McDermott Will & Emery

In an unanimous decision, the Supreme Court of the United States reversed and remanded an award of damages for willful infringement of the Lanham Act (15 U.S.C. The Supreme Court ruled that the appellate court erred in including the defendant’s affiliated companies in its calculation of “defendant’s profits.” The Supreme Court found that the appellate court erred in including the defendant’s affiliated companies in its calculation of “defendant’s profits.”

Justice Elena Kagan delivered the unanimous opinion with Justice Sonia Sotomayor concurring in judgment. The Court noted that its decision was limited to the holding that the lower courts did not invoke the so-called just-sum provision of Section 1117(a) when calculating defendant’s profits and erred in treating the defendant and its affiliates as a single entity when the affiliates were not defendants to the case.

On remand, the lower court may still decide whether and how a court can use the just-sum provision, if the petitioner forfeited their just-sum argument, whether a court can determine a defendant’s true financial gain by looking at their tax or accounting records, and whether the petitioner can pierce the corporate veil to assess a profits award.

In Depth

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. Dewberry Group rebranded and resumed using the name “Dewberry”, which led to the current dispute. The lower courts found Dewberry Group to have willfully infringed. This was not the issue before the Supreme Court. The district court calculated the $43million by considering Dewberry Group’s corporate structures and the lack of profits attributable to the named defendant. John Dewberry is the owner of Dewberry Group which provides all business services to around 30 affiliated companies at prices below market rates. Dewberry Group is losing money while its affiliates are making tens of thousands of dollars in profits despite not having any employees to manage their operations. John Dewberry would occasionally inject cash into Dewberry Group to keep it afloat. The district court determined that Dewberry Group profits “appear exclusively on the

book” and treated Dewberry Group as a single entity in calculating profits. The district court argued that this method prevented Dewberry Group escaping liability. The US Court of Appeals of the Fourth Circuit affirmed. They also stated that treating the affiliates together with Dewberry Group would prevent the manipulation of corporate formalities in order 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 [property-owning affiliates’] 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.[of]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 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 found that the plaintiff only named Dewberry Group as the defendant, so only Dewberry Group’s profits could be considered. 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. Corporate law treats separate incorporated organizations

as distinct legal units with distinct obligations and rights, even when they are affiliated. (Internal citations not included). 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 calls for a court to perform two steps. First, it must assess the defendants’ profits. Next, it must consider evidence such as the affiliates profits to determine if a different figure “better reflects the defendants’ true financial gain”. The Supreme Court found the district court had not relied on the just-sum clause nor conducted the two-step analysis required. The district court did not indicate that it was removing Dewberry Group profits from the total to reflect Dewberry Groups 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.[as]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. Justice Sotomayor gave an example of how a court might calculate a defendant’s profit. She explained that they could look at what the defendant would have earned if he had negotiated a deal with a third party rather than what he earned by offering below-market rates. Justice Sotomayor suggested that guidance could be found in the tax context where a taxpayer cannot assign economic gains to a third party in an attempt to avoid taxes. Justice Sotomayor suggested that the amount provided by the common owners could be taken into account in determining defendants’ profits without impermissibly granting 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.