When Two Wrongs Make a Right: Ninth Circuit Holds Proof of Injury Not Required for Unclean Hands
Our parents and teachers taught us that “two wrongs don’t make a right.” But in the world of Lanham Act litigation, the opposite is often true. When defending a Lanham Act claim brought by a competitor, the doctrine of unclean hands—the lawyerly version of “But they did it too!”—can be a case-dispositive argument. Last month, the Ninth Circuit made it a bit easier to establish this defense, holding that a defendant arguing unclean hands need not prove that the plaintiff’s unclean conduct caused “actual harm.” See Certified Nutraceuticals, Inc. v. Avicenna Nutraceutical, LLC, 2020 U.S. App. LEXIS 22351 (9th Cir. July 27, 2020).
Background: Unclean Hands in the Ninth Circuit
The unclean hands defense is based on the equitable maxim that “he who comes into equity must come with clean hands.” Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S. 806, 814 (1945). Its roots lie in the English Court of Chancery—a royal “court of conscience” that was able to grant relief in situations where the hidebound courts of law could not. Chancery’s unique focus on conscience and morality meant that plaintiffs seeking its aid were held to a high standard of behavior. Unlike the law courts, Chancery would “close [its] doors to [a plaintiff] tainted with inequitableness or bad faith relative to the matter in which he s[ought] relief, however improper may have been the behavior of the defendant.” Id.
Unclean hands remains a viable defense today in the context of equitable claims. That includes Lanham Act claims, since Congress expressly instructed courts to apply traditional “principles of equity” under that statute. See 15 U.S.C. § 1117(a). Many courts (in the Ninth Circuit and elsewhere) have disposed of Lanham Act claims on the ground that, because the plaintiff’s hands were unclean from its own false advertising, the court’s doors were closed to it. See, e.g., Emco, Inc. v. Obst, 2004 U.S. Dist. LEXIS 12118 (C.D. Cal. May 7, 2004); Rainbow Play Sys. v. Backyard Adventure, Inc., 2009 U.S. Dist. LEXIS 93623 (D.S.D. Sept. 28, 2009); Amusement Art, LLC v. Life Is Beautiful, LLC, 2016 U.S. Dist. LEXIS 165429 (C.D. Cal. Nov. 29, 2016).
In particular, to prevail on an unclean hands defense in the Ninth Circuit, “the defendant must demonstrate that the plaintiff’s conduct is inequitable and that the [plaintiff’s inequitable] conduct relates to the subject matter of its claims.” Fuddruckers, Inc. v. Doc’s B.R. Others, Inc., 826 F.2d 837, 847 (9th Cir. 1987). Most district courts have interpreted this to mean that there are just two elements to the defense: (1) inequitable conduct by the plaintiff; (2) that has a sufficiently close nexus to the plaintiff’s own claims. See, e.g., Pom Wonderful LLC v. Coca Cola Co., 166 F. Supp. 3d 1085, 1092 (C.D. Cal. 2016); Intamin, Ltd. v. Magnetar Techs. Corp, 623 F. Supp. 2d 1055, 1074 (C.D. Cal. 2009).
But some district courts in the Ninth Circuit have posited a third element: besides being inequitable and sufficiently related to its claims, the plaintiff’s bad conduct must have “injured the defendant.” Kaseberg v. Conaco, LLC, 2018 U.S. Dist. LEXIS 195358, at *25 (S.D. Cal. Nov. 15, 2018); see also Chitkin v. Lincoln Nat’l Ins. Co., 879 F. Supp. 841, 854 (S.D. Cal. 1995) (“Courts typically do not apply the doctrine of unclean hands where the defendant has suffered no harm as a result of the plaintiff’s actions.”). This appears to be the minority position, however. See Pom Wonderful LLC v. Welch Foods, Inc., 737 F. Supp. 2d 1105, 1110 (C.D. Cal. 2010).
The District Court’s Decision
In Certified Nutraceuticals, Inc. v. Avicenna Nutraceutical, LLC, 2018 U.S. Dist. LEXIS 127276 (S.D. Cal. July 27, 2018), the plaintiff company, Certified, took issue with a marketing claim made by its competitor, Avicenna: namely, that Avicenna’s collagen product was made using “patented formulas.” Certified maintained that this claim was false and misleading because Avicenna did not actually hold any relevant patents. Avicenna countered that Certified had no business complaining because its hands were unclean: it, too, had falsely claimed that its own collagen product was made with a patented process.
The district court agreed: Certified had “knowingly made false statements regarding the patented nature” of its own product, thereby committing the requisite “inequitable conduct.” Id. at *9-10. Moreover, the “nexus” requirement was satisfied, given that the parties were direct competitors and both had allegedly misrepresented the patent status of their analogous products. Accordingly, it “c[ould not] seriously be argued” that Certified’s inequitable conduct was unrelated to the equity that it sought. Id. at *11. Based on these findings, the district court granted summary judgment for Avicenna, holding that Certified’s unclean hands barred the court’s doors to its Lanham Act claim.
The Ninth Circuit’s Decision
On appeal to the Ninth Circuit, Certified argued that the district court had omitted a required element from its unclean hands analysis. In its view, to succeed on its defense, Avicenna should also have been obligated to prove that Certified’s inequitable conduct had resulted in “actual harm [either] to the public or Avicenna.” Certified Nutraceuticals, Inc. v. Avicenna Nutraceutical, LLC, 2020 U.S. App. LEXIS 22351, at *3 (9th Cir. July 27, 2020). A majority of the Ninth Circuit panel disagreed and affirmed the district court’s grant of summary judgment.
The majority acknowledged that evidence of actual harm to the defendant or the public “can be a ‘highly relevant consideration’ in determining” the “inequitableness” element of an unclean hands defense. Id. But at least in false advertising cases, the majority held, actual harm was not itself a required element of the defense. But see id. (suggesting that the rule may be otherwise in Lanham Act “trademark infringement” cases). Because Avicenna had already sufficiently demonstrated Certified’s “inequitableness” by showing that it had “knowingly made false statements” about its competing product, a further showing of resulting harm was not necessary. Id.
In dissent, Judge Paez argued that the Ninth Circuit requires a showing of “actual deception” as an element of an unclean hands defense in a false advertising case. Id. at *4-5. He cited two false advertising decisions from the Ninth Circuit that, at least in his view, support that conclusion. See id. (discussing TrafficSchool.com, Inc. v. eDriver Inc., 653 F.3d 820 (9th Cir. 2011), and Jarrow Formulas, Inc. v. Nutrition Now, Inc., 304 F.3d 829 (9th Cir. 2002)).
While both the majority and the dissent in Certified Nutraceuticals make decent cases for their respective views, the majority seems to have the better of the argument.
For starters, the two false advertising decisions cited by the dissent do not clearly establish that actual injury is a prerequisite for an unclean hands defense. Consider TrafficSchool, where the Ninth Circuit reversed the district court’s finding that the plaintiff had unclean hands. True, the TrafficSchool court noted that “[its] review of the record reveal[ed] no evidence of actual deception caused by plaintiff’s [false] advertising.” 653 F.3d at 834. But the court did not state that such evidence was always necessary to establish unclean hands. Indeed, the facts of that case were rather unusual: the plaintiff’s allegedly unclean conduct consisted largely of registering—but never actually using—certain domain names. As the TrafficSchool court observed, “[m]erely registering a domain name” cannot constitute unclean hands because “[u]ntil a domain name is associated with a server that hosts a website, it’s not visible to consumers and thus can’t possibly confuse them.” Id. at 833-34. TrafficSchool, therefore, could fairly be read as holding that conduct cannot cause unclean hands if it is harmless by its very nature. That is a far cry from holding that a defendant asserting unclean hands bears the burden of proving that the plaintiff’s conduct caused actual harm.
The dissent also cited Jarrow, where the Ninth Circuit said that “[i]n a Lanham Act false advertising suit, a plaintiff cannot ordinarily show unclean hands … simply by alleging that the defendant made claims knowing that they were false.” 304 F.3d at 841. But read in context, this statement doesn’t suggest an “actual harm” element either. For starters, it’s phrased as a general observation, not an ironclad requirement. More importantly, the extra element that the Jarrow court said was required to “show unclean hands” was not demonstrated injury. Rather, it was a demonstration “that the [allegedly unclean party] acted with a fraudulent intent in making the challenged claims.” Id. at 842 (emphasis added). So while Jarrow might support a requirement of wrongful intent on the part of the plaintiff, it doesn’t obviously support a requirement of proven harm.
Stepping back, the majority’s approach is more consistent with what the Supreme Court has said about the unclean hands defense and with the defense’s equitable pedigree. Since the days of Chancery, the essential nature of equity—in contrast to law—has been its flexibility. Thus, in applying the unclean hands doctrine, a court of equity “is not bound by formula or restrained by any limitation that tends to trammel the free and just exercise of discretion.” Precision Instrument, 324 U.S. at 815 (emphasis added). Since there is no hard-and-fast formula, the Supreme Court has explained, “[a]ny willful act concerning the cause of action which rightfully can be said to transgress equitable standards of conduct is sufficient cause for the invocation of the maxim.” Id. (emphasis added).
At the same time, the “invocation” of the maxim doesn’t mean that it will ultimately carry the day. As the Supreme Court has explained, the “ultimate decision” whether to bar the plaintiff’s claims requires the court to strike “an equitable balance” as to what would best advance “the interests of right and justice.” Republic Molding Corp. v. B. W. Photo Utils., 319 F.2d 347, 349-350 (9th Cir. 1963) (citing Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240, 245 (1933)); see also Pom Wonderful, 166 F. Supp. 3d at 1092. Depending on the facts of a particular case, the extent of any demonstrated harm caused by the plaintiff’s unclean conduct may be “highly relevant” to that overall equitable balancing. Republic Molding, 319 F.2d at 349-50. On the other hand, the plaintiff’s fraudulent intent may be so clear, or the nexus between the plaintiff’s unclean conduct and its underlying claims so close, or the merit of the plaintiff’s underlying claims so weak, that the actual harm caused by the plaintiff’s unclean conduct recedes in importance.
Requiring a showing of actual injury as an inflexible precondition to an unclean hands defense would seem to “trammel the [court’s] free and just exercise of discretion” in a manner inconsistent with traditional equity practice and the Supreme Court’s instructions. Indeed, such a rule would allow even a plaintiff who made egregiously false statements, and who acted with egregiously fraudulent intent, to receive relief from a court of equity, simply because his fraudulent designs were unsuccessful (or because the defendant failed to prove that they succeeded)—a result at odds with “the historical concept of the court of equity as a vehicle for affirmatively enforcing the requirements of conscience and good faith.” Precision Instrument, 324 U.S. at 814 (citing Bein v. Heath, 47 U.S. 228, 247 (1848)) (emphasis added).
As an unpublished decision by a divided panel, Certified Nutraceuticals may not be the Ninth Circuit’s last word on the application of unclean hands in false advertising cases. Still, as that court’s most recent pronouncement on the subject, it is likely to be influential on district courts within that Circuit and perhaps elsewhere. At least for now, defendants faced with Lanham Act false advertising claims in the Ninth Circuit should not have to prove that the plaintiff’s inequitable conduct caused actual harm to the defendant or the public as a prerequisite to asserting an unclean hands defense. However, plaintiffs accused of having unclean hands may cite the harmlessness of their allegedly inequitable conduct—or the defendant’s failure to prove such harm—as a “relevant consideration” in the overall equitable calculus. The ultimate result should turn on the totality of the facts and equities in each individual case.