WilmerHale
On the 26th of February 2025, The Supreme Court decided Dewberry Group, Inc., v. Dewberry Engineers Inc., no. 23-900 is a case involving corporate separateness, disgorgement awards and Lanham Act trademark infringers. In an opinion written by Justice Kagan, the Court unanimously vacated and remanded, holding that in making an award of “defendant’s profits” under the Lanham Act, a court may award “only profits properly attributable to defendant itself.” In an opinion written by Justice Kagan the Court unanimously vacated the case and remanded it, holding that a court can only award profits “properly attributable to the defendant” when making an award under the Lanham Act. Dewberry Group, the defendant-petitioner, provides business services solely to about 30 separately incorporated entities that have no employees and that share the same owner as Dewberry Group, John Dewberry. The affiliates each own a piece commercial property to lease and earned tens or even hundreds of millions of dollars from the rental income. Dewberry Engineers sued Dewberry Group and not the affiliates. Nevertheless, Dewberry Engineers successfully sought to have the district court consider profits formally earned by the affiliates as part of the disgorgement award against Dewberry Group, due to their shared ownership structure.
The Fourth Circuit, affirming, had concluded that the district court did not “pierce the corporate veil,” but rather “considered the revenues of entities under common ownership with Dewberry Group in calculating Dewberry Group’s true financial gain from its infringing activities that necessarily involved those affiliates.” The Fourth Circuit noted that even though Dewberry Group did not “receive the revenues from its infringing behavior directly, it still benefited from its infringing relationships with its affiliates.” A contrary decision, it said, risked “handing potential trademark infringers the blueprint for using corporate formalities to insulate their infringement from financial consequences. The Supreme Court vacated the award after finding that the statutory text, which allows for recovery of “defendant profits”, refers only to the “party who seeks relief or recovery” in this case, Dewberry Group. The Court also referred to background principles on corporate separateness. The Court’s opinion did not provide any additional guidance on how courts can take into account earnings of related entities in awarding disgorgement pursuant to Section 1117(a). The Court, for instance, declined to address the courts’ authority to take into account profits flowing to corporate affiliates, under the statutory provision that allows courts to “enter judgement for such sum as it shall find to be fair, according to the facts of the case,” 15 U.S.C. The Court also stated “no view” on when courts can “look behind a defendant’s tax or accounting records to consider the economic realities of a transaction and identify the defendant’s true financial gain,” determining that these questions were up to lower courts first. Similarly, the Court stated “no view” on when courts can “look behind a defendant’s tax or accounting records to consider the economic realities of a transaction and identify the defendant’s true financial gain,” determining that those questions were up to lower courts to first address.
Justice Sotomayor authored a concurrence to “underscore that principles of corporate separateness do not blind courts to economic realities” or force courts “to accept clever accounting, including efforts to obscure a defendant’s true financial gain.” Echoing arguments raised by the Solicitor General, Justice Sotomayor suggested two examples for how courts “might consider accounting arrangements between a defendant and its affiliates in calculating a defendant’s profits.” First, she noted that where a company charges an affiliate below-market rates for infringing services, it “effectively assigns some portion of its revenues” to the affiliate. She suggested that in such a situation, the affiliate’s profit “might have an impact on what the company would have earned if it had been in a relationship at arm’s length” and could be taken into account when determining the profits attributable to the defendant. She also suggested that courts could consider evidence that an affiliate “indirectly” compensated a company for infringing service through the company. For example, if there was evidence that the company charged below market rates for the infringing service and paid the difference with cash from the common owner. She agreed that the Court had made the right decision to not decide the issue. However, she felt that the lower courts had not considered the issue in the “right framework”. But she suggested that, on remand, the lower courts may explore the issue and even may wish to reopen the record.
Because the full Court’s opinion declined to address many issues, it provides limited guidance for parties and courts wrestling with disgorgement awards in trademark infringement cases where the defendant is part of a family of related entities. Both Justice Sotomayor’s concurrence and Solicitor General’s brief provide possible guidelines for trademark plaintiffs wishing to argue that the named defendant’s official profits do not accurately reflect its financial gain in order to receive a disgorgement under the Lanham Act. The case reminds trademark plaintiffs to be careful about the entities they name as defendants, and to consider amending their complaints if necessary, when a complex corporate structures might obscure how profits were recorded.
