In Out of the Box Enterprises v. El Paseo Jewelry Exchange, the plaintiff sued for false advertising under the Lanham Act and California law, alleging that the defendant falsely advertised that it would buy gold jewelry for 92 percent of the gold's market value. The plaintiff alleged that, as a result of the false advertising, it lost customers.
The case went to a jury, which considered liability and damages in two phases. First, the jury determined that El Paseo had engaged in false advertising. During the damages phase, the jury then awarded more than $2 million in damages, based on $1.5 million in the plaintiff's lost profits and more than $800,000 in profits that the defendant earned as a result of the false advertising.
El Paseo moved for judgment as a matter of law, arguing that the damages award was based on insufficient evidence. The United States District Court for the Central District of California denied the motion.
On appeal, the 9th Circuit reversed, holding that the defendant was entitled to judgment as a matter of law. The 9th Circuit found that Out of the Box failed to prove that El Paseo's advertising caused Out of the Box to lose profits or the amount of any lost profits. The court wrote that the plaintiff's expert testimony, "established only a correlation -- not a causal relationship -- between El Paseo's advertisements and a decline in Out of the Box's projected profits." The court also said that the expert's testimony did not give the jury a way to determine by a preponderance of the evidence the amount of any lost profits. The court also said that the disgorgement calculation was also flawed, because there wasn't sufficient evidence to show a connection between the defendant's profits and the false advertising.
The court must ensure that the record adequately supports all items of damages . . . lest the award become speculative or violate the Lanham Act's prohibition against punishment.