Sue Them All? SCOTUS Vacates $43 Million Trademark Judgment

To plead, or not to plead. That is a question trademark infringement plaintiffs will need to carefully consider with their legal counsel when deciding which parties to name as defendants in a lawsuit and which legal arguments and facts to assert in a dispute with a company that has many affiliates.

In the case of Dewberry Group, Inc. v. Dewberry Engineers Inc.[1] , the US Supreme Court did not hesitate to vacate a $43 million judgment against the sole named defendant where that judgment was based on the profits of the defendant and its separately incorporated affiliates who were not parties to the case. Justice Elena Kagan delivered the Supreme Court’s unanimous opinion, noting that under the Lanham Act, which allows a victorious plaintiff to recover the “defendant’s profits” deriving from improper use of a mark, “the ‘defendant’s profits’ are the defendant’s profits, not its plus its affiliates’.”[2]

Factual Background

The Dewberry Case stems from a nearly 20-year dispute between Dewberry Engineers Inc. (Engineers) and Dewberry Group, Inc. (Group). Engineers provides commercial real estate development services and owns a US registration for the DEWBERRY mark. Group also operates in the commercial real estate space, providing various services under the DEWBERRY mark in connection with its approximately 30 separately incorporated affiliates, each of which owns a commercial property. Group reported no profits on its tax returns but rather operated at a loss for many years and occasionally received cash infusions from its owner, John Dewberry, to make up the shortfall. However, Group’s property-owning affiliates (also owned by John Dewberry) reportedly “racked up tens of millions of dollars in profit.”[3]

In 2007, Engineers sued Group for trademark infringement, leading to a settlement agreement that limited Group’s ability to use the DEWBERRY mark. However, several years later Group resumed use of the DEWBERRY mark, prompting the present lawsuit. The District Court found Group liable for trademark infringement (among other counts) and awarded Engineers a $43 million judgment to disgorge the “defendant’s profits.” The District Court calculated this award based on the profits of Group and its affiliates. While Group’s affiliates were not named defendants, the District Court “treated Dewberry Group and its affiliates ‘as a single corporate entity’ for purposes of calculating a profits award” to account for the “economic reality” of the case (i.e. the fact that the profits from the infringing conduct only showed up on the affiliates’ books, while Group operated at a loss).[4] Notably, the District Court did not purport to rely on the “just-sum” provision of Section 1117(a) of the Lanham Act (15 U.S.C. § 1117(a)), which allows a court to “in its discretion enter judgment for such sum as the court shall find to be just, according to the circumstances of the case” if it finds “the amount of the recovery based on [defendant’s] profits is either inadequate or excessive.” The Fourth Circuit Court of Appeals upheld the District Court’s decision.

Supreme Court’s Decision

On appeal, the Supreme Court held that the lower courts improperly treated the Group and its affiliates as a single entity for purposes of calculating the “defendant’s profits.” As (a) Group was the sole named defendant, (b) the lower courts did not rely on the “just-sum” provision of Section 1117(a) of the Lanham Act when calculating the $43 million dollar award, and (c) the plaintiff did not assert the requisite arguments or facts to pierce the corporate veil between Group and its affiliates, the plaintiff was left with the plain text of the Lanham Act, which allows a plaintiff to recover the “defendant’s profits,” and with general principles of “corporate separateness” and “corporate formalities.” Accordingly, the Supreme Court held that only the profits of the named defendant (i.e., Group) were recoverable, and remanded the case for further proceedings consistent with this holding.

In her concurring opinion, Justice Sonia Sotomayor acknowledged that “principles of corporate separateness do not force courts to close their eyes to practical realities in calculating a ‘defendant’s profits.’”[5] Justice Sotomayor continued “the Lanham Act itself directs courts to calculate such profits ‘subject to the principles of equity’” which “support the view that companies cannot evade accountability for wrongdoing through creative accounting.”[6] However, as the foregoing was not considered or adequately addressed by the lower courts, Justice Sotomayor stated that the Supreme Court “rightly declines to decide exactly when and how courts may look beyond a defendant’s books in calculating Lanham Act disgorgement awards” and, in doing so, “the lower courts may explore that important issue and consider reopening the record if appropriate.”[7]

Future Implications

Group is not out of the clear yet, and companies should not assume that clever corporate structuring will necessarily avoid a significant trademark infringement award. Justice Kagan acknowledged that “[i]n remanding this case for a new award proceeding, we leave a number of questions unaddressed.”[8] Specifically, “[t]he Court expresses no view on whether or how the courts could have used the just-sum provision to support a profits award; whether or how courts can look behind a defendant’s tax or accounting records to consider a defendant’s true financial gain even without relying on the just-sum provision; and whether veil-piercing remains an available option.”

Accordingly, for now potential plaintiffs will need to closely consider their filing strategy, including the implications of which defendants are named as parties to a suit and the development of evidence to support legal theories that would allow recovery from a defendant’s corporate affiliates. On the other hand, parties who are typically in the position of a defendant will want to closely track the developments on remand, and how other courts apply Dewberry, as such decisions may impact the ability to avoid liability for the acts of an affiliate that is a named party in the suit.

[View source.]