Whose Profits Are These, Anyway? Who Constitutes The Defendant For Purposes of Disgorgement Of Profits In A Trademark Infringement Case
In a unanimous (and unsurprising) decision on Wednesday, the Supreme Court vacated an award of nearly $43 million in disgorged profits to a trademark infringement plaintiff because those profits were not attributable to the defendant, but rather, to the defendant’s non-party affiliates.
In Dewberry Engineers Inc. v. Dewberry Group, Inc., plaintiff Dewberry Engineering, a real estate development company, sued another real estate development company, Dewberry Group over the use of the Dewberry name. Dewberry Group provides management services for a large number of affiliated entities. The affiliates, all bearing the Dewberry name, owned properties from which they received rental income. But because they had no employees, they used Dewberry Group to manage the properties at below market rates. While the rental income generated significant profits for the affiliates, the Dewberry Group itself had operated at a loss throughout the infringement period, so much so that John Dewberry, owner of Dewberry Group and the affiliates, had to provide periodic cash infusions to Dewberry Group for its ongoing operations.
Plaintiff Dewberry Engineering prevailed on its infringement claim. Under the Lanham Act, the federal law governing trademarks, a prevailing plaintiff is entitled to recover “defendant’s profits.” Concerned that Dewberry Group’s lack of profits would allow it to escape the consequences of its infringement, and considering that the profits earned by the non-party affiliates were due to Dewberry Group’s management services, the trial court aggregated the affiliates’ profits for the infringing period as a measure of Dewberry Group’s profits – nearly $43 million – and awarded that sum to plaintiff. The Fourth Circuit affirmed the award.
In a concise opinion, the Supreme Court held that the Lanham Act affords no special meaning to the term “defendant,” and therefore the language providing for disgorgement of “defendant’s profits” means just that – that only the named defendant’s profits may be awarded. The affiliates were not named defendants, so regardless that they shared the Dewberry name and that they were under common ownership with the defendant, the Court found that there was no basis for the trial court to disregard principals of corporate separateness, particularly where the plaintiff admittedly never tried to pierce the corporate veil.
The Court also rejected plaintiff’s argument that in cases where the defendant has no profits, the Lanham Act gives courts the discretion to award a “just” amount. While accepting that such “just-sum” provision could be a way to address the “economic reality” of a profitless defendant (for instance, by determining whether the named defendant had intentionally diverted its profits to its affiliates in order to avoid financial liability, as Justice Sotomayor hypothesized in a concurring opinion), the Court did not find anything in the record to suggest that the trial court employed a “just-sum” analysis. Rather, the trial court expressly stated that it was combining both Dewberry Group’s and its affiliates’ profits because they should be “treated as a single corporate entity.”
The Court acknowledged that its decision was narrowly focused on the statutory language, and that several questions remain unresolved, most immediately, whether plaintiff could seek to pierce the corporate veil, or whether the court could undertake a “just-sum” analysis on remand. Beyond this case, however, the Court did not address the how courts should apply the “just-sum” provision to ensure an adequate recovery for plaintiff based on the defendant’s “true financial gain.”
The takeaway from this decision is that plaintiffs may now be more inclusive in who they sue for trademark infringement in order to increase the chances of recovering a substantial profits award. This may also lead to increased discovery of accounting, financial and corporate structure records, particularly for defendants at the holding-company level, to tie corporate group profits back to the key infringer or to form the basis for piercing the corporate veil. Whether courts will be more tolerant of wide-ranging discovery requests or mid-case requests to add parties remain to be seen.
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