SCOTUS: Trademark Infringement Damages Award Includes Only the Named Defendant’s Profits

BACKGROUND

Dewberry Engineers is a real estate company that owns a registered trademark for “Dewberry.” Dewberry Engineers previously sued and reached a settlement with another real estate company, Dewberry Group, for trademark infringement. However, Dewberry Group resumed use of “Dewberry” when it rebranded, leading to the current dispute. The lower courts found that Dewberry Group had willfully infringed, which was not at issue before the Supreme Court.

After finding willful infringement, the district court awarded Dewberry Engineers $43 million as “defendant’s profits” under Section 1117(a), which provides a plaintiff with remedies for violations of its trademark rights, subject to the principles of equity, including a disgorgement of defendant’s profits. In calculating the $43 million, the district court considered Dewberry Group’s corporate structure and lack of profits attributed to the named defendant. John Dewberry owns Dewberry Group, which provides all necessary business services at below-market rates to about 30 affiliated companies (all of which John Dewberry commonly owns as well). Dewberry Group operates at a loss while its affiliates, despite having no employees to manage the operations, generated tens of millions of dollars in profit. To keep Dewberry Group afloat, John Dewberry provided occasional cash infusions. The district court found that Dewberry Group’s profits therefore “show up exclusively on the [property-owning affiliates’] books” and treated Dewberry Group and its affiliates as a single entity when calculating profits. The district court reasoned that this method prevented Dewberry Group from escaping liability. Dewberry Group appealed.

The US Court of Appeals for the Fourth Circuit affirmed, similarly reasoning that treating the affiliates as a single entity with Dewberry Group prevented the manipulation of corporate formalities to avoid financial consequences. However, one judge dissented, indicating he “would have held the District Court had no authority, in calculating a defendant’s profits, to simply add the revenues [of] non-parties.” Dewberry Group sought certiorari.

The Supreme Court granted certiorari to determine whether “defendant’s profits” awarded under Section 1117(a) includes profits ascribable to a defendant’s affiliates who are not parties against whom relief is sought.

OPINION OF THE SUPREME COURT

The Supreme Court held that district courts can only award profits ascribable to the named defendant when calculating “defendant’s profits” under Section 1117(a). The Court defined a “defendant” as “the party against whom relief or recovery is sought in an action or suit,” citing Black’s Law Dictionary. Section 1117(a), therefore, does not provide for disgorging a defendant’s affiliates’ profits. Consequently, the Court found that the plaintiff only named Dewberry Group as the defendant, so only Dewberry Group’s profits could be considered.

The Court reasoned that corporate law also supports construing “defendant” to mean only the corporate entity named. Even when entities are affiliated, corporate law treats “separately incorporated organizations [as] separate legal units with distinct rights and obligations” (internal citations omitted). The Court noted that piercing the corporate veil is possible in certain situations, but Dewberry Engineers conceded that it never raised the argument.

Further, the Court was unconvinced by Dewberry Engineers’ argument that the lower courts properly relied on the just-sum provision of Section 1117(a) when considering the affiliates’ profits in its calculation of defendant’s profits. The just-sum provision requires a court to take two steps: assess the defendant’s profits and consider evidence, such as the affiliates’ profits, to determine if “a different figure better reflects the defendant’s true financial gain” (internal citations omitted). The Supreme Court found that the district court did not rely on the just-sum provision nor undertake the necessary two-step analysis. The district court merely added all of the affiliates’ profits without indicating that it was departing from Dewberry Group’s profits to better reflect Dewberry Group’s true financial gain. Additionally, the Supreme Court opined that if the district court had relied on the just-sum provision, it would have needed to specifically determine which affiliates’ profits were attributable to Dewberry Group and “could not plausibly have concluded that all of them were.” Like the district court, the Fourth Circuit did not rely on the just-sum provision.

Although agreeing there was cause for concern that corporate formalities can shield defendants from liability, the Supreme Court held that the lower courts erred and acted beyond the bounds of Section 1117(a) by awarding non-defendants’ profits. The Court emphasized that its decision is limited to holding that the lower courts erred in treating “Dewberry Group and its affiliates as a single entity in calculating the ‘defendant’s profits.’” The Court left several questions unanswered for the lower courts to potentially decide on remand; namely:

• Whether Dewberry Engineers’ interpretation of the just-sum provision is correct and whether Dewberry Engineers forfeited said argument
• Whether and how courts can use the just-sum provision
• Whether courts can determine a defendant’s true financial gain by looking at their tax or accounting records without the just-sum provision
• Whether the petitioner can pierce the corporate veil on remand.

CONCURRENCE

Justice Sotomayor filed a concurrence to “underscore that principles of corporate separateness do not blind courts to economic realities” but agreed with the opinion’s outcome. As an example of how defendant’s profits could be calculated, Justice Sotomayor explained that a court could consider what a defendant would have earned in an arms-length deal rather than what the defendant earned by providing below-market rates. Justice Sotomayor suggested finding guidance in the tax context, where a taxpayer is prevented from assigning economic gains to another party in a scheme to avoid taxes. Justice Sotomayor also suggested that the amount of cash infusions provided by the common owner could be considered in determining defendant’s profits without impermissibly awarding affiliates’ profits. Lastly, Justice Sotomayor emphasized that principles of equity underlie the purpose of the Lanham Act, and courts should not “close their eyes to the practical realties in calculating defendant’s profits.

Practice Note: Plaintiffs should take care when naming applicable affiliates as defendants or, at the very least, raise the arguments offered by Justice Sotomayor in the concurrence or attempt to pierce the corporate veil.