Fair Wind Sailing Inc v. H. Dempster

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_____________

Nos. 13-3305 & 14-1572

_____________

FAIR WIND SAILING, INC.,

Appellant

v.

H. SCOTT DEMPSTER, Individually and Doing Business as

VIRGIN ISLANDS SAILING SCHOOL and VIRGIN

ISLANDS SAILING SCHOOL

____________

On Appeal from the District Court of the Virgin Islands

(D.C. No. 11-cv-00055)

District Judge: Honorable Curtis V. Gómez

____________

Argued: May 13, 2014

Before: RENDELL, FUENTES, and GREENAWAY, JR.,

Circuit Judges

(Filed: September 4, 2014)

____________

Michael C. Quinn, Esq.

Stefan B. Herpel, Esq. [ARGUED]

Gregory H. Hodges, Esq.

Dudley, Topper and Feuerzeig, LLP

P.O. Box 756

St. Thomas, VI 00804-0756

Attorneys for Appellant

Ravinder S. Nagi, Esq.

Lisa Michelle Kömives, Esq. [ARGUED]

BoltNagi PC

5600 Royal Dane Mall, Suite 21

St. Thomas, VI 00802

Attorneys for Appellees

________________________

OPINION

________________________

FUENTES, Circuit Judge:

Fair Wind Sailing, Inc. brought this action against

Virgin Island Sailing School (“VISS”) and its co-founder

Scott Dempster, alleging, in relevant part, that Defendants

infringed upon Fair Wind’s “trade dress” in violation of the

Lanham Act, 15 U.S.C. § 1051 et seq., and unjustly enriched

themselves by copying Fair Wind’s business. The District

Court dismissed Fair Wind’s trade dress and unjust

enrichment claims, and subsequently awarded Defendants

fees under Virgin Islands law. Fair Wind challenges both the

dismissal of its claims and the award of attorneys’ fees.

2

The District Court properly concluded that Fair Wind

failed to state claims for trade dress infringement and unjust

enrichment. As to the former claim, Fair Wind has failed to

adequately explain what “dress” it seeks to protect, and its

trade dress, as pleaded, is functional in nature. As to the latter

claim, Fair Wind has not pleaded with sufficient particularity

in what manner Defendants have been unjustly enriched. We

therefore affirm the dismissal of both claims.

However, we agree with Fair Wind that the District

Court improperly awarded fees for the entirety of the

litigation under Virgin Islands law. While it would have been

appropriate for the District Court to award reasonable fees

accrued defending the territorial law claims, an award for the

portion of the fees accrued defending the Lanham Act claim

was appropriate only to the extent that this was an

“exceptional” case. 15 U.S.C. § 1117(a). The District Court

did not decide whether this case was an “exceptional” one.

We therefore remand the fee dispute for further proceedings.

In the wake of new Supreme Court precedent, we take this

opportunity to amend our recently-abrogated jurisprudence on

the standard for finding “exceptionality” under § 35(a) of the

Lanham Act.

I.

A.

The complaint alleges the following facts, which we

assume to be true and construe in the light most favorable to

the plaintiff. See Ashcroft v. Iqbal, 556 U.S. 662, 678-80

(2009).

3

Fair Wind is a Michigan corporation that owns sailing

schools throughout the United States, including one in St.

Thomas, Virgin Islands. The St. Thomas school exclusively

uses catamarans. 1

In July 2007, Fair Wind hired Larry Bouffard as a

captain and sailing instructor for its St. Thomas school.

Bouffard entered into a contract with Fair Wind, which

contained a provision precluding Bouffard from joining a Fair

Wind competitor within 20 miles of the St. Thomas school for

two years after the end of his employment with Fair Wind. A

popular instructor, Bouffard stayed with Fair Wind for over

three years.

In June 2010, Bouffard introduced Dempster to Fair

Wind as a potential instructor and captain. Relying on

Bouffard’s assurance that Dempster was qualified for the

post, Fair Wind hired Dempster for a probationary two-week

period. Fair Wind was dissatisfied with Dempster’s

performance, and declined to retain Dempster at the end of

those two weeks.

Shortly after Fair Wind terminated Dempster, Bouffard

resigned. At or about this time, however, Dempster and

Bouffard decided to open a sailing school together in St.

Thomas. By the following winter, Dempster and Bouffard’s

1

For our landlocked readers, a catamaran is a boat “with twin

hulls and usually a deck or superstructure connecting the

hulls.” Catamaran Definition, Merriam-Webster.com,

http://www.merriam-webster.com/dictionary/catamaran (last

visited July 9, 2014).

4

school, VISS, was up and running, in direct competition with

Fair Wind. Opening VISS violated Bouffard’s two-year non-

compete agreement with Fair Wind.

Since its inception, VISS has copied Fair Wind’s St.

Thomas school in several respects. VISS employs 45-foot

catamarans, the same boats used by Fair Wind. VISS also

uses teaching curriculum and itineraries identical to those

used by Fair Wind, and employs the same procedures for

student feedback. The marketing on VISS’s website is

identical to Fair Wind’s marketing. Additionally, the VISS

website contains a picture of a catamaran belonging to Fair

Wind, includes “student testimonials” from students who took

classes with Dempster while he worked for Fair Wind, and

mentions Bouffard’s experience teaching “[o]ver the last

year,” presumably in reference to his time teaching at Fair

Wind. First Am. Compl. ¶ 32.

Fair Wind alleges that “[s]ince VISS began competing

with Fair Wind, Fair Wind has lost considerable business and

reputation.” Id. ¶ 35. It also alleges that “Dempster and

VISS have been enriched by their improper and unjustified

conduct.” Id. ¶ 48.

B.

Fair Wind filed an action against Dempster and VISS

in the District Court of the Virgin Islands. The complaint, as

amended shortly thereafter, alleged three claims against

Dempster and Fair Wind: (1) a “trade dress” infringement

claim under § 43(a) of the Lanham Act; (2) a common-law

tortious interference claim; and (3) a common-law unjust

enrichment claim. VISS filed a motion to partially dismiss

5

the complaint under Rule 12(b)(6) of the Federal Rules of

Civil Procedure, arguing that Fair Wind failed to state claims

for trade dress infringement or unjust enrichment.

The District Court concluded that Fair Wind had failed

to state claims for either trade dress infringement or unjust

enrichment. As to the trade dress claim, the District Court

concluded that the complaint had several dispositive flaws.

First, the District Court explained that Fair Wind had failed to

allege facts about its business that “amount[ed] to its trade

dress.” Fair Wind Sailing, Inc. v. Dempster, No. 2011-55,

2013 WL 1091310, at *4 (D.V.I. Mar. 15, 2013). “Without

knowing the precise product features that Fair Wind seeks to

protect” as trade dress, the District Court “struggle[d] to

undertake a productive Rule 12(b)(6) analysis.” Id. Second,

assuming that the product features at issue amounted to a

trade dress, the Court determined that the complaint was

“devoid of any allegations that [these features were]

inherently distinctive or ha[d] acquired any secondary

meaning.” Id. at *4-5. Third, the District Court determined

that the product features comprising Fair Wind’s alleged trade

dress were “functional” and therefore fell beyond the

protections of the Lanham Act. Id. at *5-6. With respect to

the unjust enrichment claim, the District Court concluded that

Fair Wind had failed to “allege any facts to support the first

element required for an unjust enrichment claim—that the

defendant was enriched.” Id. at *7. Accordingly, the District

Court granted VISS’s motion to dismiss in its entirety. In

response, Fair Wind voluntarily dismissed its remaining claim

for tortious interference, making the judgment final and

appealable. See Camesi v. Univ. of Pittsburgh Med. Ctr., 729

F.3d 239, 246 (3d Cir. 2013).

6

Thereafter, Defendants moved for $41,783 in

attorneys’ fees under § 35(a) of the Lanham Act and Title 5,

section 541 of the Virgin Islands Code. This constituted the

“total amount of legal fees incurred by Defendants in this

matter” over the course of the litigation. App. 64. Relying

solely on the Virgin Islands fee statute, the District Court

concluded that Defendants were entitled to a “fair and

reasonable award of attorney’s fees” for their effort defending

the entirety of this case. Fair Wind Sailing, Inc. v. Dempster,

No. 2011-55, 2014 WL 886832, at *1 (D.V.I. Mar. 6, 2014).

After concluding that a portion of the fees sought was

unreasonably expended, the District Court awarded

Defendants fees in the amount of $36,347. Id. at *3.

Fair Wind filed separate, timely appeals of both the

dismissal order and the fees order, which were subsequently

consolidated for disposition. 2

II.

We first consider Fair Wind’s trade dress claim. Like

the District Court, we conclude that Fair Wind has failed to

properly state a claim for trade dress infringement. We

therefore affirm the District Court’s dismissal of the claim. 3

2

The District Court had subject matter jurisdiction under 28

U.S.C. §§ 1331 and 1367(a). We have appellate jurisdiction

under 28 U.S.C. § 1291.

3

In deciding a motion to dismiss under Rule 12(b)(6), courts

must “accept all factual allegations as true, construe the

complaint in the light most favorable to the plaintiff, and

determine whether, under any reasonable reading of the

7

Section 43(a) of the federal Lanham Trademark Act

sets forth the standard for infringement of unregistered

trademarks. It provides in relevant part that:

(1) Any person who, on or in connection with

any goods or services, or any container for

goods, uses in commerce any word, term, name,

symbol, or device, or any combination thereof,

or any false designation of origin, false or

misleading description of fact, or false or

misleading representation of fact, which — (A)

is likely to cause confusion, or to cause mistake,

or to deceive as to the affiliation, connection, or

association of such person with another person,

or as to the origin, sponsorship, or approval of

his or her goods, services, or commercial

activities by another person, or (B) in

commercial advertising or promotion,

misrepresents the nature, characteristics,

qualities, or geographic origin of his or her or

another person’s goods, services, or commercial

activities, shall be liable in a civil action by any

complaint, the plaintiff may be entitled to relief.” Phillips v.

Cnty. of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) (internal

quotation marks omitted). “Threadbare recitals of the

elements of a cause of action, supported by mere conclusory

statements, do not suffice.” Iqbal, 556 U.S. at 678. “A claim

has facial plausibility when the plaintiff pleads factual content

that allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged.” Id. (citing

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).

8

person who believes that he or she is or is likely

to be damaged by such act.

15 U.S.C. § 1125(a)(1). Section 43(a) protects from

deceptive imitation not only a business’s trademarks, but also

its “trade dress.” 15 U.S.C. § 1125(a)(3); Two Pesos, Inc. v.

Taco Cabana, Inc., 505 U.S.763, 776 (1992) (Stevens, J.,

concurring). “Trade dress has been defined as the total image

or overall appearance of a product, and includes, but is not

limited to, such features as size, shape, color or color

combinations, texture, graphics, or even a particular sales

technique.” Rose Art Indus., Inc. v. Swanson, 235 F.3d 165,

171 (3d Cir. 2000). In short, trade dress is the overall look of

a product or business. See, e.g., Taco Cabana, Inc., 505 U.S.

at 765 (the decor of a restaurant); Am. Greetings Corp. v.

Dan-Dee Imports, Inc., 807 F.2d 1136, 1140 (3d Cir. 1986) (a

line of teddy bears with “tummy graphics”); see also Bristol-

Myers Squibb Co. v. McNeil-P.P.C., Inc., 973 F.2d 1033,

1037 (2d Cir. 1992) (graphics and arrangement of elements

on a box of Excedrin).

“The purpose of trade dress protection is to ‘secure the

owner of the trade dress the goodwill of his business and to

protect the ability of consumers to distinguish among

competing producers.’” McNeil Nutritionals, LLC v.

Heartland Sweeteners, LLC, 511 F.3d 350, 357 (3d Cir. 2007)

(quoting Shire US Inc. v. Barr Labs., Inc., 329 F.3d 348, 353

(3d Cir. 2003)). Trade dress protection does not shield

businesses from plagiarism. See Dastar Corp. v. Twentieth

Century Fox Film Corp., 539 U.S. 23, 36 (2003). Indeed,

“[t]rade dress protection must subsist with the recognition

that in many instances there is no prohibition against copying

goods and products.” TrafFix Devices, Inc. v. Mktg. Displays,

9

Inc., 532 U.S. 23, 29 (2001); see also Thomas & Betts Corp.

v. Panduit Corp., 65 F.3d 654, 657 (7th Cir. 1995) (“Copying

is not only good, it is a federal right—a necessary

complement to the patent system’s grant of limited

monopolies.”). Thus, the law does not afford every

combination of visual elements exclusive legal rights.

Instead, “trade dress protection extends only to incidental,

arbitrary or ornamental product features which identify the

product’s source.” Shire US, 329 F.3d at 353.

A plaintiff must prove three elements to establish trade

dress infringement under the Lanham Act: “(1) the allegedly

infringing design is nonfunctional; (2) the design is inherently

distinctive or has acquired secondary meaning; and (3)

consumers are likely to confuse the source of the plaintiff’s

product with that of the defendant’s product.” McNeil

Nutritionals, 511 F.3d at 357. In addition to satisfying these

three elements, it is the plaintiff’s duty to “articulat[e] the

specific elements which comprise its distinct dress.” See

Landscape Forms, Inc. v. Columbia Cascade Co., 113 F.3d

373, 381 (2d Cir. 1997); see also 1 J. Thomas McCarthy,

McCarthy on Trademarks and Unfair Competition § 8:3 (4th

ed. 2014) (“[T]he discrete elements which make up the [trade

dress claim] should be separated out and identified in a

list.”). 4 This allows the district court to ensure that the claim

4

For example, in Rose Art Industries, the plaintiff claimed

that the following elements comprised its trade dress:

(1) a prominent band that is either straight or

wavy and often black in color that cuts across

the middle of the front of the package,

extending to the sides with the words

10

is not “pitched at an improper level of generality, i.e., the

claimant [does not] seek[] protection for an unprotectable

style, theme or idea.” Landscape Forms, 113 F.3d at 381.

Even before it reaches the question of protectability, however,

a district court should scrutinize a plaintiff’s description of its

trade dress to ensure itself that the plaintiff seeks protection

“CRAYONS” or “WASHABLE MARKERS”

or other descriptive term in white letters

imprinted on the band (the “Band and Letter

feature”); (2) a yellow background on the top of

the package with a contrasting background

color (either red, purple, pink, or a combination

of purple fading to red) on the bottom of the

package; and (3) a prominent display of the

Rose Art logo in golden yellow (either foil or

print) or red, either with or without a rainbow

“swish” design behind the logo on the front of

the package. In addition, in its presentation to

the District Court, Rose Art included three other

elements in its claim of infringement: (1) the

statement “since 1923”; (2) the statement on the

front of the package that the product is

“Certified Non–Toxic;” and (3) the sentence

inviting consumer comments, “Rose Art invites

your comments and questions about this

product. Please write to Rose Art Industries,

Inc., Consumer Affairs, 6 Regent St.,

Livingston, NJ 07039 or call 1–800–

CRAYONS.”

235 F.3d at 169.

11

of visual elements of its business. As the Sixth Circuit has

noted, “any ‘thing’ that dresses a good can constitute trade

dress.” Abercrombie & Fitch Stores, Inc. v. Am. Eagle

Outfitters, Inc., 280 F.3d 619, 630 (6th Cir. 2002). However,

the “thing” must “dress[] a good.” Id. That is, the alleged

trade dress must create some visual impression on consumers.

Otherwise, there is simply no “dress” to protect.

According to Fair Wind, its trade dress is “the

combination of its choice to solely employ catamaran

vessels” and its “unique teaching curriculum, student

testimonials, and registered domain name,” which “all

combine to identify Fair Wind’s uniquely configured business

to the general public.” Appellant’s Br. at 20-21. 5 By its own

terms, then, Fair Wind’s “trade dress” is simply a hodgepodge

of unconnected pieces of its business, which together do not

comprise any sort of composite visual effect. Fair Wind is

not arguing that VISS stole Fair Wind’s “look” in order to

lure away customers. In fact, several of the elements of Fair

5

Although Fair Wind asserts in its briefs on appeal that

VISS’s domain name is nearly identical to Fair Wind’s, the

complaint makes no such allegation, nor can one reasonably

infer such an allegation. While the complaint mentions

VISS’s domain name, see First Am. Compl. ¶ 5, it never

discusses Fair Wind’s web address. Because we cannot

consider allegations outside the complaint, the similarity in

the parties’ domain names cannot play a part in our analysis.

In any event, the fact that the parties have similar web

addresses, even if properly pleaded, does not alter our

conclusion that Fair Wind has failed to allege a cognizable

trade dress.

12

Wind’s trade dress—such as the teaching curriculum—are not

clearly visual aspects of the business at all. 6 Rather, Fair

Wind asserts that Defendants have harmed Fair Wind “by

copying every material element of Fair Wind’s business and

presenting [it to] the public.” Id. at 15. This claim has little

to do with trade dress.

Perhaps realizing its failure to plead a cognizable trade

dress, Fair Wind pivoted at oral argument, placing its “web

design” at the center of the trade dress claim. But the

complaint does not enumerate what specific elements of its

website comprise a distinctive trade dress or that its site has

any distinctive ornamental features. Cf. Xuan-Thao N.

Nguyen, Should It Be a Free for All? The Challenge of

Extending Trade Dress Protection to the Look and Feel of

Web Sites in the Evolving Internet, 49 Am. U. L. Rev. 1233,

1236, 1240 (2000) (arguing that a combination of a website’s

“color, graphics, animations, designs, layout, [and] text” may

qualify for trade dress protection).

Indeed, Fair Wind has failed to allege any facts at all

relating to the substance of its own website. True, the

6

We do not suggest that the curriculum of a sailing school, if

part of, for example, an overall look of a schoolhouse or a

website, could not be part of a business’s trade dress. Cf.

Fuddruckers, Inc. v. Doc’s B.R. Others, Inc., 826 F.2d 837,

841 (9th Cir. 1987) (noting that a menu, in combination with

other aspects of a restaurant’s decor, can constitute

protectable trade dress). But the complaint does not in any

way indicate that Fair Wind’s curriculum creates any kind of

visual impression. It is not even clear from the complaint that

Fair Wind’s curriculum is something that can be seen.

13

complaint suggests that VISS’s website contains a picture of a

Fair Wind catamaran, as well as student feedback

mechanisms, curriculum, and itineraries identical to those

used by Fair Wind. First. Am. Compl. ¶ 29. But the fact that

VISS has copied aspects of Fair Wind’s business and placed

them on its website says nothing about the content of Fair

Wind’s website, let alone whether Fair Wind’s website has a

composite look that might constitute a trade dress.

Because Fair Wind has failed to give Defendants

adequate notice of what overall look it wishes to protect, its

trade dress claim cannot survive Defendants’ motion to

dismiss. See Twombly, 550 U.S. at 555.

But even assuming that Fair Wind had adequately

stated the overall design it seeks to protect, its alleged “trade

dress” is clearly functional, and therefore not protectable. A

functional feature is one that is “essential to the use or

purpose of the article,” “affects the cost or quality of the

article,” or one that, if kept from competitors, would put them

at a “significant non-reputation-related disadvantage.”

TrafFix, 532 U.S. at 33. By contrast, a feature is

nonfunctional where it “is unrelated to the consumer demand

. . . and serves merely to identify the source of the product”

or business. Prufrock Ltd., Inc. v. Lasater, 781 F.2d 129, 133

(8th Cir. 1986). Student feedback procedures, catamarans,

teaching itineraries, and curriculum all affect the quality of

Fair Wind’s business. They play a critical role in the

consumer demand for Fair Wind’s services, rather than

merely identifying Fair Wind as the source of the sailing

instruction. Cf. TrafFix, 532 U.S. at 32 (holding that the

dual-spring design was not protectable because it had a

purpose “beyond serving the purpose of informing consumers

14

that the sign stands are made by” the plaintiff). Thus, Fair

Wind’s alleged dress is plainly functional.

Rather than argue that the particular features of its

“trade dress” are nonfunctional, Fair Wind argues that the

various functional aspects of its business combine to create

something nonfunctional. Fair Wind’s argument rests on

Clicks Billiards, Inc. v. Sixshooters, Inc., where the Ninth

Circuit concluded that the sum of particular functional

elements in a pool hall, such as its counters and lighting,

could amount to a nonfunctional look. See 251 F.3d 1252,

1261-62 (9th Cir. 2001). The Clicks court explained, “[t]he

fact that individual elements of the trade dress may be

functional does not necessarily mean that the trade dress as a

whole is functional; rather, functional elements that are

separately unprotectable can be protected together as part of

trade dress.” Id. at 1259 (internal quotation marks omitted);

see also id. at 1261 (“To be sure, many of these elements,

considered in isolation, may be functional. The issue,

however, is whether, taken as a whole, the overall look and

feel of the establishment is functional.”). The plaintiff in

Clicks offered evidence that its “composite tapestry of visual

effects” had become associated with its pool halls and not

others. See id. at 1259, 1261-62. Thus, the Ninth Circuit

concluded that the plaintiff’s trade dress claim should survive

summary judgment.

In stark contrast to the plaintiff in Clicks, Fair Wind

has not explained how the identified functional elements

achieve a nonfunctional “composite tapestry of visual

effects.” Id. at 1259. Fair Wind has not suggested, in its

complaint or elsewhere, that its business has a distinctive

appearance at all. Clicks is therefore inapposite.

15

In sum, Fair Wind has failed to allege a cognizable

trade dress. Moreover, to the extent that the complaint

alleges that Fair Wind’s boats, curriculum, itineraries, and

student feedback procedures are its trade dress, that trade

dress is functional, and therefore not protectable. Fair Wind’s

claim does not hold water.

III.

Fair Wind next argues that the District Court

improperly dismissed its unjust enrichment claim by

employing too exacting a pleading standard. Specifically, the

District Court concluded that Fair Wind had failed to properly

plead that Defendants had been enriched by their conduct.

We agree with the District Court that Fair Wind has failed to

state a claim for unjust enrichment. We therefore affirm.

To recover for unjust enrichment under Virgin Islands

law, a plaintiff must prove that (1) the defendant was

enriched, (2) the enrichment was at the plaintiff’s expense,

and (3) the circumstances were such that, in equity and good

conscience, the defendant should return the money or

property to the plaintiff. Martin v. Martin, 54 V.I. 379, 393-

94 (V.I. 2010). To state the obvious, a defendant’s

enrichment is critical to the success of an unjust enrichment

claim. See Restatement (Third) of Restitution and Unjust

Enrichment § 1 cmt. d. (“Restitution is concerned with the

receipt of benefits that yield a measurable increase in the

recipient’s wealth.”).

The premise of Fair Wind’s unjust enrichment claim is

that Defendants gained, and Fair Wind lost, by Defendants

“trading on Fair Wind’s trade dress, proprietary information

16

and trade secrets.” First Am. Compl. ¶ 50. As the District

Court noted, however, the complaint contains no facts

concerning in what respect Defendants were enriched, other

than the conclusory assertion that “Dempster and VISS have

been enriched by their improper and unjustified conduct.” Id.

at ¶ 48.

At the pleadings stage, it is often not possible for a

plaintiff to recount with specificity to what extent a defendant

was enriched by her misconduct. That is what discovery is

for. At the same time, however, Rule 8(a)(2) of the Federal

Rules of Civil Procedure requires a plaintiff to plead some

factual allegations in order to survive a motion to dismiss.

See Twombly, 550 U.S. at 557; Iqbal, 556 U.S. at 678.

Pleading the “mere elements” of a cause of action will not do.

Phillips, 515 F.3d at 233. Here, Fair Wind has failed to even

allege that Defendants’ business accrued additional profits by

poaching Fair Wind’s proprietary information and trade

secrets. That may have satisfied Rule 8(a)(2)’s fairly lenient

notice-pleading standard. See id. at 234. But the bald

assertion that Defendants “have been enriched” does not.

Accordingly, we affirm the District Court’s dismissal

of Fair Wind’s unjust enrichment claim.

IV.

We next address the District Court’s award of

attorneys’ fees to the Defendants in the amount of $36,347. 7

7

“We exercise plenary review over legal issues relating to the

appropriate standard under which to evaluate an application

for attorneys’ fees. . . . We review the reasonableness of the

17

After reducing Defendants’ fee award by roughly $5,000 for

excessive billing and vague time entries, the District Court

awarded Defendants the remainder of their hours billed for

the entirety of the litigation, relying solely on Title 5, section

541 of the Virgin Islands Code. See Fair Wind Sailing, Inc.,

2014 WL 886832, at *1-3. The District Court did not attempt

to segregate which fees were accrued defending the federal

claim, nor did it discuss the Lanham Act as a basis for a fee

award. Id.

A.

Section 541 provides in relevant part that “there shall

be allowed to the prevailing party in the judgment such sums

as the court in its discretion may fix by way of indemnity for

his attorney’s fees in maintaining the action or defenses

thereto.” V.I. Code Ann. tit. 5, § 541(b). However, section

541 does not permit a district court to award the prevailing

party all of its attorneys’ fees where the case includes both

territorial and federal causes of action. Rather, “[i]n awarding

fees to a prevailing party under section 541, . . . the court

must subtract fees and costs associated with federal claims, as

section 541 is only applicable to fees for the litigant who

succeeds in pursuing [or defending] Virgin Islands territorial

claims.” Figueroa v. Buccaneer Hotel Inc., 188 F.3d 172,

183 (3d Cir. 1999) (emphasis added).

District Court’s award of attorneys’ fees for abuse of

discretion.” Nat’l Amusements Inc. v. Borough of Palmyra,

716 F.3d 57, 64 (3d Cir. 2013) (quoting People Against

Police Violence v. City of Pittsburgh, 520 F.3d 226, 231 (3d

Cir. 2008)).

18

Defendants do not dispute that the District Court failed

to “subtract fees and costs associated with” Fair Wind’s

federal claim. Id. They nonetheless insist that “the District

Court correctly chose to award Defendants . . . fees solely

under Section [541] . . . as the attorneys’ fees expended in

defending all three of [Fair Wind’s] causes of action were

inextricably intertwined.” Appellees’ Supplemental Br. at 9.

Defendants “cit[e] . . . defense counsel’s timesheets” as

evidence that “the fees incurred defending against Plaintiff’s

claims for trade dress infringement, tortious interference with

contract and unjust enrichment were ‘inextricably

intertwined.’” Id. at 23.

We have never approved of section 541 fees where the

territorial and federal claims are “inextricably intertwined.”

Acknowledging that we have not endorsed this argument,

Defendants rely on a Ninth Circuit opinion, Gracie v. Gracie,

217 F.3d 1060 (9th Cir. 2000), for their proposed exception to

the Figueroa rule. There, the Ninth Circuit held that “a party

cannot recover legal fees incurred in litigating non-Lanham

Act claims unless the Lanham Act claims and non-Lanham

Act claims are so intertwined that it is impossible to

differentiate between work done on claims.” Id. at 1069

(internal quotation marks omitted).

Despite Defendants’ insistence that the fees incurred

defending the territorial law and federal law claims cannot be

segregated, the District Court made no such finding. Unless

and until it does, we see no reason to decide when, if ever, the

“inextricably intertwined” exception to the Figueroa rule

might apply. See Gracie, 217 F.3d at 1070 (“[T]he

impossibility of making an exact apportionment does not

relieve the district court of its duty to make some attempt to

19

adjust the fee award in an effort to reflect an

apportionment.”).

Moreover, we remain unconvinced that where federal

and territorial claims are “inextricably intertwined,” it

necessarily makes sense to award fees to the prevailing party

for the entirety of the litigation under section 541. The rule

proposed by Defendants, it seems to us, would encourage

parties to obfuscate time entries. Indeed, the fact that

Defendants cite their own time entries as evidence that the

claims were inextricably intertwined lends credence to that

concern. Moreover, Defendants’ proposed rule seems

particularly inequitable in a case, such as this one, where the

majority of the parties’ energy was spent litigating the federal

claim, not the territorial claims.

In sum, the District Court should have attempted to

apportion the fees incurred defending the territorial and

federal claims.

B.

Once the time spent on the federal and territorial

claims is apportioned, the question remains whether

Defendants may recover fees spent defending the federal

claim at all. As it happens, Fair Wind’s sole federal claim

was brought under the Lanham Act, § 35(a) of which permits

the recovery of reasonable attorneys’ fees only “in

exceptional cases.” 15 U.S.C. § 1117(a). Defendants argue

that this case meets the standard for exceptionality, and that

they are therefore entitled to reasonable fees expended on the

entirety of the litigation.

20

As we have explained elsewhere, “Congress added the

attorney’s fee provision of § 35(a) to the Lanham Act in 1975

in response to the Supreme Court’s decision in Fleischmann

Distilling Corp. v. Maier Brewing Co., 386 U.S. 714 (1967),

holding that attorney’s fees were not available in trademark

cases under the Lanham Act absent express statutory

authority.” Securacomm Consulting, Inc. v. Securacom Inc.,

224 F.3d 273, 279 (3d Cir. 2000). However, while “the

statute now expressly provides for an award of attorney’s fees

at the discretion of the court in ‘exceptional cases,’ 15 U.S.C.

§ 1117(a), it does not define an ‘exceptional case[].’” Id. at

279-80 (alteration in original).

Our case law requires a district court to engage in a

“two-step process” before determining that a case is

“exceptional” under § 35(a):

First, the District Court must decide whether the

defendant engaged in any culpable conduct. We

have listed bad faith, fraud, malice, and

knowing infringement as non-exclusive

examples of the sort of culpable conduct that

could support a fee award. Moreover, the

culpable conduct may relate not only to the

circumstances of the Lanham Act violation, but

also to the way the losing party handled himself

during the litigation. Second, if the District

Court finds culpable conduct, it must decide

whether the circumstances are “exceptional”

enough to warrant a fee award.

Green v. Fornario, 486 F.3d 100, 103 (3d Cir. 2007) (internal

citation omitted). The requirement that a district court find

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culpability before awarding attorneys’ fees under the Lanham

Act has been in place in this Circuit for over two decades.

See Ferrero U.S.A., Inc. v. Ozak Trading, Inc., 952 F.2d 44,

48 (3d Cir. 1991) (holding that awarding fees under § 35(a) is

inappropriate absent an “explicit finding . . . that [the losing

party] acted willfully or in bad faith”).

While this action was on appeal, the Supreme Court

handed down Octane Fitness, LLC v. Icon Health & Fitness,

Inc., 134 S.Ct. 1749 (2014), analyzing when a district court

may award fees under § 285 of the Patent Act. Like § 35(a)

of the Lanham Act, § 285 provides that “[t]he court in

exceptional cases may award reasonable attorney fees to the

prevailing party.” 35 U.S.C. § 285.

Prior to Octane Fitness, the Federal Circuit took the

position that “a case is ‘exceptional’ only if a district court

either finds litigation-related misconduct of an independently

sanctionable magnitude or determines that the litigation was

both ‘brought in subjective bad faith’ and ‘objectively

baseless.’” Octane Fitness, 134 S. Ct. at 1756 (quoting

Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d

1378, 1381 (Fed. Cir. 2005)). The Octane Fitness Court

rejected this standard, embracing a definition of “exceptional”

far more expansive than the one articulated by the Federal

Circuit in Brooks. Looking to the plain meaning of the term,

the Court explained that “an ‘exceptional’ case is simply one

that stands out from others with respect to the substantive

strength of a party’s litigating position (considering both the

governing law and the facts of the case) or the unreasonable

manner in which the case was litigated.” Id. at 1756. Thus, it

is within a court’s discretion to find a case “exceptional”

based upon “the governing law and the facts of the case,”

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irrespective of whether the losing party is culpable. For

example, “a case presenting . . . exceptionally meritless

claims may sufficiently set itself apart from mine-run cases to

warrant a fee award.” Id. at 1757. This is so even if the

losing party’s conduct did not suggest “bad faith, fraud,

malice, [or] knowing infringement.” Green, 486 F.3d at 103.

While Octane Fitness directly concerns the scope of a

district court’s discretion to award fees for “exceptional” case

under § 285 of the Patent Act, the case controls our

interpretation of § 35(a) of the Lanham Act. Not only is §

285 identical to § 35(a), but Congress referenced § 285 in

passing § 35(a). See S. Rep. No. 93–1400, at 2 (1974),

reprinted in 1974 U.S.C.C.A.N. 7132, 7133; see also

Securacomm Consulting, 224 F.3d at 281. Thus, we have

“look[ed] to the interpretation of the patent statute for

guidance” in interpreting § 35(a). Id. Moreover, in its

explication of the word “exceptional,” the Octane Fitness

Court relied in part on the D.C. Circuit’s holding that the term

“exceptional,” as used in § 35(a) of the Lanham Act, means

“uncommon” or “not run-of-the-mill.” Octane Fitness, 134

S. Ct. at 1756 (quoting Noxell Corp. v. Firehouse No. 1 Bar-

B-Que Rest., 771 F.2d 521, 526 (D.C. Cir. 1985)). In so

doing, the Octane Fitness Court noted that the Lanham Act

fee provision is “identical” to § 285 of the Patent Act. Id. We

believe that the Court was sending a clear message that it was

defining “exceptional” not just for the fee provision in the

Patent Act, but for the fee provision in the Lanham Act as

well.

We therefore import Octane Fitness’s definition of

“exceptionality” into our interpretation of § 35(a) of the

Lanham Act. Under Octane Fitness, a district court may find

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a case “exceptional,” and therefore award fees to the

prevailing party, when (a) there is an unusual discrepancy in

the merits of the positions taken by the parties or (b) the

losing party has litigated the case in an “unreasonable

manner.” Id.; cf. Green, 486 F.3d at 103 (noting that a district

court may award fees as a result of either the circumstances of

the Lanham Act violation or the way in which the losing party

litigated the claim). Whether litigation positions or litigation

tactics are “exceptional” enough to merit attorneys’ fees must

be determined by district courts “in the case-by-case exercise

of their discretion, considering the totality of the

circumstances.” Octane Fitness, 134 S. Ct. at 1756.

Importantly, that discretion is not cabined by a threshold

requirement that the losing party acted culpably. The losing

party’s blameworthiness may well play a role in a district

court’s analysis of the “exceptionality” of a case, but Octane

Fitness has eliminated the first step in our two-step test for

awarding fees under § 35(a) of the Lanham Act.

The parties ask us to decide whether this case merits

attorneys’ fees under § 35(a) of the Lanham Act. We decline

to do so. With its unparalleled knowledge of the litigation

and the parties, the District Court is better suited to make that

assessment in the first instance. See Securacomm Consulting,

224 F.3d at 279. We therefore remand to the District Court,

so that it may determine whether fees are appropriate under

this slightly altered standard for awarding fees in Lanham Act

cases. 8

V.

8

We similarly decline to reach the “reasonableness” of the

District Court’s fee award.

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We affirm the District Court’s dismissal of Fair

Wind’s trade dress and unjust enrichment claims. However,

we vacate the District Court’s award of attorneys’ fees. On

remand, the District Court must determine whether this case

is an “exceptional” one under § 35(a) of the Lanham Act. If

it is, the Court may award reasonable fees for the entirety of

the litigation. If it is not, the Court must subtract from its

award any fees accrued by Defendants in litigating the

Lanham Act claim.

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