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Xlear, Inc. v. Focus Nutrition, LLC

United States Court of Appeals, Tenth Circuit

June 26, 2018

XLEAR, INC., a Utah corporation, Plaintiff - Appellant,
v.
FOCUS NUTRITION, LLC, a Utah limited liability company, Defendant-Appellee.

          Appeal from the United States District Court for the District of Utah (D.C. No. 2:16-CV-00643-DB)

          Timothy B. Smith (Kenneth A. Okazaki and Taryn N. Evans with him on the briefs), Jones Waldo Holbrook & McDonough, P.C., Salt Lake City, Utah, for Plaintiff -Appellant.

          Matthew A. Steward (Shannon K. Zollinger with him on the brief), Clyde Snow & Sessions, P.C., Salt Lake City, Utah, for Defendant - Appellee.

          Before MATHESON, McHUGH, and EID, Circuit Judges.

          MCHUGH, CIRCUIT JUDGE

         Xlear, Inc. and Focus Nutrition, LLC are both in the business of selling sweeteners that use the sugar alcohol xylitol. Xlear filed a complaint raising a trade dress infringement claim under the Lanham Act, a claim under the Utah Truth in Advertising Act (UTIAA), and a claim under the common law for unfair competition. The claims all alleged that Focus Nutrition copied the packaging Xlear used for one of its sweetener products. Focus Nutrition moved to dismiss Xlear's Lanham Act claim. At a hearing on Focus Nutrition's motion to dismiss, the district court judge made several comments questioning the validity of Xlear's Lanham Act claim but, ultimately, denied the motion. Following the hearing, the parties, pursuant to Federal Rule of Civil Procedure 41(a)(1)(A)(ii), stipulated to the dismissal of all claims with prejudice. Under the stipulation, the parties reserved the right to seek attorneys' fees and Focus Nutrition exercised its right by filing a motion under Federal Rule of Civil Procedure 54 to recover its fees under the Lanham Act and the UTIAA. The district court concluded that Focus Nutrition was a prevailing party under both the Lanham Act and the UTIAA, and that Focus Nutrition was entitled to all of its requested fees.

         On appeal, Xlear raises five challenges to the district court's order. We reverse the district court's award of attorneys' fees under the Lanham Act because Focus Nutrition is not a prevailing party under federal law. As to the UTIAA, we vacate the district court's award of attorneys' fees and remand for further proceedings to permit the district court to analyze the factors governing prevailing party status under Utah law and, if the court concludes Focus Nutrition is a prevailing party under the UTIAA, to determine what portion of the requested fees Focus Nutrition incurred in defense of the UTIAA claim and the reasonableness of the requested fees.

          I. BACKGROUND

         Xlear and Focus Nutrition both sell sweeteners containing the sugar alcohol xylitol. According to Xlear's complaint, several former employees of Xlear work for Focus Nutrition. Xlear further alleged that when Focus Nutrition struggled to sell its sweetener in a blue box, Focus Nutrition changed its packaging to resemble the packaging used by Xlear. The three-count complaint filed by Xlear alleged (1) trade dress infringement under the Lanham Act, 15 U.S.C. § 1125(a); (2) a violation of the UTIAA, Utah Code Ann. § 13-11a-3; and (3) common law unfair competition. Focus Nutrition filed an answer to the complaint, defending the action on the grounds that Xlear's packaging and trade dress were not distinctive and that Focus Nutrition's packaging was not likely to confuse consumers. Focus Nutrition also raised a counterclaim, in which it sought a "declaratory judgment of non-infringement and unenforceability" relative to whether Xlear's packaging constituted a protectable trade dress. App'x at 45-46.

         Focus Nutrition moved, under Federal Rule of Civil Procedure 12(c), to dismiss Xlear's Lanham Act claim on the pleadings. Focus Nutrition's Rule 12(c) motion, however, did not seek dismissal of Xlear's UTIAA claim or Xlear's common law unfair competition claim. The district court convened a hearing on the Rule 12(c) motion. By the hearing date, Xlear had not conducted any discovery or submitted any initial disclosures required by Federal Rule of Civil Procedure 26(a)(1). At the hearing, Focus Nutrition presented the district court with the packaging used by several of Focus Nutrition's and Xlear's competitors. Viewing the display, the district court judge expressed skepticism about the validity of Xlear's allegations and Xlear's ability to produce evidence in support of its Lanham Act claim. Relevant to Focus Nutrition's argument for recovering its attorneys' fees, the district court judge made three statements:

• "I have had dozens of trade dress cases through the years . . . it just seems as weak a case as I can imagine from a company that is upset that some former employees went out and did exactly what it seems like a lot of other companies are doing with this same Xylitol product and artificial sweeteners." Id. at 107.

• "[I]t wouldn't be hard for me today to say that no reasonable jury is going to find trade dress infringement based on the allegations . . . and a lack of facts on your side, and that is why I asked what you're planning to do in discovery." Id. at 109.

• "It is a little hard to believe that there are facts to support [the allegation that customers associate specific packaging with Xlear's products] when we just look at this display [of all the sweetener companies' packaging] here on the table." Id. at 110.

         Ultimately, however, the Rule 12(c) nature of the proceeding compelled the district court to focus on the pleadings and deny the motion.

         Following the hearing, the parties engaged in settlement discussions, which culminated in a stipulation of dismissal pursuant to Federal Rule of Civil Procedure 41(a)(1)(A)(ii).[1] Under the stipulation of dismissal, all three of Xlear's claims, as well as Focus Nutrition's counterclaim, were dismissed with prejudice but the parties reserved the right to seek attorneys' fees. In accord with the stipulation of dismissal, the Clerk of Court terminated the case.

         Within fourteen days of the entry of the stipulation of dismissal, Focus Nutrition filed a Federal Rule of Civil Procedure 54 motion seeking $26, 674 in attorneys' fees. In its Rule 54 motion, Focus Nutrition argued that it was entitled to recover its attorneys' fees under both the Lanham Act and the UTIAA. Focus Nutrition supported the reasonableness of the requested attorneys' fees through an affidavit from lead counsel and a one-page billing record. The affidavit summarized the parties' conduct during the litigation, provided information about Focus Nutrition's attorneys' hourly rates and experience, and identified six broad tasks performed by counsel during the litigation. The billing record provided a month-by-month accounting of the requested attorneys' fees but did not indicate how much time counsel spent on a given task and did not separate the requested fees by claim- i.e., how much was attributable to the defense of the Lanham Act claim, the defense of the UTIAA claim, the defense of the common law unfair competition claim, or the pursuit of the counterclaim. In response to the Rule 54 motion, Xlear argued, in part, that Focus Nutrition was not a prevailing party under either the Lanham Act or the UTIAA and that Focus Nutrition failed to submit sufficient evidence to permit the district court to assess the reasonableness of the requested fees. In reply, Focus Nutrition did not provide any additional evidence in support of the requested fees; instead, it argued that the affidavit and one-page billing record were sufficient to permit the court to assess the reasonableness of the requested fees.

         The district court commenced its analysis of Focus Nutrition's Rule 54 motion by finding that Xlear (1) filed a cursory complaint; (2) failed to provide initial disclosures as required by Federal Rule of Civil Procedure 26; (3) did not "conduct, respond to, or participate in any discovery to support its claims"; and (4) stipulated to the dismissal with prejudice after the fact discovery deadline and on the eve of Focus Nutrition filing a motion for summary judgment. Id. at 149-50. Relevant to our resolution of this appeal, the district court concluded that Focus Nutrition was a prevailing party under both the Lanham Act and the UTIAA. Without discussing Xlear's argument about the sufficiency of the evidence submitted by Focus Nutrition in support of the requested fees and without stating any findings relative to the reasonableness of the requested fees, the district court awarded Focus Nutrition all of its requested fees.

         Xlear appeals the district court's award of attorneys' fees. On appeal, Xlear's arguments include: (1) a stipulation of dismissal pursuant to Rule 41(a)(1)(A)(ii) does not produce a judgment for purposes of a Rule 54 motion; (2) Focus Nutrition was not a prevailing party for purposes of the Lanham Act; (3) the district court did not consider the factors governing the prevailing party analysis under Utah law for purposes of awarding fees under the UTIAA; (4) even if Focus Nutrition was a prevailing party under the UTIAA, Focus Nutrition would be entitled to recover only fees related to the UTIAA claim and not the Lanham Act claim, the common law unfair competition claim, or the counterclaim; and (5) Focus Nutrition did not submit sufficient evidence to permit the district court to determine the reasonableness of the requested fees. In response, Focus Nutrition defends the merits of the district court's award of attorneys' fees and argues that Xlear did not preserve its argument that a Rule 41(a)(1)(A)(ii) stipulation of dismissal does not produce a judgment for purposes of a Rule 54 motion. After stating the standard of review, we address each of the above identified arguments.

         II. STANDARD OF REVIEW

         Generally speaking, "[w]e review the decision to award attorney fees, and the amount awarded, for abuse of discretion." United Phosphorus, Ltd. v. Midland Fumigant, Inc., 205 F.3d 1219, 1232 (10th Cir. 2000). "An abuse of discretion has been characterized as an arbitrary, capricious, whimsical, or manifestly unreasonable judgment." Mid-Continent Cas. Co. v. Vill. at Deer Creek Homeowners Ass'n, Inc., 685 F.3d 977, 981 (10th Cir. 2012) (internal quotation marks omitted). A district court abuses its discretion if it commits legal error, relies on clearly erroneous factual findings, or issues a ruling without any rational evidentiary basis. Dullmaier v. Xanterra Parks & Resorts, 883 F.3d 1278, 1295 (10th Cir. 2018). Further, although a district court possesses broad discretion to award attorneys' fees, "[i]t remains important . . . for the district court to provide a concise but clear explanation of its reasons for the fee award." Mares v. Credit Bureau of Raton, 801 F.2d 1197, 1201 (10th Cir. 1986) (quoting Hensley v. Eckerhart, 461 U.S. 424, 437 (1983)). "Such explanations must give us an adequate basis for review. And, in reaching their determinations district courts must follow the guidelines established by the Supreme Court and this court." Id. (internal quotation marks and citation omitted).

         Although the overarching standard of review is for an abuse of discretion, "[w]e review the statutory interpretation or legal analysis that formed the basis of the award de novo." Malloy v. Monahan, 73 F.3d 1012, 1017 (10th Cir. 1996). Whether a litigant is a "prevailing party" is a legal question we review de novo. Lorillard Tobacco Co. v. Engida, 611 F.3d 1209, 1214 (10th Cir. 2010). Finally, although this appeal involves the review of an award of attorneys' fees under state law, the standard of review under which we review an award of fees is a procedural matter controlled by federal precedent. See id. at 1213 ("In reviewing state law awards of attorney's fees, . . . it has been our consistent practice to look to our own precedent on this purely procedural issue-viz., the applicable standard of review.").

         III. DISCUSSION

         A. Does a Fed.R.Civ.P. 41(a)(1)(A)(ii) Stipulation of Dismissal Produce a Judgment for Purposes of a Fed.R.Civ.P. 54 Motion?

         A motion for attorneys' fees pursuant to Federal Rule of ...


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