Legal Theories

 

A. The Lanham Act’s disgorgement remedy.

The Grove Fresh litigation started on February 10, 1989, when Grove Fresh filed five separate lawsuits alleging that the defendants competed unfairly by making and selling adulterated orange juice products falsely labeled as 100% pure. The complaints were filed by Jeffrey Hines, a Maryland lawyer.  Local counsel was Robert Langendorf. The captions of the five lawsuits, and the judges assigned to the cases, were as follows:

In each of the five cases, Grove Fresh’s primary claim for relief was under Section 43(a) of the Lanham Act, which creates a cause of action for any business injured by “any false or misleading description of fact, or any false or misleading representation of fact” regarding goods sold in interstate commerce. 15 U.S.C. §1125.

A plaintiff who proves that the defendant’s products are misbranded has two alternative measures of damages: the plaintiff’s lost profits, or the illegal profits the defendant realized from sales of the misbranded goods. 15 U.S.C. §1117(a) 

If the plaintiff opts to seek an award of the defendant’s illegal profits, the burden of proof on damages is simple: the plaintiff need only prove the gross sales of the misbranded products.  The burden would then shift to the defendant to “prove all elements of cost or deduction claimed.” 15 U.S.C. §1117(a)(3). If the plaintiff carries its burden of persuasion on the issue of liability, it is awarded damages in an amount equal to the difference between: (a) the defendant’s gross sales, and (b) the defendant’s direct costs.

In all five cases filed by Hines, Grove Fresh gave notice that it was seeking to recover the defendants’ illegal profits.

(Olympic Gold went out of business while the Grove Fresh litigation was pending; it settled Grove Fresh’s claims in or about 1991 for a nominal amount.  The 89c1118 defendants did not participate in the wrongdoing described in these narratives.  Accordingly, the 89c1118 case is not discussed in any detail.)

1. The burden-shifting effect of the Brause Reports.

Attached to each of the February 1989 complaints were reports from an expert chemist, Dr. Alan Brause (“the Brause Reports”). In the months preceding the filing of the February 1989 complaints, Dr. Brause had tested samples of orange juice products distributed by six of Grove Fresh’s competitors.  The tests showed that five of the competitors’ products were “dirty,” which is industry argot for juice adulterated with illegal ingredients.  Grove Fresh sued each of the “dirty” competitors. 

The Brause Reports were prima facie evidence that at trial, Grove Fresh could meet its burden of going forward with proof that the defendants had made and sold misbranded orange juice.  If Grove Fresh presented evidence that it had lost business to the defendants’ misbranded products, then, by operation of 15 U.S.C. §1117(a)(3), the burden of proof would shift to each defendant to establish the actual costs of each ingredient in its adulterated product.

For purposes of pretrial discovery, the Brause Reports established that Grove Fresh had a good-faith basis for seeking discovery of all aspects of the defendants’ manufacturing practices, including the identity and cost of the ingredients in their misbranded products. 

2. Grove Fresh’s proof.

The elements of Grove Fresh’s burden of proof, and the sources of proof for each element, were as follows:

Proof that the defendant sold misbranded goods.  Grove Fresh could prove this element through testimony by Dr. Brause regarding the samples he had tested of each defendant’s orange juice. He offered such testimony in the May 1991 jury trial in 89c1115. His testimony persuaded that jury to return a verdict for Grove Fresh on the issue of liability. See Grove Fresh Distributors, Inc. v. New England Apple Products Co., 969 F.2d 552, 554-55 (7th Cir. 1992).

Proof that Grove Fresh was harmed.  Grove Fresh could prove this element through the testimony of Mr. Troy and the route drivers testifying about customers who, citing lower prices, switched from Grove Fresh’s pure orange juice to the defendants’ misbranded products.

Troy and the drivers offered such testimony in the May 1991 trial in 89c1115. Their testimony persuaded the jury to award Grove Fresh $100,000 in damages. The 89c1115 defendants challenged the sufficiency of that evidence on appeal, but Seventh Circuit held that the testimony by Troy and the drivers satisfied Grove Fresh’s burden of proof on injury. 969 F.2d at 556-58.

Proof of the gross sales of the defendant’s misbranded products.  This proof would come from the defendants’ own books and records.

The burden would then shift to the defendant to “prove all elements of cost or deduction claimed.” 15 U.S.C. §1117(a)(3).  If Grove Fresh carried its burden of persuasion on the issue of liability (elements 1 and 2, above), it would be awarded damages in an amount equal to the difference between: (a) the defendant’s gross sales, and (b) the defendant’s direct costs.

3. The straightforward discovery.

The pretrial discovery that Grove Fresh would need to support a disgorgement remedy was simple and straightforward.  First, Grove Fresh would ask for the gross sales, during the relevant period of time, of all products labeled as “100% pure orange juice from concentrate.”

Second, Grove Fresh would ask for the recipes used to make all products labeled as “100% pure orange juice from concentrate.”   If the recipes for these products listed ingredients other than the four authorized by the standard of identity[1]—FCOJ, water, orange oil, and orange pulp—then the defendants’ own business records (i.e., their recipes) would establish their liability under the Lanham Act.

Third, Grove Fresh would ask for vendor records regarding all of the unlawful ingredients listed in the unlawful recipes. 

B. Continuous tort doctrine. 

The Lanham Act has no specific statute of limitations, so the most appropriate state time limitation applies.  Wilson v. Garcia, 471 U.S. 261 (1985).  The Illinois Consumer Fraud and Deceptive Practices Act fixes a three-year limitations period for unfair competition claims.  815 ILCS 505/10a(e).

However, if a defendant has engaged in a continuous course of wrongful conduct, the limitations period does not begin to run until the conduct has halted. Taylor v. Meirck, 712 F.2d 1112, 1118 (7th Cir. 1983) (affirming “the general principle that the statute of limitations does not begin to run on a continuing wrong till the wrong is over and done with.”)

Thus, an Illinois plaintiff alleging an ongoing scheme of unfair competition has three years from the date of the final unfair act to bring suit.  If a plaintiff files suit within three years of that act, the plaintiff can recover damages dating back to the first act of unfair competition, no matter how long ago that first act occurred.

In a Memorandum Opinion [link to Zagel ruling on statute of limitations] dated December 13, 1990, Judge Zagel affirmed Grove Fresh’s right to invoke the continuous tort doctrine against competitors who made or sold adulterated orange juice.

C. Civil conspiracy.

 “Civil conspiracy” is Illinois’s nomenclature for the joint and several liability of intentional tortfeasors; it describes “two or more persons who combine for the purpose of accomplishing by concerted action either a lawful purpose by unlawful means or an unlawful purpose by lawful means.” M. Polelle & B. Ottley, Illinois Tort Law 389 (1985)

D. The negligible impact of legitimate claims of evidentiary privileges on Grove Fresh’s right to discover facts at the core of its claims. 

If Grove Fresh’s pretrial discovery yielded evidence corroborating its allegations, that evidence would support criminal charges against the corporate defendants and against the officers, directors, and employees responsible for the adulteration.  If brought, the criminal charges underlying Grove Fresh’s claims would send individuals to jail, ruin the corporate defendants’ reputations, and wreck their finances.

When defending against claims with such potentially devastating consequences, lawyers can invoke any of three evidentiary privileges to withhold damaging information from discovery—the attorney-client privilege, the fifth amendment privilege against self-incrimination, and the attorney’s qualified privilege to keep his work product confidential. 

Properly invoked, these privileges posed no obstacle to Grove Fresh’s preparations for trial:  the privileges had no application to the historical facts at the core of Grove Fresh’s discovery efforts. 

1. The non-privileged information at the core of Grove Fresh’s case. 

To prove its claims, and to present them persuasively, Grove Fresh needed to obtain the following information from each set of defendants during pre-trial discovery:

  1. The names of the officers, directors, and employees at each corporate defendant who had knowledge of the corporation’s illegal practices.
  2. The formula(s) that each corporate defendant used to make its adulterated and misbranded products.
  3. The gross sales of the adulterated and misbranded products.
  4. The identity of the undeclared ingredients in the adulterated and misbranded products.
  5.  The identity of the vendors who supplied the undeclared ingredients.
  6. With respect to 89c1113 and 89c1114, the particulars of prior complaints of adulteration and misbranding that had been brought to the attention of Labatt. 

In November/December 1989, Grove Fresh served interrogatories, document requests, and deposition notices that, if answered in accordance with FRCP 33, 34, and 30(b)6), would have elicited all of this information.

2. The attorney-client privilege protects communications, not facts. 

When a corporation is sued in federal court, the corporation’s lawyer must necessarily interview officers, directors, and employees who have information relevant to the defense.  These communications are protected by the attorney-client privilege so long as the “communications concerned matters within the scope of the employees' corporate duties, and the employees themselves were sufficiently aware that they were being questioned in order that the corporation could obtain legal advice.” See discussion in Procedural History.

As Professor Lilly has pointed out, however, the attorney-client privilege protects only communications, not facts.[2]  So long as discovery requests are framed to elicit historical facts, and not the substance of communications with defense counsel, the privilege is not a bar to discovery. 

Consider, for example, Bruno Moser, the quality control manager at Everfresh; he supervised the mixing of Everfresh’s adulterated orange juice.  If Moser were to testify in a deposition or at trial he could not properly be asked, “What did you tell McDermott Will & Emery about the formulas you used to make adulterated orange juice?”  He could be asked:  “What formulas did you use to make adulterated orange juice?” 

Similarly, if a McDermott Will & Emery lawyer were to testify at a deposition or at trial, he could not properly be asked: “What did Moser tell you about Everfresh’s formulas for adulterating orange juice?”  On the other hand, when preparing Everfresh’s answer to an interrogatory asking Everfresh to “describe the formula used to manufacture the adulterated orange juice,” McDermott Will & Emery would be obliged to include in the answer the information he obtained during his interview with Moser. (Grove Fresh served Everfresh with such an interrogatory on December 1, 1989.)

In sum, the attorney-client privilege does not immunize historical facts from discovery.  The defendants in the Grove Fresh litigation could not invoke the privilege to shield discovery of their formulas, their sales, or any of the other historical facts at the core of Grove Fresh’s case. 

3. The corporate defendants had no fifth amendment rights.

Corporations have no fifth amendment privilege against self-incrimination. Hale v. Henkel, 201 U.S. 43 (1906).  The corporate defendants in the Grove Fresh litigation had no choice but to answer Grove Fresh’s pleadings and discovery requests, even if their answers would be incriminating. 

4. The adverse inference that may be drawn against a party connected to a fifth amendment witness.

In civil cases, individual litigants and witnesses can invoke their fifth amendment privilege against self-incrimination if they have a legitimate fear that the information they have may, if disclosed, lead to criminal charges.  Thus, the individual defendants in the Grove Fresh litigation could refuse to answer Grove Fresh’s complaints or respond to its discovery requests.  They could also refuse to testify at depositions, as could non-party witnesses. 

Unlike the situation in a criminal case, however, where a defendant cannot be punished for exercising his right to silence,[3] invoking the fifth amendment in a civil case has a price: When an individual who is a party to a civil case invokes his or her fifth amendment privilege and remains silent, the trier of fact is permitted to draw an adverse inference against that party. Baxter v. Palmigiano, 425 U.S. 308 (1976).

When the witness invoking the Fifth Amendment privilege is a non-party, the trier of fact may nevertheless draw an adverse inference against a party closely connected to that witness.  For example, when the witness is a current or former employee, and the subject matter of the lawsuit relates to the current or former employee’s duties and responsibilities, an adverse inference may be drawn against the witness’s employer. RAD Services, Inc. v. Aetna Casualty & Surety Co., 808 F.2d 271, 275 (3rd Cir. 1986 (current employees); Brink’s Inc. v. City of New York, 717 F.2d 700 (2d Cir. 1983) (former employees).

5. No fifth amendment privilege for business records.

Because a corporation has no fifth amendment privilege against self-incrimination, the privilege has no application to the production of documents by a corporation.  It has only limited application to the production of documents by culpable individuals.

An individual cannot invoke the privilege to resist production of preexisting materials that are incriminatory in content, such as business records showing the formulas used to make adulterated orange juice.  However, under the so-called “act-of-production doctrine,”[4] an individual who possesses incriminating documents can invoke the fifth amendment to resist production, but only if the very act of producing the documents has a testimonial aspect that is incriminating in itself.[5]

The originals of the business records at the core of Grove Fresh’s claims were in the possession of the corporate defendants, not in the hands of any individual defendant or witness.  Consequently, the fifth amendment privilege did not shield those records from discovery. 

6. The limited effect of the work product doctrine.

Rule 11 required defense counsel to investigate the allegations in Grove Fresh’s complaints.  The written results of those investigations were protected by the work product privilege. Hickman v. Taylor, 329 U.S. 495 (1947).  As was the case with the attorney-client privilege, however, the work product privilege did not protect the historical facts uncovered during the investigations. 

7. A note regarding the common interest privilege. 

The "common interest" privilege enables counsel for clients with a common interest to exchange privileged communications and attorney work product in order to adequately prepare a defense without waiving either privilege.[6]  The privilege encompasses notes and memoranda of statements made at meetings among counsel and their clients with a common interest, as well as the statements themselves. In re Grand Jury Subpoena, 406 F. Supp. 381, 384-94 (S.D.N.Y. 1975).

The rationale for the common interest privilege is an extension of the rationale for the attorney-client privilege:

Whether an action is ongoing or contemplated, whether the jointly interested persons are defendants or plaintiffs, and whether the litigation or potential litigation is civil or criminal, the rationale for the joint defense rule remains unchanged: persons who share a common interest in litigation should be able to communicate with their respective attorneys and with each other to more effectively prosecute or defend their claims.

In re Grand Jury Subpoenas, 89-3 and 89-4, John Doe 89-129, 902 F.2d 244, 249 (4th Cir. 1990).

8. A note on who, in a corporate setting, controls the right to waive the attorney-client privilege. 

Here are the basic rules on who controls the attorney-client privilege (a) when a single corporation is the client, (b) when multiple corporations are represented jointly, and (c) when multiple defendants represented by separate counsel pool their resources. 

a. Publicly- or widely-held corporation.

When a lawyer represents a publicly-held corporation, or a private corporation with numerous shareholders, the attorney-client privilege may apply to communications between the lawyer and a vast range of persons currently or formerly employed there.  However, the privilege is for the exclusive benefit of the corporate entity, not for the benefit of any corporate constituent interviewed by the lawyer. C. Wolfram, Modern Legal Ethics 421(1986) [“Modern Legal Ethics”]. The corporation controls the privilege and may waive it, usually through its board of directors.

An officer or employee or other constituent who has provided information to the corporate lawyer has no standing to object to the corporation’s decision to waive the privilege, even if the waiver will disclose incriminating statements by the constituent. Modern Legal Ethics 287, 422.

Application to the Grove Fresh litigation:  Labatt and its subsidiaries (Holiday Juice since 1983 and Everfresh since 1986) were the only publicly-held entities in the Grove Fresh litigation.  The officers and employees whom McDermott Will & Emery interviewed in the course of the litigation had no legally cognizable expectation that their communications with the law firm were confidential. Modern Legal Ethics 422.

b. Closely-held corporation.

“When corporate stock is concentrated into fewer and fewer hands, the distinction between corporate entity and shareholders begins to blur.  In the case of a sole-owner corporation, they may merge.” Modern Legal Ethics 422.  Some courts have held that “for conflict of interest purposes a small and closely-held corporation and its stockholders are to be treated as virtually identical and inseparable.”[7]

Application to the Grove Fresh litigation:  American Citrus was solely-owned by Lang, so Burditt Bowles & Radzius could treat the corporation and Lang as virtually identical and inseparable. 

Flavor Fresh was also closely-held, by Marshall and Benton, so a single lawyer could represent the corporate entity and the two shareholders simultaneously without jeopardizing anyone’s expectations of confidentiality. 

c. Joint representation.

When a lawyer represents more than one client in a matter of common interest, “t]he rule in such situations protects the statements of both the clients and the lawyer, and allows any of the clients to invoke the privilege against outsiders.  The privilege is lost, however, in subsequent disputes between the clients themselves.” G. Lily, An Introduction to the Law of Evidence 411 (2d ed. 1986) [emphasis in original].  See also Proposed Fed. R. Evid. 503(d)(5).

Application to the Grove Fresh litigation:  McDermott Will & Emery jointly represented four defendants—Everfresh, Powell (Everfresh’s president), Flavor Fresh, and Benton (Flavor Fresh’s president).  Because Flavor Fresh was closely-held by Marshall and Benton, Marshall, though not a named defendant, shared control of the corporation’s attorney-client privilege with Benton.  Both Benton and Marshall had an expectation that their communications with McDermott Will & Emery were protected by the attorney-client privilege. 

Burditt Bowles & Radzius jointly represented four defendants as well—American Citrus, Lang, Flavor Fresh, and Benton.  For the reasons just stated, Marshall, though not a named defendant, had an expectation that his communications with Burditt Bowles & Radzius were protected by the attorney-client privilege. 

d. Common interest privilege. 

The privilege can be invoked by any one of the clients whose attorneys participated in the communications protected by the privilege. See Westinghouse Electric Corp. v. Kerr-McGee Corp., 580 F.2d 1311, 1319 (7th Cir. 1978) (defense attorney breaches fiduciary duty if he uses information obtained in a joint defense meeting).   

[1] A standard of identity is the recipe that establishes the criteria that must be met before a food can be labeled in a certain way.  The standard of identity for orange juice from concentrate is codified at 21 C.F.R. §146.145.

[2] Professor Lilly puts it this way: “It is important to remember that only the confidential communication itself is protected, not the events that are its subject matter.  Thus, while the privilege prevents the client from being asked what he told his lawyer about a given matter, the client can properly be asked, in a deposition or at trial, what he knows about the matter.  The privilege simply allows the client to communicate with his lawyer without the fear that his communication will be used adversely against him.” G. Lilly, An Introduction to the Law of Evidence 399 (2d ed. 1987) [emphasis in the original].

[3] Griffin v. California, 380 U.S. 609 (1965) (declaring unconstitutional a state law allowing the prosecutor to ask the jury to draw an inference of guilt from the defendant's refusal to testify in his own defense).

[4] The act of production doctrine was developed in a trilogy of cases—Couch v. United States, 409 U.S. 322 (1973); Fisher v. United States 425 U.S. 391 (1976); and Andresen v. Maryland, 427 U.S. 463 (1976). 

[5] Producing documents or materials may have an incriminating testimonial aspect if the act of production provides information about the (1) existence; (2) custody; or (3) authenticity, of the incriminating documents or materials sought to be produced.  Webster v. United States, 530 U.S. 27 (2000). 

[6] See Walter v. Financial Corp. of America, 828 F.2d 579, 583 n.7 (9th Cir. 1987) ("communications by a client to his own lawyer remain privileged when the lawyer subsequently shares them with codefendants for purposes of a common defense") (quoting United States v. McPartlin, 595 F.2d 1321, 1326 (7th Cir. 1979), cert. denied, 444 U.S. 833 (1979)); In re Grand Jury Subpoena Duces Tecum Dated Nov. 16, 1974, 406 F. Supp. 38l, 389 (S.D.N.Y. 1975) (“the attorney-client privilege covers communications to a prospective or actual co-defendant's attorney when those communications are engendered solely in the interests of a joint defense effort”).

[7] Modern Legal Ethics 422, citing In re Brownstein, 288 Or. 83, 602 P.2d 655, 656-67 (1979); In re Banks, 283 Or. 459, 584 P.2d 284, modified 284 Or. 691, 588 P.2d 34, 1 A.L.R.4th 1105 (1978).  See also Rosman v. Shapiro, 653 F. Supp. 1441 (S.D.N.Y. 1987); D.C. Bar Ethics Opinion 216 (1991).