The Perils of Not Awarding Profits in Lanham Act Cases Against Counterfeiters | Kohrman Jackson & Krantz LLP
The wild west of the e-commerce landscape keeps many trademark owners up at night trying to protect their brand. In the ever-expanding online marketplace, counterfeiters pop-up daily trying to make a quick buck passing off inferior products as strong household brand names, only to vanish as soon as legal action is threatened. Consequently, trademark owners need to be ever vigilant in stopping such counterfeiters. Counterfeiters can erode brand recognition, lead to poor product reviews, and otherwise damage a company’s sales and reputation. Ostensibly, the Lanham Act, 15 USC §1117(a) provides punishment to counterfeiters, or so we thought.
The Seventh Circuit recently heard arguments appealing a district court’s ruling that declined to award profits in a trademark counterfeiting lawsuit where several e-commerce shops defaulted. The case underscores significant concerns resulting from failing to award profits in Lanham Act cases, particularly when counterfeiters do not appear in court.
The Case at Hand
Dyson Technology Limited (Dyson), known for its high-quality household appliances, initiated a lawsuit against several e-commerce shops accused of selling counterfeit Dyson products. The counterfeiters failed to appear and defend the case and Dyson moved for default judgment. In its Motion for Default Judgment, Dyson asked the Court for an award of profits, and provided evidence of gross revenues from these alleged counterfeit sales. The district court, however, declined to award profits, reasoning that the gross revenue numbers provided by Dyson do not equate to profit.
The Burden of Proof Under the Lanham Act
Under Section 1117(a) of the Lanham Act, once a plaintiff provides evidence of gross revenue from infringing sales, the burden shifts to the defendants to prove any costs or deductions. A court, after assessing both numbers, would then award profits. In this case, however, the defendants did not appear and thus did not provide any evidence of costs or deductions. Nonetheless, the Court incorrectly placed the burden back on Dyson to provide values solely in the possession of the counterfeiters. This effectively punished the company for the counterfeiters’ absence and failure to participate in the proceedings.
Judicial Discretion vs. Statutory Construction
At oral arguments, Seventh Circuit Judges Candace Jackson-Akiwumi and John Lee emphasized that district judges have the discretion to deviate from the revenue baseline established by the plaintiff. However, Dyson contended that this discretion must still align with the statutory framework, which was not followed. Under the Lanham Act, a court has discretion to adjust the amount of profits if either inadequate or excessive. Here the court did neither, they simply declined to award any profits, instead granting statutory damages of $1000. Such a ruling seems to undermine the purpose of the Lanham Act and rewards counterfeiters by allowing them to retain their illegal gains.
Purpose of the Lanham Act
One of the Lanham Act’s primary objectives is to deter trademark infringement by making such violations financially unprofitable for infringers. By failing to award profits, courts may inadvertently send a message that counterfeiters can avoid meaningful financial penalties. This not only undermines the law’s deterrent effect but also emboldens counterfeiters to continue their illicit activities, knowing that non-participation in legal proceedings might shield them from significant financial consequences.
Conclusion
If upheld, the district court’s decision could set a dangerous precedent, effectively rewarding counterfeiters for evading or ignoring court proceedings. This creates an unfair burden on plaintiffs – it shifts the responsibility back onto them to impossibly prove what is inherently within the defendants’ knowledge—counterfeiters’ legitimate costs and actual profits. Such a precedent could diminish the willingness of trademark holders to pursue legal action against counterfeiters, knowing the potential for inadequate financial recourse, thereby undermining the fundamental objectives of the Lanham Act. It is crucial that the law remains a robust tool for combating trademark counterfeiting and protecting legitimate businesses.
