Summary of a Recent
Judicial Development in
Cooperatives

Pass-Through Feature of Cooperative Irrelevant in Determining
Profits for Purposes of the Lanham Act

John Stacks,
National AgLaw Center Research Associate

Summary of Decision

In American Rice, Inc. v. Producers Rice Mill, Inc., 518 F.3d 321 (5th Cir. 2008), the United States Court of Appeals for the Fifth Circuit affirmed in part and vacated in part the United States District Court for the Southern District of Texas's judgment in favor of American Rice.

Background

American Rice, Inc. (ARI), a Delaware corporation, sold parboiled American long-grain rice in Saudi Arabia under the "Abu Bint" brand, and had spent between $25 million and $30 million to promote the brand using its distinctive "girl design" on the label. Id. at 326. ARI sold approximately 120,000 to 150,000 tons of rice in Saudi Arabia annually, constituting about 65 percent of the Saudi Arabian parboiled rice market. Id. ARI's trademark for the "girl design" was originally issued in 1969 and was renewed in 2000. Id.

Producers Rice Mill, Inc. (PRMI), an Arkansas corporation operating as a farmer-owned cooperative, also sold parboiled American long-grain rice in Saudi Arabia. Id. Profits derived from rice sales would flow through to PRMI's farmer members. Id. Its rice bags portrayed a girl with a hat, a design used since 1985. Id. The bags featured the words "Al Falaha" ("farmer girl") until 2005; the wording was then changed to the girl's name "Bothaina" in 2005. Id. From 1985 until this case, PRMI sold only 1,000 to 3,000 tons of rice annually in the bags portraying a girl with a hat. Id. In 2005, PRMI's Saudi wholesale customers requested that it sell private-label rice with a different design. Id. ARI sued PRMI alleging that the PRMI girl design was too similar to its own design, and the parties settled in April 2005. Id. PRMI agreed not to use the proposed girl design or any design "confusingly similar to ARI's girl design." Id. At the time of the settlement, ARI claimed that it did not know that PRMI had used its girl design for twenty years; it claimed that it did not learn of PRMI's girl with a hat design until September 2005. Id. ARI brought a cause of action under the Lanham Act for violation of its Registered Trademark and for breach of the April 2005 Settlement Agreement. Id.

The District Court found trademark infringement under the Lanham Act and a breach of the Settlement Agreement. Id. at 327. It originally awarded ARI a permanent injunction under both causes of action, disgorgement of PRMI's profits in 2005 ($1,256,635) for violation of the Lanham Act, reasonable attorney's fees under Texas law for breach of the Settlement Agreement, and interests and costs. Id. The court issued an amended order, awarding only the permanent injunction, attorney's fees of $383,986.10 for breach of the Settlement Agreement, and only $227.10 in disgorged profits. Id. The court also applied an "election of remedies" theory, finding that ARI could only recover under the theory providing the greater remedy; it limited the award to the attorney's fees and the temporary injunction for the breach of the Settlement Agreement. Id. The court also found that PRMI had not established a laches defense. Id. Both parties appealed. Id.

Arguments

PRMI argued that the "district court improperly exercised extraterritorial jurisdiction because the allegedly infringing conduct took place in Saudi Arabia," the district court's finding concerning the likelihood of confusion was clearly erroneous, and that ARI did not have a protectable right in the Girl Design asserted. Id. PRMI further argued that "ARI [could not] recover under the Lanham Act because ARI [did] not use the specific mark that ARI asserted had been infringed with trademark registration number 882,997 in Saudi Arabia," and ARI only used the mark with the registration number 1,233,824 in Saudi Arabia. Id. PRMI argued that the district court was clearly erroneous in finding that there was sufficient similarity in the girl designs. Id. at 332. PRMI also argued that the district court abused its discretion in finding that ARI's claim was not barred by laches and that that the injunction granted by the district court was overly broad because it should not have been extended to labels with girl images generally and because it should only apply in Saudi Arabia. Id. at 334.

ARI argued that the application of the election of remedies theory was erroneous because the theories of recovery were not inconsistent and because they did not allow ARI to receive a double recovery. Id. at 335. ARI argued that the district court abused its discretion by reducing the profit disgorgement award from $1,256,280, PRMI's sales for 2005, to $227.10, PRMI's tax profit for 2005. Id. at 336. ARI further argued that a more appropriate profit disgorgement award would be between $8,277,556 and $25,132,669, based on PRMI's 20-year sales estimate. Id. at 337. ARI also contended that PRMI produced no evidence of costs to reduce its level of 2005 profits and that PRMI's flow-through status is irrelevant to the profits award. Id. at 337, 339.

Analysis and Holdings

The court held that the district court properly exercised extraterritorial jurisdiction because PRMI was an Arkansas corporation and PRMI's sales in Saudi Arabia had an impact on interstate commerce through various activities that took place in the United States. Id. at 328. Also, there was no evidence any Saudi court found that PRMI had a legal right to use its design. Id. The court further held that the district court did not commit clear error in finding that there was a likelihood of confusion between the marks and that ARI did use the design with the trademark registration number 882,997. Id. at 328-29.

The court held that the district court did not abuse its discretion by finding that "ARI had an excuse for its delay in bringing suit because it did not know of PRMI's infringement until 2005. Id. at 334. Because there was sufficient evidence in the record to show that PRMI had infringed ARI's trademark, the court found that the district court "did not abuse its discretion in extending the scope of the injunction to a design with a girl image for use on rice." Id. at 335. The court explained that the district court properly applied the election of remedies theory; it would be impermissible in this case for ARI to "pick and choose among damage elements arising under different theories," contrary to Texas law. Id. at 336.

The court found that the proper disgorgement of profits award should be the initial $1,256,635 awarded by the district court. Id. at 341. It also found that PRMI's status as a flow-through entity was irrelevant and that tax profits did not constitute "profits" for the purposes of the Lanham Act. Id. at 340. The court found that PRMI did not "produce evidence of proper deduction from sales to reduce its profit" and that "the district court did not abuse its discretion in determining that such a profit award should be limited to PRMI's profits earned in the year 2005" because ARI's delay in filing suit "prejudiced PRMI by inhibiting its ability to provide proof of costs or deductions from previous years." Id. at 338, 340.

The case was decided on February 22, 2008.