1. Balance Dynamics Corporation v. Schmitt Industries, Incorporated

2. In 1992, Schmitt Industries sent letters to 3,200 customers and prospective customers, which stated that Halon gas was a regulated substance, and would eventually be banned in the United States. A number of customers using the Halon balancer contacted the competing company Balance Dynamics regarding this letter. Balance Dynamics is the only company that produces a machine that balances industrial grinders using a gas Halon 1202. Balance Dynamics investigated the claim, and confirmed that its Halon balancer is not subject to regulation, did not require labeling, and was not slated to be banned. In 1994, Balance Dynamics brought suit against Schmitt Industries under the Lanham Trademark Act, 15U.S.C 1051 et seq. Case Overview argued: Dec. 17, 1999 – Feb. 25, 2000

3. The Arguments Balance Dynamics’ Arguments: Balance Dynamics stipulated that it did not incur any lost sales, lost profits, or increased cost of seeking capital investments. It sought recovery of its damage control costs and damages to its goodwill. Schmitt Industries’ Arguments: Balance Dynamics did not incur any marketplace damages.

4. Court Decision The trial court denied Balance Dynamics any recovery since it did not incur any marketplace damages. Balance Dynamics appealed and argued that marketplace damages are not a prerequisite to recovery of damage control costs and, second, that it was entitled to recover damages to its goodwill because Schmitt engaged in advertising which was literally false and acted in bad faith.

5. The Sixth Circuit’s decision The Sixth Circuit noted that this was an issue of first impression. It reasoned that a business faced with the reasonable likelihood of confusion, would undertake to protect its business. They think Schmitt Industries is responsible for ‘any damages’ caused by violation of the Lanham Act and should compensate Balance Dynamics for any reasonable and necessary expenses incurred in mitigating the detrimental effects of that transgression. Thus the Sixth Circuit reversed the lower court and permitted Balance Dynamics to recover its damage control costs. On the second appeal the Sixth Circuit concluded that, under the facts in this case, Balance Dynamics could not recover for damages to its goodwill “ in the absence of more substantial indication that these injuries occurred.”

6. The Sixth Circuit’s decision The court set the following rule: “Hence, to recover loss control damages, plaintiffs must show that a violation of the Lanham Act occurred, and that: 1) There was a likelihood of confusion or damages to sales, profits, or goodwill; 2) Its damage control expenses are attributable to the violation and; 3) That its damage control efforts were reasonable under the circumstances and proportionate to the damage that was likely to occur.”

7. Conclusions False advertising claims under Lanham Act might concern a communication that has a tendency to deceive and therefore can be the subject of a damage control-related Lanham Act violation per se. So they must be treated differently from Marketplace damages

8. The court proceedings can be found here: http://caselaw.findlaw.com/us-6th-circuit/1439111.html

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