It’s October and, in addition to playoff baseball, that means the Supreme Court is back in session. The Court has chosen to hear arguments in two cases with significant ramifications for advertising law. Both cases will impact the risks and liabilities faced by companies accused of false or misleading advertising practices nationwide.
In Medical Marijuana, Inc. et al. v. Horn, the Court will decide whether plaintiffs may bring suit under the federal Racketeer Influenced and Corrupt Organizations Act (RICO) to recover economic damages resulting from personal injuries. In Dewberry Group v. Dewberry Engineers, Inc., the Court will determine whether the Lanham Act permits district courts to penalize corporate subsidiaries for trademark infringement.
Medical Marijuana, Inc. et al. v. Horn
In Medical Marijuana, long-haul trucker Douglas Horn filed civil RICO claims against a drug manufacturer and two affiliated holding companies. Horn alleged that the companies engaged in wire fraud by misrepresenting the amount of THC in their product, Dixie X, and that those representations cost him his job, insurance, and pension benefits after he failed a drug test. A federal court in New York ruled for the defendant, holding that RICO does not provide a cause of action for personal injury claims—but the Second Circuit reversed, holding that Horn’s economic losses could form the basis of a RICO claim.
The Second Circuit’s decision deepens a divide among the federal appellate courts regarding the scope of liability under RICO, which permits plaintiffs who are “damaged” in their “business or property” by racketeering activity to file civil claims seeking triple damages. The Sixth, Seventh, and Eleventh Circuits have held that plaintiffs cannot recover under RICO for personal injuries—such as Horn’s ingestion of THC. But the Ninth and Second Circuits hold that personal injuries are actionable, so long as they result in economic damages to the plaintiff’s “business or property”—such as Horn’s loss of employment, income, and benefits.
This case may have significant implications for companies accused of false or misleading advertising practices nationwide. The Supreme Court has historically avoided expanding RICO so broadly as to reach ordinary products liability claims or garden-variety fraud and is likely to closely scrutinize the Second Circuit’s decision. If any economic loss following personal injury is actionable under RICO, nearly any state tort action could be converted to a federal civil RICO claim, raising the specter of triple damages in run-of-the-mill lawsuits. This case will be argued on October 15, 2024, and Venable’s advertising law team will provide additional insights and updates as the argument date approaches.
Dewberry Group v. Dewberry Engineers, Inc.
This case is the next episode in a long-running trademark rivalry. In 2006, Sidney Dewberry, founder of Dewberry Engineers, sued John Dewberry, founder of Dewberry Group, for trademark infringement in violation of the federal Lanham Act. One year later, the case settled, and John Dewberry agreed to rebrand his company “DDC.” But in 2017, he announced the opening of the “Charlottesville Dewberry,” run by Dewberry Group through three subsidiary corporations. Sure enough, Dewberry Engineers sued Dewberry Group in 2020, alleging further violations of the Lanham Act and seeking disgorgement of all profits earned from the putative infringement. The Dewberry Group insisted that it had no earned profits, as all assets were held by its separately incorporated subsidiaries, but a district court disagreed—ordering a disgorgement award of $42.9 million. The Fourth Circuit affirmed in a divided opinion.
At issue here is a clash between the Lanham Act’s equitable disgorgement provisions and doctrines limiting liability for owners of corporations. Courts may permit plaintiffs to “pierce the corporate veil” and recover from a corporation’s owner if he has abused the corporate form by engaging in fraud or undercapitalization. But because a court’s authority to remedy infringement under the Lanham Act is “subject to the principles of equity,” it is unclear whether disgorgement awards are limited to the infringer, or whether such awards may reach subsidiary corporations and other affiliated entities. The Fourth Circuit’s majority held that the district court’s award was necessary to reflect the defendant’s “true financial gain” and deter infringement—but dissenting Judge A. Marvin Quattlebaum Jr. argued that this award blurred the boundaries between entities and circumvented the strict rules regarding veil piercing.
The Supreme Court may rule on narrower grounds, avoiding any firm decision about the limits of a court’s discretion under the Lanham Act. The district court relied on evidence that the Dewberry Group promoted and managed its affiliates’ properties and recorded its revenues and expenses on the subsidiaries’ books. Should the Supreme Court focus on this evidence, it may be inclined to address this case on traditional veil-piercing principles and avoid the expansion of corporate liability that would result from a broad reading of the Lanham Act. This case has yet to be scheduled for argument, but we will closely monitor the docket for updates.
