Wednesday, February 20, 2019
Opinion Affirms Contempt Adjudication Because Defendants Agreed Not to ‘Disparage’ Rival
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals held yesterday that defendants breached a consent decree, which forbade their disparagement of a competitor’s products, by complaining to five governmental agencies about supposed dangers of those products.
A memorandum opinion by a three-judge panel upholds a 2017 civil contempt finding by District Court Judge Edward Chen of the Northern District of California against defendants Theos Medical Systems, Inc. and its founder/CEO, Saket Bhatia. It also affirms his award of $117,126.75 in attorney fees and costs to plaintiffs Malem Medical, Ltd., and Enureses Associates, LLC in connection with gaining the contempt adjudication.
Theros and Malem are rival makers of bedwetting products, Under the March 2015 consent decree in a case involving alleged trademark infringement and deception, Theros is obliged to remove from its website certain derisive statements concerning Malem’s products and alter some other claims.
One broad provision in the decree reads:
“9. DEFENDANTS will not disparage PLAINTIFFS or any of their products, services, officers, directors, or employees. For purposes of this agreement, disparage means to take any action which could reasonably be expected to adversely affect the reputation of PLAINTIFFS or any of their products, services, officers, directors, or employees. This paragraph does not apply to legitimate business concerns raised by DEFENDANTS or to allegations that PLAINTIFFS have violated this Agreement or this Consent Decree.”
Following a one-day trial, at which three witnesses testified, Chen found the defendants to be in contempt based on violating the non-disparagement provision.
Reporting Safety Concerns
The defendants argued on appeal that the non-disparagement provision cannot reasonably be applied to preclude reports of safety concerns to governmental agencies. The opinion responds:
“The right to petition the government, including administrative agencies, is one of the freedoms protected by the United States Constitution….A person may waive his or her constitutional rights, however, as long as there is clear and convincing evidence that the waiver was voluntary, knowing, and intelligent….
“In an oral ruling before trial, the district court found that Theos knowingly and intelligently waived its right to make the type of reports at issue here. Given the context in which the non-disparagement provision was negotiated, including Theos falsely claiming Malem’s products were dangerous, Theos clearly ‘voluntarily and knowingly’ waived its First Amendment rights.”
The opinion rejects the defendants’ contention that the public’s interest in safety concerns being reported to responsible agencies outweighs any interest in literal enforcement of the consent decree. It remarks:
“The district court’s conclusions that Mr. Bhatia was not credible and that Theos submitted false reports to regulatory agencies in order to mislead the agencies and hurt Malem’s business (not in an attempt to safeguard public safety) are amply supported by the record.”
The case is Malem Medical, LTD. v. Theos Medical Systems, Inc., 17-17289.
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