act, a district court has the “power to grant injunctions,

according to the principles of equity and upon such terms as the court may deem

reasonable, to prevent . . . a violation [of the Act].” 15 U.S.C. § 1116(a).

Although courts have found disclaimers to be adequate alternatives to injunctions

8
Defendants also argue that injunctive relief is inappropriate because the
Final Pretrial Order does not contain a request by ETS that Defendants be
enjoined from purchasing ETS products or interfering with ETS’s distributor
agreements. This argument is without merit. Plaintiffs’ complaint contained a
request for injunctive relief, and Plaintiffs reiterated their request after trial.

- 31 -
in certain cases, “each case must be judged by considering the circumstances of

the relevant business and its consumers.” Home Box Office, Inc. v.

Showtime/The Movie Channel Inc., 832 F.2d 1311, 1315 (2d Cir. 1987). The

proponent of a disclaimer bears a “heavy burden . . . to come forward with

evidence sufficient to demonstrate that any proposed materials would significantly

reduce the likelihood of consumer confusion.” Id. at 1316.

In this case, Defendants have not shown that a disclaimer would be

sufficient to alleviate the likelihood of confusion. See United States Jaycees v.

Philadelphia Jaycees, 639 F.2d 134, 142 (3d Cir. 1981). Rather, Defendants offer

only conclusory allegations that “if there were any evidence of a likelihood of

confusion, it could be remedied by a simple disclaimer.” Moreover, even if a

disclaimer were sufficient to prevent consumer confusion, such a disclaimer

would not prevent Defendants from impermissibly using Plaintiffs’ trademarks in

Defendants’ metatags and on Overture.com. Nor would the disclaimer prevent

Defendants from capitalizing on consumers’ initial interest confusion.

Thus, the district court did not err in entering an injunction in this case, and

the scope of the injunction entered by the district court is not overly broad.

V. Sanctions for Discovery Abuses

“Determination of the correct sanction for a discovery violation is a

fact-specific inquiry that the district court is best qualified to make.” Ehrenhaus

- 32 -
v. Reynolds, 965 F.2d 916, 920 (10th Cir. 1992). Therefore we review a district

court’s decision whether or not to impose sanctions, as well as its choice of

sanctions, for an abuse of discretion. See Knowlton v. Teltrust Phones, Inc., 189

F.3d 1177, 1182 (10th Cir. 1999).

During discovery in this case, Plaintiffs filed a motion to compel, seeking

the disclosure of Defendants’ suppliers for lotions other than Products.

Defendants resisted, asserting a trade secret privilege. Plaintiffs sought sanctions

against Defendants based on Defendants’ non-disclosure of the supplier list and

Defendants’ non-disclosure of documents responsive to one of Plaintiffs’ other

discovery requests that Plaintiffs later found in Defendants’ trash dumpster. After

a hearing, the district court sanctioned Defendants, ordering them to pay

approximately $27,000 in attorney’s fees and costs incurred by Plaintiffs in

prosecuting this and one other motion to compel. 9

Defendants contend that the court erred in awarding Plaintiffs these fees

and costs. Defendants argue that the documents that Defendants did not produce

and that later were discovered by Plaintiffs were not within the scope of

Plaintiffs’ request for production. Defendants also assert that their list of

suppliers was a privileged trade secret. Finally, Defendants argue that the amount

The second motion to compel sought the production of tax records, which
9

Defendants refused to produce voluntarily.

- 33 -
of attorney’s fees awarded to Plaintiffs as a sanction was excessive because the

hours for which Plaintiffs sought reimbursement were excessive. Defendants’

contentions are without merit.

- 34 -
A. Discarded Documents

Defendants conceded below that the documents found in their dumpster

were responsive to Plaintiffs’ requests for production. Specifically, Defendants

stated that the documents were responsive, but merely reiterated information

contained in other documents. 10 Defendants’ decision not to disclose these

documents is improper, for every responsive document must be disclosed, absent

a timely objection. See Fed. R. Civ. P. 34(b). In such instances, Fed. R. Civ. P.

37 “mandates an award of expenses unless the court finds that an exception

applies.” Harolds Stores, Inc., 82 F.3d at 1555. No exceptions are applicable in

the instant case. See Fed. R. Civ. P. 37. Thus, the district court’s decision in this

case to sanction Defendants the costs and expenses provided in Fed. R. Civ. P.

37(a)(4) does not constitute an abuse of discretion.

B. List of Suppliers

Plaintiffs requested Defendants’ list of suppliers in connection with ETS’s

10
To the extent that Defendants might argue that they did not concede
below that the documents found in their dumpster were responsive to Plaintiffs’
requests for production, that argument is without merit. Plaintiffs requested
production of any and all documents relating to the sale of Products on
Defendants’ Web sites. The documents found in Defendants’ dumpster “consist
of daily transaction listings allowing Defendants to verify charge card debits and
product shipment information for all products and items sold by Defendants . . .
and the daily shipment detail report for all UPS shipments made by Defendants
reflecting the charge for that UPS service.” Thus, it is clear that the documents
found in Defendants’ dumpster related to the sale of products from Defendants’
Web sites.

- 35 -
state-law claim for tortious interference with contract. Therefore, Oklahoma law

governs the analysis of whether the trade secrets privilege applies to the list. See

Fed. R. Evid. 501.

The Oklahoma Uniform Trade Secrets Act defines “trade secret” as

information including a formula, pattern, compilation, program,
device, method, technique or process, that:

a. derives independent economic value, actual or potential,
from not being generally known to, and not being readily
ascertainable by proper means by, other persons who can
obtain economic value from its disclosure or use, and

b. is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.

78 Okla. Stat. § 86(4). Oklahoma has adopted six factors from the Restatement of

Torts to help determine whether information is a trade secret: (1) the extent to

which the information is known outside of the business; (2) the extent to which

the information is known by employees and others involved in the business; (3)

the extent of measures taken by the business to guard the secrecy of the

information; (4) the value of the information to the business and to competitors;

(5) the amount of effort or money expended by the business in developing the

information; and (6) the ease or difficulty with which the information could be

properly acquired or duplicated by others. See Amoco Prod. Co. v. Lindley, 609

P.2d 733, 743 (Okla. 1980).

- 36 -
In this case, Defendants bear the burden of proof in establishing a trade

secret. Id. Thus, in order to prove that their list of suppliers constituted a trade

secret, Defendants had to establish that the list “derives independent economic

value, actual or potential, from not being generally known to, and not being

readily ascertainable by proper means by, other persons who can obtain economic

value from its disclosure or use.” However, the list sets out only a collection of

suppliers whom any participant in the industry would presumably be able to

access. Thus, the list contains information that is (1) widely known outside of

Defendants’ business; (2) presumably widely known by employees and others

involved in the business, since many employees were involved in picking up

products; and (3) easily acquired or duplicated by others. Thus, at least three of

the factors used to determine whether a trade secret exists indicate that such a

secret does not exist in this case. Therefore, the district court did not abuse its

discretion in determining that the trade secrets privilege did not apply. Cf. Russ

Stonier, Inc. v. Droz Wood Co., 52 F.R.D. 232, 233 (E.D. Pa. 1971) (“There is no

absolute privilege protecting a manufacturer from disclosing his customer list and

source of supply.”). 11

11
Defendants’ reliance on Brenner v. Stavinsky, 88 P.2d 613, 615 (Okla.
1939), for the proposition that a customer list is a trade secret is misplaced.
Brenner addresses whether an employee who leaves a company may be enjoined
from using that company’s customer list for the purpose of taking business away
(continued...)

- 37 -
C. Amount of Sanctions

Defendants argue that the district court’s award of over $27,000 in

attorney’s fees and costs based on Plaintiffs’ success in prosecuting two motions

to compel was excessive. Specifically, Defendants argue that the district court

erred because it did not reduce Plaintiffs’ calculation of the amount of time spent

preparing the motions, eliminate Plaintiffs’ travel time, or write off duplicative

time.

In its award of attorney’s fees to Plaintiffs, the district court noted that

“[t]he itemized description of labor in Plaintiffs’ application significantly relates

to both Motions to Compel, and . . . such hours were reasonably expended in light

of the circumstances.” Moreover, even though the district court approved all of

the hours spent on the case, Plaintiffs reduced the amount of attorney’s fees that

they sought in this case by over $7,500—some 25%—to take account of the fact

that the hourly rates of Plaintiffs’ counsel are higher than the rates customarily

charged by comparable professionals in Oklahoma City, and two out-of-town

counsel attended the hearing on the motion to compel. Given this substantial

adjustment, we cannot say that the district court abused its discretion by failing to

reduce Plaintiffs’ fees still further.

(...continued)
11

from his former employer, not whether a customer or supplier list constitutes a
trade secret that should be privileged in litigation.

- 38 -
Thus, the district court did not abuse its discretion in deciding to impose

sanctions for Defendants’ discovery violations or in its choice of sanctions.

CONCLUSION

For the foregoing reasons, we AFFIRM the judgment of the district court. 12

12
Throughout their briefs, Defendants criticize the jury instructions given
by the district court, as well as the district court’s rejection of certain alternative
jury instructions proposed by Defendants. We have not analyzed those criticisms,
because they are only mentioned in passing and are not argued. See Murrell v.
Shalala, 43 F.3d 1388, 1389 n.2 (10th Cir. 1994). Moreover, to the extent that
Defendants’ quarrels with the jury instructions stem from their wish to advance a
different substantive view of the law—the same view represented by their motion
for judgment as a matter of law—we have rejected that view of the law in this
appeal. By extension, we have necessarily rejected Defendants’ criticism of the
jury instructions, for where the instructions, viewed as a whole, accurately state
the law, they will not form a basis for relief on appeal. See Garrison v. Baker
Hughes Oilfield Operations, Inc., 287 F.3d 955, 964 (10th Cir. 2002).

- 39 -

Australian Gold, Inc. v. Hatfield

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