Opinion
No. A04-260.
Filed November 24, 2004.
Appeal from the District Court, Mower County, File No. CX-01-1441.
Donald Chance Mark, Jr., Erik F. Hansen, Fafinski Mark Johnson, P.A., (for respondent).
Ralph V. Mitchell, Lapp, Libra, Thomson, Stoebner Pusch, Chtd., (for appellant).
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2002).
UNPUBLISHED OPINION
Respondent Thomas Betts Corporation (TB), a manufacturer of waste-oil furnaces, brought an action against appellant Ronald Leger, one of its distributors, alleging tortious interference with prospective and existing contracts, defamation, deceptive trade practices, breach of contract, unjust enrichment, unfair competition, consumer fraud, and fraud and misrepresentation. TB later amended its complaint to add Janet Leger, Ronald Leger's wife, and Independent Waste Oil Furnaces, Inc. (IWOF), the Legers' newly created distributing company, as defendants. TB also added claims for trademark dilution and infringement, fraudulent conveyance, and punitive damages. The claims against the Legers and their company arose primarily out of Ronald Leger's sales and service of TB furnaces following his termination as a distributor.
After two years of litigation, two orders compelling discovery, and three contempt orders for failure to comply with an ex parte temporary restraining order, the district court entered a default judgment against the Legers and IWOF in the amount of $578,230.48. The court later vacated the judgment against Janet Leger and the company for lack of personal jurisdiction. Ronald Leger now appeals from the default judgment and from the denial of his motion to vacate the judgment, arguing that (1) as a discovery sanction, the default judgment is neither fair nor related to the particular claims at issue in the orders compelling discovery; (2) the evidence is insufficient to establish a prima facie case of liability or damages on any of TB's claims; (3) the judgment should be vacated as void under Minn. R. Civ. P. 60.02(d) because he was denied his due-process right to cross-examine TB's witnesses and to provide input into the proposed findings of fact and conclusions of law; (4) the judgment should be vacated under Minn. R. Civ. P. 60.02(f) for "[a]ny other reason justifying relief" from the judgment; and (5) the district court's grant of permanent injunctive relief is illegal because the court did not make adequate findings or set forth its reasons for granting injunctive relief. By notice of review, TB argues that the district court abused its discretion by (1) vacating the default judgment against Janet Leger and IWOF and (2) refusing to award TB damages on its trademark-infringement and trademark-dilution claims.
FACTS
Thomas Betts is a Memphis-based corporation that manufactures waste-oil furnaces under the REZNOR trademark. TB sells its furnaces through a network of authorized distributors who, in addition to selling, are required to make warranty repairs, for which they are later compensated by TB.
Ronald Leger (Leger), the sole proprietor of Independent Distributing, became a TB distributor in 1997. Leger signed a Distributor Contract Stocking Plan, under which he agreed to (1) sell Reznor waste-oil furnaces as his "exclusive line" of furnaces, (2) "[a]ctively promote" the sale of Reznor furnaces, (3) service furnaces as required by customers, and (4) refrain from using the TB name or any of its trademarks without prior written approval. Leger also signed a service agreement, under which he agreed to restrict his sales to Minnesota (except the northwest portion) and Wisconsin. Specifically, Leger agreed "not to actively promote or market Reznor waste oil heaters in . . . North Dakota, South Dakota, or Iowa."
In March 2000, Leger ordered 90 new Reznor furnaces worth approximately $240,000. Leger stopped making payments on the furnaces, however, after TB refused to honor an approximately $47,000 claim that Leger had submitted for warranty repairs. Leger contended that problems with the furnaces, including faulty heat exchangers and parts, accounted for the high service costs. But TB concluded that the vast majority of the claim was unjustified, and refused to honor it. TB then terminated Leger as a distributor and brought an action against him in Tennessee for the balance due on the furnaces.
After TB terminated Leger, Leger continued to hold himself out as an authorized distributor. He also misrepresented the status of other distributors, telling customers that they were not authorized. At the same time, Leger began to sell Reznor furnaces as "scratch-and-dent" furnaces, at prices below the suggested retail price. As a result, several customers to whom Leger had offered Reznor furnaces at substantially reduced prices accused authorized distributors of overcharging. Leger also made statements about the superiority of a competing brand, and told customers that Reznor furnaces were "junk" and were "too light" to operate properly and that TB did not honor warranties or pay distributors for warranty repairs. Finally, Leger made unauthorized modifications to his remaining Reznor stock, causing the furnaces to underperform. Specifically, Leger unnecessarily equipped furnaces designed for low altitudes with pumping mechanisms designed for high altitudes. He also substituted various furnace components with components from other manufacturers and actively concealed his modifications by placing his own stickers over warning labels and identifying marks, thereby voiding the factory warranty.
In the fall of 2001, TB learned that a Wisconsin customer's shop had burned down and that the fire had originated near a Reznor RA 140 furnace that Leger had sold to the business. The furnace had been equipped with a pump designed for an RA 235 model, and both the warning label and the sticker identifying the pump's manufacturer had been covered with an Independent Distributing sticker.
Out of concern for the safety of its customers, TB brought an ex parte motion for a temporary restraining order (TRO), seeking to enjoin Leger from selling any Reznor products and to require him to produce a list of customers to whom Leger had sold Reznor furnaces. In October 2001, the district court issued a TRO, enjoining Leger from selling, advertising, or modifying Reznor products and from using the Reznor name. The TRO also required Leger to return his remaining stock and to produce the requested list of customers.
TB then filed and served a complaint against Leger, alleging tortious interference with prospective and existing contracts, defamation, deceptive trade practices, breach of contract, unjust enrichment, unfair competition, consumer fraud, and fraud and misrepresentation.
In November 2001, the court granted the first of three contempt motions to enforce compliance with the TRO. TB's motion was supported by affidavits and exhibits showing that Leger had continued to advertise Reznor products for sale, both in newspapers and on his company's website; had offered an Iowa company a Reznor RA 350 furnace at a price below the suggested retail price; and had sold a reconditioned RA 235 model to Larry Wood Construction. The court granted the motion and issued an order finding Leger in contempt for continuing to sell Reznor furnaces and for failing to provide TB the customer list it had requested and the court had ordered Leger to produce. The court also ordered Leger to pay TB's attorney fees.
In March 2002, TB brought a second motion for contempt. The district court granted the motion, finding that Leger had serviced Reznor furnaces at Kemna Motors on three separate occasions, in violation of the TRO. The court fined Leger and sentenced him to 90 days in jail, but it stayed the sentence to allow Leger to purge himself of the contempt. In May 2002, the court issued its first order compelling Leger to respond to TB's discovery requests.
TB brought its third and last motion for contempt in May 2002, based on information provided by James Daily, a former employee of Leger. Daily advised TB that after Leger's employees learned about the TRO from a third party, Leger directed them to disregard it and told them only to stop using Reznor parts numbers on documentation. Daily also stated that Leger's technicians had serviced Reznor furnaces in Sauk Centre on at least three occasions, had installed a Shenanodoah fire cone on a Reznor RA 500 furnace on one occasion, and had retrofitted two Reznor furnaces that were later sold under the name EZ WASTE OIL HEATERS. Additionally, Daily indicated that Leger had not only failed to return all Reznor parts to TB but also had ordered $10,000 worth of Reznor parts from a Canadian distributor and had instructed his employees to burn the labels on the shipping crates.
In April 2002, the court denied TB's motion for a temporary injunction, based on findings that (1) the likelihood of irreparable harm was minimal and (2) the issuance of an injunction would not further serve the public because Leger had returned his Reznor stock and the public had been warned of the modifications.
In August 2002, the court issued an order finding Leger in contempt for continuing to service Reznor furnaces and for failing to advise his employees of the TRO. The court imposed a $750 fine, ordered Leger to pay TB $3,000 for attorney fees, and sentenced Leger to 90 days in jail. But the court stayed the sentence, once again, to allow Leger an opportunity to purge himself of the contempt.
In November 2002, Leger filed an answer and counterclaim, alleging breach of contract, breach of the implied warranty of merchantability, and defamation. Shortly after, TB served a request for the production of documents related to Leger's counterclaims and the incorporation of the business known as Independent Waste Oil Furnaces. The request for information about IWOF stemmed from Leger's October 2002 deposition testimony, in which he stated that (1) his wife, Janet Leger, was the sole officer of IWOF; (2) IWOF operated with the same customers and employees as Independent Distributing, his old business; (3) except for the Reznor business, all of the business of Independent Distributing had been transferred to IWOF; and (4) although he incorporated IWOF, he had no formal position with the company.
In January 2003, Leger served unexecuted responses and no documents in response to TB's document-production request. In February, TB moved to compel discovery. TB also moved to amend its complaint to add Janet Leger and IWOF as defendants and to add claims for trademark infringement and dilution, deceptive trade practices, fraudulent conveyance, and punitive damages. In addition, TB noticed the Legers' depositions for February 27 and 28. The day before the depositions, however, the Legers' attorney withdrew. As a result, the district court continued the motion to compel for 30 days to give the Legers time to obtain new counsel. In March, the Legers retained a bankruptcy attorney.
In April 2003, the district court granted TB's motion to amend the complaint, and it issued its second discovery order, compelling the production of documents related to Leger's counterclaims and the incorporation of IWOF. The court gave the Legers 60 days to respond to the request and warned the Legers that if they did not comply, their answer would be stricken and a default judgment would be entered against them.
On April 11, the sheriff's office served the amended complaint on the Legers and IWOF but did not serve a summons. Neither the Legers nor IWOF filed an answer to the amended complaint. As a result, at a scheduling conference held in June 2003, the court found Janet Leger and the company in default for failure to answer the amended complaint. The court also found Ronald Leger in default for failure to comply with the court's second discovery order. In response to Leger's contention that he had not had "[a] chance or the funding to answer any of [TB's] claims" and did not have a lawyer to assist him in responding to discovery, the court stated that it had "a reasonably good memory of what went on when [Leger] had a lawyer" and that it could "honestly say that [it had] not been involved with a civil defendant who ha[d] more blatantly flouted court orders." The court also noted that the matter could have been resolved a year earlier had Leger complied with the court's orders.
In July 2003, the court held a default hearing. The Legers were present at the hearing but called no witnesses. TB called two witnesses and presented 32 exhibits. In late July, the district court filed findings of fact, conclusions of law, and an order granting a default judgment in the amount of $578,230.48 against Ronald Leger, Janet Leger, and IWOF. The court indicated that TB was entitled to a default judgment under Minn. R. Civ. P. 37.02(b)(3), 12.01 and 55.01.
The Legers did not move to vacate the judgment immediately. Instead, in August 2003, they filed for chapter 13 bankruptcy. But the United States Bankruptcy Court concluded that the Legers had filed their petition in a bad-faith effort to avoid the default judgment and converted the petition to a chapter 7 petition, under which the default judgment could not be discharged. Following the bankruptcy court's decision, the Legers brought a petition for relief from the automatic stay imposed under 11 U.S.C. § 362(a) (2000) so that they could file a rule 60 motion to vacate the judgment. The bankruptcy court granted the petition, and the Legers subsequently filed their rule 60 motion.
In December 2003, the district court held a hearing on the motion. The district court allowed both parties to file supplemental memoranda but denied TB's request for time to respond to the Legers' memorandum and, instead, directed both parties to file their memoranda within seven days. In their supplemental memorandum, the Legers argued, for the first time, that the default judgment against Janet Leger and IWOF was void because neither Janet Leger nor IWOF had been served with a summons. The district court vacated the default judgment against Janet Leger and IWOF, reasoning that it lacked personal jurisdiction over them because they had not been properly served. But the court denied the motion to vacate the default judgment against Ronald Leger.
Leger now appeals from the default judgment and the denial of his rule 60 motion. By notice of review, TB challenges the district court's order vacating the default judgment against Janet Leger and IWOF and denying TB damages on its trademark-infringement and trademark-dilution claims.
DECISION I.
Leger first argues that the district court abused its discretion by granting a default judgment as a sanction for his failure to comply with the court's order compelling the production of documents relating to his counterclaim and to TB's fraudulent-conveyance claim. Relying on an Oklahoma case, Leger specifically argues that the sanction is neither fair nor related to the particular claims at issue in the discovery order and that the proper sanction would have been to strike his counterclaims only.
District courts have the authority to order a default judgment against a party who fails to comply with discovery or to plead or defend a claim within the time allowed by law. Minn. R. Civ. P. 37.02 (b)(3), 55.01. We review the choice of a discovery sanction for abuse of discretion, keeping in mind that a sanction must be "no more severe . . . than is necessary to prevent prejudice to the movant." Chicago Greatwestern Office Condo. Ass'n v. Brooks, 427 N.W.2d 728, 731 (Minn.App. 1988) (quotation omitted). But because default judgments infringe on a party's right to trial by jury and run counter to the policy of deciding cases on the merits, our review of discovery sanctions involving a default judgment requires greater scrutiny than our review of lesser sanctions. See id. at 730-31.
The sanctions of default and dismissal are traditionally reserved for a party who willfully, without justification or excuse, and with the intent to delay trial fails to comply with discovery orders or refuses to cooperate with the court and counsel to resolve the case promptly and expeditiously. See Breza v. Schmitz, 311 Minn. 236, 237, 248 N.W.2d 921, 922 (1976). The repeated failure to produce documents or to comply with an order compelling discovery justifies the imposition of a default judgment or a judgment of dismissal. See, e.g., State by Humphrey, III v. Ri-Mel, Inc., 417 N.W.2d 102, 109-10 (Minn.App. 1987) (upholding $581,000 default judgment entered as discovery sanction when defendant failed to cooperate with efforts to depose it, caused depositions to be canceled several times by giving false assurance that it would cooperate and settle, disobeyed two court orders to appear for deposition and produce documents, ignored counsel's letters requesting production of the documents, and failed to appear personally at contempt hearing), review denied (Minn. Feb. 17, 1988); Hous. Redevelopment Auth. of City of St. Paul v. Kotlar, 352 N.W.2d 497, 500 (Minn.App. 1984) (affirming dismissal with prejudice of landowner's claim because of unexplained failure to produce documents by court-ordered deadline); cf. Chicago Greatwestern, 427 N.W.2d at 732 (reversing $20,000 default judgment imposed for technical violation of discovery order).
In determining whether a severe sanction is warranted, courts consider the extent of the noncompliance, the reasons for delay, the motivation for it, and whether the party being sanctioned had a pattern of misconduct. Firoved v. Gen. Motors Corp., 277 Minn. 278, 283-84, 152 N.W.2d 364, 368-69 (1967); Williams v. Grand Lodge of Freemasonry AF AM, 355 N.W.2d 477, 480 (Minn.App. 1984) (considering history of refusing to appear at depositions), review denied (Minn. Dec. 20, 1984). The paramount consideration, however, is the resulting prejudice to the parties. Firoved, 277 Minn. at 283, 152 N.W.2d at 368.
Leger does not dispute that TB was prejudiced by his failure to comply with discovery orders, and our evaluation of the remaining factors on the record indicates that the district court acted within its discretion in ordering a default judgment.
Leger intentionally and without justification failed to comply with the court's order compelling the production of documents. Leger's claim that he failed to comply with discovery because he was unable to retain an attorney and lacked the time and financial resources to comply is disingenuous. Leger was able to retain a bankruptcy attorney in March 2003, immediately after his original attorney withdrew, and had no trouble finding the financial resources to pursue his bankruptcy petition aggressively. Additionally, the record suggests that Leger was motivated by the desire to force the entry of a default judgment that he could later discharge in bankruptcy. Leger took no steps to vacate the judgment until the bankruptcy court determined that he had filed for bankruptcy in bad faith and converted his chapter 13 petition to a chapter 7 petition, under which the default judgment could not be discharged. Finally, Leger had an extensive pattern of misconduct that included three contempt orders for failure to comply with the temporary restraining order. Indeed, in finding Leger to be in default, the court indicated that it had never encountered a civil defendant who had "more blatantly flouted court orders." Under the circumstances, we conclude that the district court did not abuse its discretion by determining that Leger's conduct warranted the entry of a default judgment.
Relying on an Oklahoma case, Leger argues that the sanction of default judgment is neither fair nor related to the claim that was at issue in the discovery order. See Payne v. Dewitt, 995 P.2d 1088 (Okla. 1999). But Leger's claim is unsupported by Minnesota law, which requires only that the discovery sanction be no more severe than necessary to prevent prejudice. See Chicago Greatwestern, 427 N.W.2d at 731. Leger has cited no Minnesota cases requiring proportionality between the discovery order and the sanction. Moreover, given the fact that repeated findings of contempt failed to ensure Leger's compliance with the TRO, a discovery sanction less stringent than default likely would not have ensured compliance with discovery orders.
Leger also argues that the district court erred by not stating its reasons for imposing default judgment. See id. (stating that when granting default judgment as a sanction the trial court should clearly state its reasons so meaningful review may be had). But at the default hearing and in its July 2003 order, the court indicated that it was finding Leger in default under Minn. R. Civ. P. 37.02(b)(3) for failure to comply with discovery. In conjunction with the court's extensive findings, this statement is sufficient to permit adequate review.
II.
Leger next argues that the default judgment must be reversed because the evidence is insufficient to establish liability or damages on any of TB's claims. We conclude that the evidence is sufficient to support some of TB's claims but insufficient to support others.
When reviewing a direct appeal from a default judgment, we consider only whether the evidence in the record supports the district court's findings and whether the findings support the court's conclusions of law. Nazar v. Nazar, 505 N.W.2d 628, 633 (Minn.App. 1993), review denied (Minn. Oct. 28, 1993), superceded by statute on other grounds Minn. Stat. § 518.551.
A default judgment is "equivalent to an admission by the defaulting party to properly pleaded claims and allegations." Ri-Mel, 417 N.W.2d at 110. Accordingly, once the court determines that a party is in default, the complaint's factual allegations, except those related to damages, will be taken as true. Cole v. Metro. Council HRA, 686 N.W.2d 334, 337 (Minn.App. 2004). Liability is not deemed established, however, simply by virtue of the default. Instead, to obtain a liability judgment the party seeking the default must establish a prima facie case. See Hill v. Tischer, 385 N.W.2d 329, 332 (Minn.App. 1986) (vacating default judgment for failure to prove damages); Elk River Enterp., Inc. v. Adams, 357 N.W.2d 139, 140-41 (Minn.App. 1984) (vacating default judgment on finding that evidence of liability and damages was insufficient to support judgment). Prima facie evidence is "evidence which, if unrebutted, would support a [favorable] judgment." Ulrich v. City of Crosby, 848 F. Supp. 861, 867 (D. Minn. 1994) (quotation and citation omitted).
1. Tortious Interference with Prospective Contracts
The district court determined that Leger tortiously interfered with prospective contracts between TB and its authorized distributors by telling potential customers that authorized distributors were not authorized and by selling his unpaid-for Reznor stock at discounted prices. The court awarded TB $65,400 in damages, based on the number of furnaces that it found that Leger sold at a discount.
Leger argues that the evidence is insufficient to establish that he tortiously interfered with TB's prospective contracts. We disagree. To establish a claim for interference with prospective contracts, a plaintiff must prove that the defendant, without justification, intentionally induced or otherwise caused a third person not to enter into or continue in a contractual relation with the plaintiff. United Wild Rice, Inc. v. Nelson, 313 N.W.2d 628, 633 (Minn. 1982); R.A., Inc. v. Anheuser-Busch, Inc., 556 N.W.2d 567, 570-71 (Minn.App. 1996), review denied (Minn. Jan. 29, 1997). The record shows that Leger's practice of selling at discounted prices caused two distributors not to renew their contracts with TB. Ron Foskey, a TB division manager, testified that A B Distributing and American Building Brokers opted not to renew their contracts with TB because they were losing customers to Leger and could not match his "low-bottom pricing." Leger's conduct was unjustified because he had not paid for the furnaces he was selling at a discount and could engage in that practice only because he had not paid for the furnaces.
Leger claims that his practice of selling at discounted prices was merely competitive pricing and that it was permissible because it was not expressly prohibited by the distributor agreement. We disagree. Although "[f]ull, fair, and free competition is necessary to the economic life of a community, under its guise, no man can by unlawful means, prevent another fromobtaining the fruits of his labor." Johnson v. Gustafson, 201 Minn. 629, 633, 277 N.W. 252, 254-55 (1938). Leger prevented TB from obtaining the fruits of its labor by selling furnaces for which he had not paid at discounted prices. Leger was obligated to return those furnaces and failed to do so despite TB's requests. His conduct was therefore unjustified even though it was not expressly prohibited by the distributor agreement. Accordingly, the district court properly determined that TB established a prima facie case of liability on its claim of tortious interference with prospective contracts.
The evidence does not support the district court's award of damages, however. Damages for tortious interference with contractual relations include the loss of benefits of the contracts or the prospective relationships and other losses directly caused by the interference. 4 Minnesota Practice, CIVJIG 40.45 (1999). The court estimated the loss of benefits of the contracts resulting from Leger's conduct by multiplying the number of furnaces Leger allegedly sold (50) by the difference between the suggested retail prices and the prices at which Leger sold the furnaces. But the profit TB would have made on the sale of the 50 furnaces Leger failed to return is not a direct loss resulting from the decision of A B Distributing and American Building Brokers not to renew their contracts with TB. The only loss directly resulting from the nonrenewal of those contracts is the cost of training two replacement distributors and advertising on their behalf. Additionally, even if the court had used the correct measure of damages, the record does not support the court's finding that Leger sold 50 furnaces at discounted prices. It shows only that he sold three furnaces at discounted prices. We therefore reverse the $65,400 award of damages and remand for recalculation.
2. Tortious Interference with Existing Contracts
The district court determined that Leger intentionally and unjustifiably interfered with existing contracts between TB and A B Distributing and American Building Brokers by selling his unpaid-for Reznor stock outside of his primary distribution area at prices below the suggested retail prices. The court found that Leger's conduct caused these distributors to sever their relationship with TB. The court awarded TB $26,000, the cost of training two replacement distributors and advertising on their behalf and the cost of a direct mailing to upper-Midwest customers to respond to Leger's conduct.
Leger argues that the evidence does not support the district court's liability determination. We agree. To establish a claim for tortious interference with existing contracts, a plaintiff must prove that (a) there was a contract, (b) defendant knew about the contract, (c) defendant intentionally interfered with or caused the breach of the contract, (d) defendant's conduct was unjustified, and (e) defendant's conduct damaged the plaintiff. Bouten v. Richard Miller Homes, Inc., 321 N.W.2d 895, 900 (Minn. 1982); 4 Minnesota Practice, CIVJIG 40.30 (1999).
The record does not establish that Leger's conduct caused A B Distributing and American Building Brokers to breach their existing contracts. Nor does it establish that Leger's conduct interfered with the performance of those contracts by retarding, preventing, or making performance more difficult. See Johnson, 201 Minn. at 633, 277 N.W. at 254 (stating that claim of interference with contractual relations may be based not only on procurement of a breach but also on any interference that retards, prevents, or makes performance of contract more difficult). The record shows only that A B Distributing and American Building Brokers opted not to renew their contracts after their existing contracts expired. The district court therefore erred in concluding that TB established a prima facie case of tortious interference with existing contracts. Accordingly, we reverse the judgment in favor of TB on its tortious-interference-with-existing-contracts claim.
3. Defamation
The district court determined that Leger made defamatory statements about TB and its products to Brad Stratzunberg and to people at a trade show. The court awarded TB $18,000 in damages, the amount that TB spent marketing the Reznor line in the upper Midwest annually.
Leger argues that the evidence is insufficient to establish a prima facie case of defamation. We disagree. To establish a claim for defamation, a plaintiff must show that the defendant communicated a false statement to someone other than the plaintiff tending to harm the plaintiff's reputation and to lower it in the estimation of the community. Ferrell v. Cross, 557 N.W.2d 560, 565 (Minn. 1997). A statement that tends to injure a corporation's credit, property, or business is defamatory per se, i.e., without proof of special damages. Advanced Training Sys. v. Caswell Equip. Co., 352 N.W.2d 1, 10 (Minn. 1984); Imperial Developers, Inc. v. Seabord Sur. Co., 518 N.W.2d 623, 627 (Minn.App. 1994), review denied (Minn. Aug. 24, 1994).
The evidence in the record shows that Leger told William Wiemann that TB "was not backing its warranties" and "had not paid for warranty covered repairs on Reznor heaters." By asserting that TB did not honor warranties or pay for warranty repairs, Leger clearly disparaged TB's business reputation for honesty and fair dealing.
Leger argues that his statements are not actionable because there is no evidence that they were false. But Jon Pas, a TB employee who was familiar with TB's handling of warranty claims, testified that TB reviewed warranty claims for accuracy and honored them if they were accurate. Pas's testimony is sufficient to support a prima facie showing that Leger's blanket statement that TB did not back its warranties or honor warranty-covered repairs was false.
Leger also argues that his statements are not actionable because they are statements of opinion. We disagree. In distinguishing a statement of opinion from an actionable statement of fact, courts consider (a) the statement's accuracy, (b) the statement's verifiability, (c) the social and literary context in which the statement was made, and (d) the statement's public context. Hunt v. Univ. of Minn., 465 N.W.2d 88, 93 (Minn.App. 1991). Leger's statement that TB did not back its warranties and had not paid for warranty-covered repairs on Reznor heaters was specific; could be objectively verified by looking into TB's records; and, in the social and public context in which it was made, could reasonably be interpreted as stating facts about TB's handling of warranty claims. Additionally, the statement did not relate to a matter of public concern. Cf. Hunt, 465 N.W.2d at 94 (concluding that statements regarding the integrity of a public employee were a matter of public concern). Leger's statement was thus one of fact rather than opinion.
Finally, Leger argues that the statement was conditionally privileged because it was made to another distributor. We do not agree. A defamatory statement is conditionally privileged if it is made on a proper occasion and from a proper motive and if it is based on reasonable or probable cause. Stuempges v. Parke, Davis Co., 297 N.W.2d 252, 256-57 (Minn. 1980). Leger's statement was not made from a proper motive because it was designed to discourage others from purchasing Reznor furnaces. Additionally, the statement was not based on reasonable or probable cause because Leger had no reason to believe that Reznor was not backing other people's warranty claims or warranty-covered repairs. His own experience with TB was insufficient to permit a blanket statement as to TB's practices in general. Leger's statement was not, therefore, conditionally privileged.
The district court awarded TB $18,000 for damages incurred as a result of Leger's defamatory statements. The award represented the annual cost of marketing Reznor products in the upper Midwest. Because the statement Leger made about TB's business was defamatory per se, general damages, including the cost of advertising to restore TB's reputation, are presumed and the district court did not abuse its discretion by awarding them.
4. Deceptive Trade Practices
The district court concluded that Leger violated the Deceptive Trade Practices Act (DTPA) by (a) attempting to pass his goods as those of another, by causing confusion as to the origin and sponsorship of his products, (b) claiming approval and affiliation he did not have, (c) disparaging TB's goods and business, and (d) making false statements about his reasons for discounting Reznor furnaces. The court awarded TB $87,035.61 in costs and attorney fees.
Leger first argues that TB did not establish a viable claim under the DTPA. Leger's claim has no merit. Minn. Stat. § 325D.44 (2002) provides that
[a] person engages in deceptive trade practice when, in the course of business, vocation, or occupation, the person:
(1) passes off goods or services as those of another;
(2) causes likelihood of confusion or of misunderstanding as to the source, sponsorship, approval, or certification of goods or services;
(3) causes likelihood of confusion or of misunderstanding as to affiliation, connection, or association with, or certification by, another;
. . .
(5) represents that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities that they do not have or that a person has a sponsorship, approval, status, affiliation, or connection that the person does not have;
. . .
(7) represents that goods or services are of a particular standard, quality, or grade, or that goods are of a particular style or model, if they are of another;
(8) disparages the goods, services, or business of another by false or misleading representation of fact;
. . .
(11) makes false or misleading statements of fact concerning the reasons for, existence of, or amounts of price reductions.
The record reflects that Leger (a) held himself out as a factory-authorized distributor of Reznor furnaces when, in fact, he had been terminated; (b) sold modified Reznor waste-oil furnaces as new furnaces covered by a ten-year warranty; (c) falsely advertised Reznor furnaces as "scratch and dent" at substantially lower prices than retail, when, in fact, the furnaces were new and part of his unpaid-for inventory; (d) failed to inform customers that their furnaces would not function as specified in the literature because they had been equipped with an oil pump designed for operation at high altitudes; and (e) altered the Reznor trademarked logo to read EZ WASTE OIL HEATERS instead of REZNOR WASTE OIL HEATERS, while retaining Reznor's distinctive design, lettering, and color scheme. The record thus fully supports the district court's liability determination.
Leger argues that TB's DTPA claim is not viable because the exclusive remedy under the DTPA is injunctive relief, and TB did not seek injunctive relief. But the first prayer for relief in the amended complaint is for injunctive relief. The complaint thus properly stated a claim under the DTPA, and the district court properly granted TB permanent injunctive relief enjoining Leger from further violating the DTPA. See In re Rood's Estate, 229 Minn. 73, 75, 38 N.W.2d 70, 71 (1949) (stating that "[i]n determining the specific nature and degree of relief demanded in the complaint, it may be necessary to construe the prayer for relief in conjunction with the allegations of the complaint as a whole"); cf. Dennis Simmons D.D.S., P.A. v. Modern Aero, Inc., 603 N.W.2d 336, 339 (Minn.App. 1999) (affirming dismissal of DTPA claim as nonviable when appellant sought damages instead of injunctive relief).
Leger also challenges the district court's award of damages. The district court awarded TB $87,035.61 for attorney fees. The measure of damages under the DTPA is costs and attorney fees incurred in obtaining injunctive relief. Minn. Stat. § 325D.45 (2002). The DTPA's goal is to encourage the aggressive prosecution of DTPA violations by reimbursing private individuals who challenge deceptive trade practices, despite the absence of proof of monetary damage. See Minn. Stat. § 325D.45, subds. 1, 2.
Relying on Boline v. Doty, 345 N.W.2d 285, 289 (Minn.App. 1984), Leger first argues that the award is improper because TB failed to provide him with notice of its attorney-fees claim. Boline is inapposite, however, because it involved an attorney-lien claim. In Boline, this court held that an attorney-lien claim that would result in the deprivation of property entitled the client to minimal due process. Id. Unlike an attorney-lien claim, a claim under the DTPA is not a claim against an interest in property. Leger was thus not entitled to the due-process guarantees Boline requires when the deprivation of property is at issue.
We agree with Leger, however, that the fee award is excessive because it compensates TB for fees spent on issues other than the DTPA claims. The record shows that TB incurred $87,035.61 in attorney fees prosecuting this action. The court awarded TB the full amount. But the award of fees under the DTPA must be limited to fees incurred in obtaining the relief provided for by the statute. Simmons, 603 N.W.2d at 339-40 (stating that DTPA intended to reimburse individuals who challenge deceptive trade practices for attorney fees incurred in obtaining injunctive relief rather than as back-door to obtain attorney fees generally). Accordingly, we reverse the award and remand for a determination of the fees TB incurred prosecuting the DTPA claim.
5. Breach of the Stocking Agreement
The district court concluded that Leger breached a contract for the purchase of 90 Reznor furnaces by ordering and receiving the furnaces, and refusing to pay for them. The court awarded TB $283,794.87 in damages (the cost of the furnaces Leger did not return, plus contractual interest).
The award was based on the affidavit of Jean Mendelsohn, TB's credit and collections supervisor. Mendelsohn's affidavit indicates that Leger ordered and received 90 Reznor furnaces in June 2000. Leger ordered an additional furnace in October 2000, which he received in November. Leger also ordered Reznor parts. Leger returned 43 furnaces in October 2001, of which 40 were in resalable condition. After deducting the cost of inspection and reconditioning, TB credited Leger $58,980.76. According to Mendelsohn, the principal amount due on Leger's account as of July 2003 was $181,561.23. The total balance, including $102,233.64 in contractual interest, was $283,794.87. The district court awarded TB the full amount.
Leger first argues that the district court abused its discretion by failing to credit him $2,887.80, the amount that TB admitted owing Leger for the disputed warranty repairs. We agree that the credit to which Leger was entitled should have been deducted from the award of damages.
Leger next argues that the award is excessive because the average price of the heaters he ordered was $2,548.19 but the $58,980.76 credit he received for the heaters he returned was based on an average price of $1,474.52 per heater. But nothing in the stocking agreement indicates that Leger was entitled to receive credit based on the average price of the furnaces. Leger ordered different furnace models, and the credit he received was properly based on the price of each model rather than on the average price of all models.
Leger also argues that the district court improperly awarded TB $102,203.64 in contractual interest, because (a) TB did not make a claim for prejudgment interest in the complaint, and (b) the stocking agreement does not provide for an award of contractual interest. But the court did not award prejudgment interest, and the stocking agreement expressly provides for a monthly late fee on the balance due on orders. Leger's claim is thus without merit as a matter of fact.
Finally, relying on Minn. Stat. § 334.01 (2002), Leger argues that the 18% annual rate of interest TB applied to the balance due on his account was excessive. Minn. Stat. § 334.01 applies only when the parties have not contracted for a different rate in writing, however. The parties in this case contracted for a different rate in writing. Leger concedes in his brief that the stocking agreement provides that all orders are subject to a monthly late charge of 1.5%. Because the parties' written contract provided for a rate different from the statutory rate, Mendelsohn properly calculated the interest due under the contract to be $102,203.64.
We thus reverse the district court's award of damages and remand for recalculation of damages in light of the credit to which Leger was entitled.
6. Breach of the Service-Area Agreement
The district court concluded that Leger violated his service-area agreement by selling Reznor waste-oil furnaces in Iowa, Michigan, Wisconsin, and North Dakota. The court awarded no damages for breach of the service-area agreement, reasoning that the claim was based on the same conduct as TB's claim for tortious interference with existing contracts, for which it awarded Leger $25,000.
Leger argues that the evidence is insufficient to support the district court's liability determination. According to Leger, the service-area agreement defined his primary territory not his exclusive territory. But in a letter agreement Kent Freeman sent to Leger in September 1997 "to clarify" Leger's territory under the distributorship agreement, Freeman expressly indicated that Leger "agreed not to actively promote or market Reznor waste oil heaters in [the northwest] corner of Minnesota, or in North Dakota, South Dakota, or Iowa." Freeman's letter also stated that Leger would be allowed to contact customers who had purchased a Reznor furnace from him in the past and were now outside his primary service area but only if Leger provided proof that the customer had actually bought a Reznor furnace from Leger in the past. Freeman's letter agreement thus made it clear that Leger's primary territory was also his exclusive territory. By selling outside his primary territory, Leger therefore breached his service-area agreement. The evidence thus supports the district court's liability determination.
Because the district court awarded no damages for breach of the service-area agreement, we do not consider Leger's claim that TB incurred no damages as a result of the breach.
7. Unjust Enrichment
The district court concluded that Leger was unjustly enriched by the profits that he earned selling Reznor furnaces for which he had not paid. Leger argues that TB may not assert an unjust-enrichment claim because the parties' rights are governed by a valid contract. We agree.
Equitable relief based on unjust enrichment may not be granted where the rights of the parties are governed by a valid contract that contains their full agreement. U.S. Fire Ins. Co. v. Minn. State Zoological Bd., 307 N.W.2d 490, 497 (Minn. 1981). Because the rights of the parties in this case were governed by a valid contract that contained their full agreement, a claim of unjust enrichment does not lie. The district court therefore abused its discretion in determining that Leger was liable for unjust enrichment. See Sterling, 575 N.W.2d at 126-27 (holding that existence of brokerage agreement precludedbroker's recovery on theory of unjust enrichment); Midwest Sports Mktg., Inc. v. Hillerich Bradsby of Can., Ltd., 552 N.W.2d 254, 268 (Minn.App. 1996) (affirming summary judgment dismissing claim for unjust enrichment when valid contract governed parties and detailed compensation for performance of duties), review denied (Minn. Sept. 20, 1996). Accordingly, we reverse the judgment on TB's unjust-enrichment claim.
8. Unfair Competition/Duty of Loyalty
The district court determined that Leger breached his duty of loyalty to TB and thereby unfairly competed by selling Shenandoah waste-oil furnaces in violation of his contractual obligation to sell Reznor furnaces exclusively. The court found that Leger sold three Shenandoah furnaces, and it awarded TB $10,000 based on the estimated cost of the furnaces.
Leger argues that to the extent that TB's unfair-competition claim is based on a breach-of-duty theory the claim fails because (a) it is not properly pleaded and (b) Minnesota law does not recognize a fiduciary, non-contractual duty not to sell a competitor's products. We agree.
First, the amended complaint did not sufficiently plead a claim for unfair competition based on breach of the duty of loyalty. The tort of unfair competition includes tortious interference with contractual relations, improper use of trade secrets, and breach of the duty of loyalty. Midwest Sports, 552 N.W.2d at 267. Count eight of the amended complaint alleges that Leger unfairly competed with TB by selling at discounted prices Reznor furnaces for which he had not paid. Although Minnesota is a notice-pleading state and a pleading need not, therefore, allege every element of a cause of action, it must "give fair notice to the adverse party of the incident giving rise to the suit with sufficient clarity to disclose the pleader's theory . . . [and] to permit the application of the doctrine of res judicata." Northern States Power Co. v. Franklin, 265 Minn. 391, 394, 122 N.W.2d 26, 29 (1963). The allegations in count eight of the amended complaint did not give Leger fair notice of the duty-of-loyalty theory on which TB's unfair-competition claim was based.
Additionally, even if the allegations were sufficient from a notice standpoint, the claim fails as a matter of law because a distributor does not owe a manufacturer a fiduciary, non-contractual duty of loyalty. Cf. Cowley v. Anderson, 159 F.2d 1, 3 (10th Cir. 1947) (stating that contract between manufacturer and distributor "gives rise to a duty of mutual trust, confidence, and loyalty . . . respecting the subject matter of the contract"). Leger's obligation not to sell a competitor's product, on which the court premised its breach-of-duty-of-loyalty determination, was contractual rather than fiduciary. That obligation did not, therefore, provide a basis for an independent tort.
Finally, because the breach-of-duty-of-loyalty claim is premised on the same conduct for which the court awarded TB damages for breach of contract and tortious interference with contractual relations, the $10,000 award of damages is duplicative and must be vacated. While TB can maintain parallel actions stemming from the same conduct, it may not obtain double recovery for those actions. See Wirig v. Kinney Shoe Corp., 461 N.W.2d 374, 379 (Minn. 1990) (holding that plaintiff was limited to damages awarded in sexual-harassment action and could not recover damages on battery claim arising out of same conduct); cf. Bradley v. Hubbard Broad., Inc., 471 N.W.2d 670, 677 (Minn.App. 1991) (holding that harms resulting from defamatory statements and reprisal discrimination were sequential and sufficiently discrete to support separate damage awards), review denied (Minn. Aug. 2, 1991).
Because Leger breached a contractual rather than a fiduciary duty of loyalty and the $10,000 award of damages is duplicative, the default judgment on TB's unfair-competition claim must be reversed.
9. Consumer Fraud
The district court concluded that Leger violated Minn. Stat. § 325F.69, subd. 1 (2002), by selling modified Reznor furnaces as new and falsely identifying himself as an authorized Reznor distributor after TB terminated him. The court awarded TB $87,035.61 for costs and attorney fees. Leger challenges the district court's liability determination and award of damages.
Minn. Stat. § 325F.69, subd. 1, provides that the "act, use, or employment by any person of any . . . false pretense, . . . misrepresentation, [or] misleading statement . . . with the intent that others rely thereon in connection with the sale of any merchandise, whether or not any person has in fact been misled, deceived, or damaged thereby, is enjoinable." The record sufficiently establishes that Leger violated the statute by selling modified Reznor furnaces as new and by misrepresenting his status as an authorized Reznor distributor after he was terminated. James Jensen's affidavit indicates that in September 2001, Leger told people at the Big Iron trade show in North Dakota that he was an authorized Reznor distributor. And Brad Strutzenberg's affidavit indicates that Leger told him in August 2001 that he was an authorized distributor.
Leger argues that the statements were true because he was permitted to distribute new Reznor products under factory warranty after his termination. That permission, however, did not make him an "authorized distributor" within the commonly understood meaning of the term "authorized." By claiming that he was an authorized distributor, Leger created the false impression that he was still associated with TB, with the intent that potential customers rely on that association in connection with the purchase of waste-oil furnaces. Leger's statements were therefore actionable.
We agree that the district court's award of damages constitutes an abuse of discretion, however. A person injured by a violation of Minn. Stat. § 325F.69, subd. 1, is entitled to recover damages as well as costs and attorney fees incurred in bringing a consumer-fraud claim. See Minn. Stat. § 8.31, subd. 3a (2002). The court awarded TB all of its attorney fees. The award should have been limited to the fees TB incurred in bringing only the consumer-fraud claim, however. We therefore reverse the award and remand for recalculation.
10. Fraud and Misrepresentation
The district court concluded that Leger fraudulently misrepresented warranty-repairs claims for which he was allegedly credited $40,000. The court specifically found that 95% of the $47,429 claim Leger submitted for warranty repairs before he was terminated as a distributor was false. The court applied that percentage to the $40,000 TB allegedly credited Leger for warranty repairs over the course of their association and awarded TB $38,000 in damages. Leger challenges both the liability determination and the award of damages.
To establish fraud and misrepresentation, a plaintiff must prove that the defendant (a) falsely represented a material fact, (b) with knowledge that the representation was false, and (c) intending that the plaintiff would rely on the representation. Heidbreder v. Carton, 645 N.W.2d 355, 367 (Minn. 2002). The plaintiff must also prove that it relied on the representation to its detriment. Id.
The record shows that Leger fraudulently misrepresented the amount of time he spent on warranty repairs, with knowledge that the representations were false and with the intent that TB would rely on them and credit him for repairs he did not make. But the record does not establish that TB relied on Leger's fraudulent representations to its detriment, however. In fact, it establishes the opposite. Pas testified that TB carefully reviewed each claim for warranty-covered repairs and credited distributors only for claims that were reasonable. There was, therefore, no detrimental reliance. Accordingly, the district court abused its discretion in determining that TB had established a prima facie case of liability.
We therefore reverse the judgment on TB's fraud and misrepresentation claim.
11. Trademark Infringement
The court concluded that Leger infringed on TB's trademark by selling modified furnaces under the name "EZ WASTE OIL HEATERS." The court determined that TB was entitled to $213,000 (50 furnaces times the price at which Leger allegedly sold the furnaces), but it awarded no damages in light of its punitive-damages award. Leger challenges the court's liability determination. By notice of review, TB challenges the court's failure to award damages.
Trademark infringement occurs when a person, without the consent of the registrant, reproduces, copies, or imitates in commerce a registered trademark in connection with the sale of goods or services, thereby causing a likelihood of confusion in the marketplace as to the source of the product. 15 U.S.C. § 1114, subd. (1)(a) (2000). Trademark infringement also occurs when a person reproduces, copies, or imitates a registered mark and applies it to signs, packages, wrappers, or advertisement intended to be used in commerce in connection with the sale of goods or services, thereby causing a likelihood of confusion as to the source of the goods or services. Id., subd. (1)(b) (2000). Additionally, a person who, in connection with goods or services, uses in commerce a word, name, symbol, or false designation of origin likely to cause confusion as to the source of the goods or services is liable to any person who believes that he or she is likely to be damaged by such an act. 15 U.S.C. § 1125(a)(1)(A) (2000).
The REZNOR mark consists of white upper-case letters in a red/burgundy box. The record shows that Leger modified the REZNOR mark by removing the letters R, N, and O to spell "EZ." Leger retained the color scheme, lettering style, box design, and placement (lower-right corner) of the REZNOR mark. Leger also modified the Reznor logo, which consists of red and yellow stripes running diagonally beside the REZNOR name, by removing letters to spell "EZ" while retaining the red and yellow stripes. Leger used the modified logo on a sign he placed outside his booth at a trade show.
Leger argues that his conduct did not amount to trademark infringement because to sell the modified furnaces, he was required to "obliterate" the REZNOR mark. Alternatively, Leger argues that the district court's implicit finding that the use of the EZ mark caused a likelihood of confusion is clearly erroneous. We disagree.
Leger's claim that he was required to "obliterate" a protected mark in order to sell his modified furnaces is absurd and contrary to the fundamental principles of trademark protection. Understandably, Leger provides no authority for his claim.
Leger's claim that the district court clearly erred by implicitly finding that the EZ mark caused a likelihood of confusion is similarly without merit. To determine whether the use of a registered mark causes a likelihood of confusion as to the source of goods or services, courts consider six factors: (a) the strength of the owner's mark; (b) the similarity between the owner's mark and the alleged infringer's mark; (c) the degree of competition between the products; (d) the alleged infringer's intent to "pass off" its goods as the trademark owner's; (e) incidents of actual confusion; and (f) the type of product, its cost, and conditions of purchase. Co-Rect Prods., Inc. v. Marvy! Adver. Photography, Inc., 780 F.2d 1324, 1330 (8th Cir. 1985). No single factor is dispositive; instead, the court must consider all factors. SquirtCo v. Seven-Up Co., 628 F.2d 1086, 1091 (8th Cir. 1980).
Likelihood of confusion is a question of fact subject to review for clear error. Beer Nuts, Inc. v. Clover Club Foods Co., 805 F.2d 920, 923 n. 2 (10th Cir. 1986). A finding is clearly erroneous when, although there is evidence to support it, the appellate court on the entire evidence is left with the definite and firm conviction that a mistake has been made. Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, 855, 102 S. Ct. 2182, 2189 (1982).
The unrebutted allegations in the amended complaint and the evidence in the record leave us with the firm conviction that no mistake has been made. First, the testimony of John Pas establishes that the REZNOR mark was strong, not only in the waste-oil business but also in the heating industry generally. Leger does not dispute that TB has a valid trademark in the Reznor name and logo or that he knew that the Reznor name and logo were trademarked.
Second, although there are differences between the REZNOR and EZ marks, the district court did not clearly err by implicitly finding that the marks were confusingly similar. For trademark infringement to occur, it is not necessary that every word of a trademark be appropriated. Instead, "[i]t is sufficient that enough be taken to deceive the public in the purchase of a protected article." J. Thomas McCarthy, Trademarks and Unfair Competition § 23:3 (4d ed. 1997) (quotations and footnotes omitted). Instead, it is the impression that the mark as a whole creates on the average, reasonably prudent buyer and not the parts thereof that is important. Id. Thus, if the overall impression created by the marks is essentially the same, the marks will be deemed to be confusingly similar. See Gen. Mills, Inc. v. Kellogg Co., 824 F.2d 622, 627 (8th Cir. 1987) (considering overall impression created by marks, rather than merely comparing individual features, in analyzing similarities of sight, sound, and meaning between marks APPLE RAISIN CRISP and OATMEAL RAISIN CRISP); Clairol, Inc. v. Roux Labs., Inc., 442 F.2d 980, 982 (C.C.P.A. 1971) (holding that marks PLATINUM PUFF and PLATINUM PLUS, when viewed in their entirety, create a likelihood of confusion).
The overall impression created by the REZNOR and EZ marks was essentially the same. The color scheme, lettering style, box design, and placement of the marks was identical and, therefore, likely to cause the average consumer to associate EZ waste-oil furnaces with REZNOR and thereby cause confusion about the source of the furnaces. Moreover, the marks were used on Reznor furnaces. Leger modified the inside of the Reznor furnaces that he sold under the EZ label but retained their distinctive beige coloring. The similarity of the total trade-dress context in which the marks appeared made the likelihood of confusion greater than if the marks had appeared on different products.
Given the similarities between the REZNOR and EZ labels and the fact that the labels were used on the same product, the district court did not clearly err by implicitly finding that the average buyer would have been confused. To find trademark infringement only when the marks are identical and not when the infringer makes some slight modification would be "in effect to reward the cunning infringer and punish only the bumbling one." T T Mfg. Co. v. A.T. Cross Co., 449 F. Supp. 813, 822 (D.R.I.), aff'd, 587 F.2d 533 (1st Cir. 1978); Baker v. Master Printers Union of N.J., 34 F. Supp. 808, 811 (D.N.J. 1940) (stating that "the most successful form of copying is to employ enough points of similarity to confuse the public with enough points of difference to confuse the courts").
In addition to infringing on the REZNOR mark, Leger infringed on the Reznor logo in violation of 15 U.S.C. § 1114(1)(b). Leger modified a sign advertising REZNOR WASTE OIL HEATERS to read EZ WASTE OIL HEATERS, while retaining the distinctive lettering, the word arrangement, and a logo consisting of red and yellow stripes running diagonally beside the words. Leger placed the sign outside his booth at a trade show. At his deposition, Leger admitted that the logo he used to market his EZ furnaces at the trade show was the Reznor logo. A consumer who was familiar with the Reznor logo would have been confused by the modified sign about the source of the EZ furnaces.
The district court did not therefore clearly err in finding that the evidence sufficiently established a prima facie case of trademark infringement and false designation of origin under 15 U.S.C. §§ 1114, 1125(a)(1)(A).
By notice of review, TB argues that the district court abused its discretion in refusing to award TB compensatory damages on its trademark-infringement claims. We agree.
A plaintiff who prevails on a trademark-infringement claim under 15 U.S.C. § 1114(1)(a) is entitled to recover (1) defendant's profits, (2) actual damages, and (3) costs. 15 U.S.C. § 1117(a) (2000). If the court finds that an award of damages based on profits is inadequate, it may award any sum it deems just under the circumstances. Id. Similarly, "the court may enter judgment, according to the circumstances of the case, for any sum above the amount found as actual damages, not exceeding three times such amount." Id. These sums constitute compensation rather than a penalty. Id. We review an award of damages for abuse of discretion. Robert W. Carlstrom, Inc. v. German Evangelical Lutheran St. Paul's Congregation of the Unaltered Augsburg Confession at Jordan, 662 N.W.2d 168, 173 (Minn.App. 2003).
The district court determined that Leger intentionally infringed on TB's trademark, but it awarded no damages "beyond the punitive damages awarded herein." The court did not elaborate on the reasons for its refusal to award TB compensatory damages. Presumably, the court determined that punitive damages sufficiently compensated TB for actual damages and costs. Unless the harm is intangible, however, punitive damages may not be awarded absent a compensatory-damage award. See, e.g., Jacobs v. Farmland Mut. Ins. Co., 377 N.W.2d 441, 444 (Minn. 1985). The district court therefore abused its discretion in concluding that punitive damages were an adequate substitute for the compensatory damages to which TB was entitled under 15 U.S.C. § 1117(a).
Relying on 15 U.S.C. § 1117(b) (2000), TB argues that it is entitled to treble damages for Leger's intentional infringement of the REZNOR mark. But section 1117(b) applies only to counterfeiting cases brought under section 1114(1)(a). 15 U.S.C. § 1117(b). This is not a counterfeiting case. Whether to award Leger treble damages, therefore, is a matter entirely within the district court's broad discretion. See 15 U.S.C. § 1117(a); BASF Corp. v. Old World Trading Co., 41 F.3d 1081, 1092 (7th Cir. 1994); Babbit Elecs., Inc. v. Dynascan Corp., 38 F.3d 1161, 1183 (11th Cir. 1994); McCarthy, supra, § 27:40.
The district court determined that TB was entitled to an estimated $213,000 in compensatory damages on its trademark-infringement claim. The court based its determination on the number of furnaces Leger failed to return (and for which he had not paid) times the price at which he allegedly sold the furnaces. But the record contains no evidence that Leger sold 50 furnaces. We therefore remand for a redetermination of damages under 15 U.S.C. § 1117(a), noting that any award must be based on Leger's profits and TB's actual damages and costs.
12. Trademark Dilution
The district court concluded that Leger diluted TB's distinctive trade dress in violation of 15 U.S.C. § 1125(a)(1) by removing the letters R, N, O, and R from the Reznor name to spell "EZ," while retaining the distinctive paint used on all Reznor furnaces. The court determined that TB was entitled to damages under 15 U.S.C. § 1117(a), but, without explanation, it awarded no additional damages. Leger challenges the district court's liability determination.
As a preliminary matter, we note that 15 U.S.C. § 1125(a)(1) establishes a cause of action for false designation of origin and false or misleading representation of fact rather than a cause of action for trademark dilution. Trademark dilution in violation of 15 U.S.C. § 1125(c) (2000) occurs when a person uses a famous mark in commerce after the mark has become famous and causes "dilution of the distinctive quality of the mark." Typically, the dilution doctrine applies in cases where "similar marks are used on dissimilar goods." Luigino's, Inc. v. Stouffer Corp., 170 F.3d 827, 833 (8th Cir. 1999) (quotation omitted). The doctrine is premised on the notion that "[b]y causing consumers to connect [a] famous mark with different products, the subsequent mark weakens, or dilutes, the famous mark's unique and distinctive link to a particular product." Id.
Because Leger used the EZ mark on furnaces rather than in connection with a different product, the district court erred by concluding that TB established a prima facie case for trademark dilution. See id. (holding that use of "Michelina's Lean `N Tasty" mark did not dilute Stouffer's "Lean Cuisine" mark because both marks were used on low-fat frozen entrees, eliminating the possibility that consumers would associate "Lean Cuisine" with something other than low-fat frozen entrees). The judgment on TB's trademark-dilution claim must therefore be reversed.
13. Fraudulent Conveyance
The district court concluded that Leger fraudulently transferred assets within the meaning of Minn. Stat. § 513.44 (2002). As damages, it allowed TB to collect any judgment against Leger from the assets fraudulently transferred from Independent Distributing to IWOF.
In determining whether a transfer is fraudulent, courts may consider several factors, including (a) whether the transfer was to an insider, (b) whether the debtor retained control of the property transferred, (c) whether the transfer was concealed, (d) whether the debtor had been sued before the transfer was made, and (e) whether the transfer occurred shortly before or after the debtor incurred a substantial debt. Minn. Stat. § 513.44 (2002). The record shows that (a) Leger intentionally transferred most of the assets of Independent Distributing, his former company, to IWOF with the intent of defrauding TB by hindering its ability to collect on a judgment; (b) Janet Leger, an insider, was named president of the new company; (c) despite his alleged lack of ownership or involvement, Leger controlled the new company; (d) the transfer occurred after this action was filed and after Leger incurred a substantial debt to TB; and (e) Leger attempted to conceal the transfer by refusing to produce an accounting of the assets transferred. The evidence is therefore sufficient to support the district court's liability determination. Leger's claim that the district court's liability determination was directed only at Janet Leger and IWOF is without merit. The amended complaint clearly names Ronald Leger as a defendant. He is therefore subject to the court's judgment on TB's fraudulent-conveyance claim.
By notice of review, TB argues that the district court erred by granting Janet Leger and IWOF relief from the judgment for lack of personal jurisdiction. We disagree. Before a court may exercise personal jurisdiction over a party, proper service of process must be made. Uthe v. Baker, 629 N.W.2d 121, 123 (Minn.App. 2001). Service of process is properly made — and a civil action is thereby commenced — when a defendant is served with a summons. Minn. R. Civ. P. 3.01. Absent proper service of process, the district court must dismiss the action unless the defense is waived. Uthe, 629 N.W.2d at 123. A judgment entered by a court without personal jurisdiction is void. Pugsley v. Magerfleisch, 161 Minn. 246, 247, 201 N.W. 323, 323 (1924) (stating that default judgment is void for lack of jurisdiction when service of process not properly made); see generally 2A David F. Herr Roger S. Haydock, Minnesota Practice § 60.23, at 26 (3d ed. 1998). Whether service of process was proper is a question of law, subject to de novo review. Amdahl v. Stonewall Ins. Co., 484 N.W.2d 811, 814 (Minn.App. 1992), review denied (Minn. July 16, 1992).
The record unequivocally shows that Janet Leger and IWOF were not served with the summons; they were served only with the amended complaint. Service of process was therefore insufficient, and the district court did not acquire personal jurisdiction over them. Accordingly, the default judgment against them was void, and the district court properly vacated it.
TB argues that the judgment was improperly vacated because Janet Leger and IWOF waived the improper-service defense by appearing at hearings. We disagree. The insufficiency-of-process defense is waived if it is omitted from a responsive pleading, an amendment to a pleading, or a motion. Minn. R. Civ. P. 12.08(a). The defense is also implicitly waived when a party affirmatively invokes the court's jurisdiction on the merits of a claim. Patterson v. Wu Family Corp., 608 N.W.2d 863, 868 (Minn. 2000); Galbreath v. Coleman, 596 N.W.2d 689, 691 (Minn.App. 1999). A party affirmatively invokes the court's jurisdiction on the merits of a claim by, for example, obtaining extensions of time within which to move or answer, filing a motion to compel arbitration, appealing a denial of a motion, and obtaining court approval of a bond. See Peterson v. Eishen, 512 N.W.2d 338, 339-40 (Minn. 1994), superceded by rule on other grounds by In re Welfare of Children of S.C., 656 N.W.2d 580 (Minn.App. 2003); see also Igo v. Chernin, 540 N.W.2d 913, 914 (Minn.App. 1995) (holding that party waived jurisdictional objection by taking opposing party's deposition on merits of case before asserting defense).
Janet Leger and IWOF included the insufficiency-of-process defense in their motion to vacate the default judgment. They did not therefore waive the defense by omitting it from a motion. Nor did they implicitly waive the defense merely by appearing at hearings. A party does not waive a jurisdictional defense unless it takes an affirmative step to invoke the court's jurisdiction on the merits of a claim. See Patterson, 608 N.W.2d 867-68 (stating that party does not waive jurisdictional defense merely by participating in litigation through discovery and responding to an opposing party's motions). Neither Janet Leger nor IWOF affirmatively invoked the court's jurisdiction on the merits of the claim, or otherwise acquiesced to the court's exercise of jurisdiction over them, before moving to vacate the judgment for lack of personal jurisdiction. The court thus properly vacated the judgment against them for lack of personal jurisdiction.
Because the parties did not raise the issue, we do not consider whether TB can collect any judgment against Leger from Janet Leger and IWOF, who, because of the court's lack of personal jurisdiction, were not parties to these proceedings.
14. Punitive Damages
The district court concluded that TB was entitled to $50,000 in punitive damages because Leger "demonstrated a deliberate disregard for the rights and safety of others." Leger argues that the award must be vacated because punitive damages for breach of contract may be awarded only in exceptional cases where the breach is accompanied by an independent tort. Alternatively, Leger argues that the evidence is insufficient to support the award. We disagree with both arguments.
Minnesota law permits the recovery of punitive damages in a civil action when the evidence shows clearly and convincingly that the wrongdoer acted with "deliberate disregard for the rights or safety of others." Minn. Stat. § 549.20, subd. 1(a) (2002). A defendant acts with deliberate disregard for the rights and safety of others when the defendant (a) knows or intentionally disregards facts that create a high probability of injury to the rights or safety of others, and (b) proceeds to act with intentional disregard of or indifference to the probability of injury. Id., subd. 1(b)(1). We review an award of damages for abuse of discretion. Robert W. Carlstrom, 662 N.W.2d at 173.
Leger first argues that the award must be vacated because punitive damages may be awarded for breach of contract only in exceptional cases, when the breach is accompanied by an independent tort. See Wild v. Rarig, 302 Minn. 419, 440, 234 N.W.2d 775, 789 (1975). The breach in this case was accompanied by several independent torts, however, including defamation and tortious interference with contractual relations. Punitive damages were therefore permissible.
Alternatively, Leger argues that the record lacks clear and convincing evidence that he acted with deliberate disregard for the rights and safety of others. We conclude otherwise. The evidence in the record shows that Leger modified Reznor furnaces without regard for the rights and safety of others. Leger outfitted furnaces designed for low-altitude areas with high-altitude pumps that he modified by replacing Reznor parts with non-Reznor parts. Leger also substituted Reznor's storage tanks, which were burgundy and clearly labeled as UL-approved tanks, with black tanks that were not UL-approved. The tanks bore a label with Leger's business phone number.
The modifications caused a Wisconsin customer's building to burn and resulted in injuries to an employee of a Minnesota customer. William Neuburg's affidavit indicates that he recovered a Reznor RA 140 furnace from a Wisconsin business after a fire that originated near the furnace. The furnace had an RA 235 high-altitude pump and had been supplied to the business by Leger. Photographs of the furnace show that an Independent Distributing sticker had been affixed over a label on the pump, warning that the 235 high-altitude pump was to be used only on Reznor 235 furnaces and only in high altitudes. Similarly, the testimony of Harold Fonville, TB's in-house counsel, established that a Kemna Motors employee was hurt while trying to start a modified Reznor heater that Leger had supplied. Photographs of the furnace show that an Independent Distributing sticker had been placed over the warning label on the pump. Leger admitted to placing his own labels over Reznor high-altitude warning labels.
The record also shows that Leger tried to conceal the modifications. At his deposition, Leger denied marketing modified Reznor furnaces under the EZ label. Photographs submitted to the court, however, showed that Leger advertised EZ waste-oil furnaces on his booth at a trade show in Des Moines. When confronted with the photographs, Leger admitted that the booth was his. And when asked to describe the EZ logo, Leger said, "It's the Reznor logo."
Because the evidence clearly and convincingly shows that Leger acted with the deliberate disregard for the rights and safety of others, the district court did not abuse its discretion by awarding punitive damages.
III.
Leger next argues that the district court erred by denying his motion to vacate the judgment as void under Minn. R. Civ. P. 60.02(d). Leger claims that the judgment is void because he was denied his due-process right to cross-examine TB's witnesses and to provide input into the findings of fact and conclusions of law that TB's counsel prepared at the court's request. We disagree.
Absent an abuse of discretion, this court will uphold the district court's decision to grant or deny a motion to vacate a default judgment. Galbreath, 596 N.W.2d at 691. When the court's decision turns on a purely legal issue, however, we review the decision de novo. Id.
Rule 60.02(d) provides relief from a void judgment even if the defaulting party lacks a meritorious defense and fails to show due diligence. See Hengel v. Hyatt, 312 Minn. 317, 318, 252 N.W.2d 105, 106 (1977). A judgment is void if the court lacks jurisdiction over the parties or the subject matter. Matson v. Matson, 310 N.W.2d 502, 506 (Minn. 1981). A judgment is also void if it is entered in a manner inconsistent with due process. See State v. Waldron, 273 Minn. 57, 66-67, 139 N.W.2d 785, 792 (1966) (stating that judgment of conviction will be held void for want of due process when circumstances surrounding trial made trial a sham); see also Great Am. Trading Corp. v. I.C.P. Cocoa, Inc., 629 F.2d 1282, 1287-88 (7th Cir. 1980) (stating that denial of statutory right to evidentiary hearing may render judgment void); Winhoven v. United States, 201 F.2d 174, 175 (9th Cir. 1952) (stating that procedures that deny party meaningful participation in litigation may render judgment void); see generally 12 James Wm. Moore et al., Moore's Federal Practice § 60.44 (3d ed. 1997).
Leger argues that the default judgment is void because he was denied his due-process right to cross-examine TB's witnesses and to provide input regarding the proposed findings of fact and conclusions of law. See Kemerer v. State Farm Mut. Auto Ins. Co., 206 Minn. 325, 328, 288 N.W. 719, 721 (1939) (stating that defaulting party has a right to cross-examine plaintiff's witnesses at default hearing). But the record shows otherwise. Leger was present at the default hearing and had the opportunity to cross-examine TB's witnesses. He opted not to do so. Cf. id. (reversing order denying motion to vacate default judgment when defendant was deprived of opportunity to participate in default hearing by lack of notice of application for order for judgment). The record also shows that Leger could have provided input regarding the proposed findings of fact and conclusions of law had he chosen to do so. Although the court invited TB's counsel to submit proposed findings and conclusions, it did not preclude Leger either from providing input regarding TB's counsel's submission or from submitting findings and conclusions of his own. Leger's argument that the judgment is void for lack of due process is thus without merit. See State ex rel. Butler v. Swenson, 243 Minn. 24, 28, 66 N.W.2d 1, 4 (1954) (stating that "where the trial court has jurisdiction of the offense and of the defendant a judgment will be held void for want of due process only where the circumstances surrounding the trial are such as to make it a sham and a pretense rather than a real judicial proceeding"). The circumstances surrounding the default hearing did not render the hearing a sham or pretense such that the default judgment was void.
IV.
Leger also argues that the district court abused its discretion by denying his motion to vacate the judgment under Minn. R. Civ. P. 60.02(f) "for any other reason justifying relief from the operation of the judgment." We disagree.
Minn. R. Civ. P. 60.02(f) allows a court to vacate a final judgment for "[a]ny other reason justifying relief from the operation of the judgment." Relief under the residual clause of rule 60.02 is appropriate when "the equities weigh heavily in favor of [the defaulting party] and clearly require relief be granted to avoid an unconscionable result." Wiethoff v. Williams, 413 N.W.2d 533, 536 (Minn.App. 1987). To prevail on a rule 60.02 motion, a defaulting party must show that (1) it has a reasonable claim on the merits, (2) it has a reasonable excuse for failing to act, (3) it acted with due diligence after notice of the entry of judgment, and (4) the opposing party would not be substantially prejudiced if the motion to vacate the judgment was granted. Bentonize, Inc. v. Green, 431 N.W.2d 579, 582 (Minn.App. 1988); see also In re Children of Coats, 633 N.W.2d 505, 510 (Minn. 2001).
The district court applied the Bentonize four-factor test and denied Leger's motion to vacate the judgment against him. The court reasoned that although Leger acted diligently after the entry of judgment, he did not establish that he had a reasonable claim on the merits or a reasonable excuse for his failure to comply with discovery orders and requests.
Leger does not challenge the district court's determination that he did not establish two of the Bentonize factors. Instead, relying on Sommers v. Thomas, 251 Minn. 461, 88 N.W.2d 191 (1958), a pre- Bentonize case, he argues that the Bentonize four-factor test does not apply to motions brought under rule 60.02's residual clause. But in Sommers the court applied the equivalent of the Bentonize four-factor test in holding that a defaulting party was not precluded from relief from the judgment under the residual clause merely because more than a year elapsed between the entry of judgment and the date when the motion was served. 251 Minn. at 468-69, 88 N.W.2d at 196. The court reversed the order denying defendant's motion to vacate, reasoning that "where a proposed answer discloses a good defense upon the merits and a reasonable excuse for delay occasioning a default is shown, the default should be opened and the case brought to trial, especially if no rights have intervened to prejudice a party." Id. (footnotes omitted). Sommers does not therefore support Leger's claim that rule 60.02(f) motions are not subject to the Bentonize test. Indeed, it supports the opposite view. See also Coats, 633 N.W.2d at 510 (making no exception for subdivision (f) when stating that four-factor test applies to rule 60.02 motions); Charson v. Temple Isr., 419 N.W.2d 488, 491 (Minn. 1988) (making no exception for subdivision (f) when stating that "[f]or more than 20 years [Minnesota courts] have analyzed motions seeking relief from orders and judgments under Minn. R. Civ. P. 60.02 by employing [the] four prong test [in Finden v. Klaas, 268 Minn. 268, 271, 128 N.W.2d 748, 750 (1964)]"). The district court thus properly applied the Bentonize test to Leger's rule 60.02(f) motion.
V.
Leger argues that the district court abused its discretion by granting permanent injunctive relief without considering the Dahlberg factors. See Dahlberg Bros. v. Ford Motor Co., 272 Minn. 264, 274-75, 137 N.W.2d 314, 321-22 (1965) (concluding that the district court must consider five equitable factors before granting temporary injunctive relief). We agree.
The granting of an injunction, whether temporary or permanent, rests in the sound discretion of the district court. Cherne Indus., Inc. v. Grounds Assocs., Inc., 278 N.W.2d 81, 91 (Minn. 1979). In determining whether permanent injunctive relief is warranted, the district court must first determine whether the plaintiff has proven its case. Minn. Pub. Interest Research Group v. Butz, 358 F. Supp. 584, 625 (D. Minn. 1973), aff'd, 498 F.2d 1314 (8th Cir. 1974). If the court determines that the plaintiff has proven its case, the court must "balance the equities." See id. (providing that after determining plaintiff has proven merits of case, district court must consider federal equivalent of Dahlberg factors, including likelihood of irreparable harm to plaintiff, possibility of injury to defendant and other interested parties, and any public interest involved).
The district court determined that TB had proven its case, but it failed to balance the equities and issue findings before granting the permanent injunction. We therefore reverse the award of injunctive relief and remand for findings and a determination of whether the balance of the equities warrants a permanent injunction. Findings are particularly important in light of the district court's April 2002 order denying TB's motion for a temporary injunction, based on the district court's determination that the likelihood of irreparable harm was minimal and a temporary injunction would not have further served the public.
DECISION
1. We affirm the entry of a default judgment as a sanction for Leger's failure to comply with the district court's orders compelling discovery.
2. We affirm the district court's liability determination on TB's claim for tortious interference with prospective contracts but reverse the award of damages and remand for a recalculation of damages.
3. We reverse the judgment in favor of TB on its claim for tortious interference with existing contracts.
4. We affirm the judgment on TB's defamation claim.
5. We affirm the district court's liability determination on TB's claim for deceptive trade practices but reverse the court's award of damages and remand for a recalculation of damages.
6. We affirm the district court's liability determination on TB's claim for breach of the stocking agreement but reverse the award of damages and remand for a recalculation of damages.
7. We affirm the district court's judgment on TB's claim for breach of the service-area agreement.
8. We reverse the judgment on TB's unjust-enrichment claim.
9. We reverse the judgment on TB's unfair-competition claim.
10. We affirm the district court's liability determination on TB's consumer-fraud claim but reverse the award of damages and remand for a recalculation of damages.
11. We reverse the judgment on TB's claim for fraud and misrepresentation.
12. We affirm the district court's liability determination on TB's trademark-infringement claim, reverse the court's determination on damages, and remand for a recalculation of damages.
13. We reverse the judgment on TB's trademark-dilution claim.
14. We affirm the judgment on TB's fraudulent-conveyance claim.
15. We affirm the district court's order vacating the judgment against Janet Leger and Independent Waste Oil Furnaces.
16. We affirm the punitive-damages award.
17. We affirm the district court's order denying Leger's motion to vacate the judgment entered against him.
18. We reverse the district court's award of permanent injunctive relief and remand for findings and a determination of whether injunctive relief is appropriate in light of the Dahlberg factors.