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“[T]he significant discretion afforded by [Section 1117(a)’s] language does not dispense with the obligation to estimate defendant profits, the Solicitor General contends.”
Yesterday, the U.S. Supreme Court granted the U.S. Solicitor General leave to participate in oral arguments for Dewberry Group, Inc. v. Dewberry Engineers Inc., a case asking the nation’s highest court to determine the proper scope of profits disgorgement awards in trademark infringement cases involving defendant’s profits flowing to non-party corporate affiliates. While the Solicitor General supports petitioner Dewberry Group’s effort to overturn the Fourth Circuit’s ruling upholding $43 million in awarded disgorged profits, both it and another recent amicus filing underscored that the economic realities of trademarks allow consideration of affiliates’ financial gains without disregarding corporate veil piercing principles.
Solicitor General: Remand Required for Detailed Estimation of Defendant’s Gain
The Solicitor General motion for leave to participate in oral arguments, filed in early October, stated that petitioner Dewberry Group (“Group”) was too limited in its view of infringer profits. However, counsel for the federal government also disagreed with respondent Dewberry Engineers’ (“Engineers”) view of the statutory grounds upon which the damages award relied.
In early September, the Solicitor General filed an amicus brief in support of neither party, arguing that courts determining profits awards can consider funds that reflect the infringer’s true financial gain even when those funds don’t flow to the infringer. While estimating a defendant’s profits is made more complex in the present case, where Group’s accounting claimed to operate at a business loss for multiple years, principles from tax law such as anticipatory assignment doctrine should allow courts to consider Group’s service contracts with its affiliates. The Solicitor General further notes that Group’s Supreme Court briefing has not properly addressed these principles from equity.
However, because the courts themselves did not properly apply those principles, the Solicitor General argues that the case should be reversed and remanded to the Fourth Circuit. Neither the district or the appellate court measured Group’s financial gain apart from its corporate affiliates, nor did they rely upon secondary liability or veil-piercing grounds. While the courts below cited language from 15 U.S.C. § 1117(a) authorizing courts to award “such sum as the court shall find to be just,” the significant discretion afforded by that language does not dispense with the obligation to estimate defendant profits, the Solicitor General contends.
IP Scholars: Considering Profit Flow to Affiliates Reflects Economic Reality of Trademarks
On October 29, an amicus brief in support of respondent Engineers was filed by a trio of intellectual property scholars: Suneal Bedi, Indiana University’s Kelley School of Business; Mike Schuster, University of Georgia’s Terry College of Business; and Jake Linford, Florida State University College of Law. Noting that infringement often confers value that isn’t reflected on a ledger, amici argue that the unique context of trademarks comports with Section 1117(a)’s broad discretion to award a just sum.
Amici note that corporations often leverage the value of trademarks using brand architecture strategies, creating benefits that often flow to affiliates. One such form is the “branded house” approach, which amici contend was employed by Group for its Dewberry Living, Dewberry Office, and Studio Dewberry sub-brands. Awarding a just sum appropriately addresses accounting practices, like those employed by Group, in which affiliates extract profits created by brand strategies. Amici add that the Lanham Act does not limit remedies based on the corporate identity of defendants, and that requiring suit against corporate affiliates can result in piecemeal litigation against entities that might not have shown the intent to deceive required by disgorgement analyses.
Dewberry Engineers: Affiliate Revenues are Relevant Where Causal Connection Exists
On October 23, Engineers filed its respondent’s brief at the Supreme Court, arguing that the Fourth Circuit properly followed Section 1117(a)’s two-step process for calculating profits-based awards. Determining that Group’s tax information failed to reflect economic reality, Engineers contended that the appellate court properly determined that “the amount of the recovery based on profits is… inadequate” by focusing on the true financial gain generated by Group through its affiliates’ revenues. At the second step, the lower courts properly considered affiliate revenues within its discretion to award a just sum under Section 1117(a), which includes no numerical cap on such awards.
Still, the just sum provision of Section 1117(a) is limited to the evidentiary record, Engineers points out. While Engineers disputed Group’s interpretation of that statute’s anti-penalty language, it noted the fact-specific nature of the “just sum” inquiry. Engineers also cited several Supreme Court and Second Circuit cases where affiliate profits have been relevant to prove an infringer’s financial gain where a causal connection exists. Such consideration does not disregard corporate separateness, a distinct legal theory with different requirements and burdens than the Lanham Act remedial provisions involved here.
If the Fourth Circuit erred, Engineers argued that remand and not reversal would be appropriate. Such proceedings could consider kickback payments to Group’s principal John Dewberry and the real market value of Group’s services in calculating Group’s true financial gain. Alternatively, the lower courts could find Group directly liable for concerted wrongdoing, which would also enable an award based on affiliate profits.
