The US Supreme Court granted certiorari to review the 4th Circuit’s damages ruling in Dewberry Engineers v. Dewberry Group, which offers a unique examination of corporate separateness and the protection of trademarks under the Lanham Act, particularly in the context of disgorgement of profits. Central to the case is whether Dewberry Group could be held liable for profits generated by its affiliates, through the use of infringing marks, despite the affiliates being separate legal entities. Legal organizations and scholars have filed amicus briefs to weigh in on the potential ramifications.
Corporate Separateness and Disgorgement of Profits
At the heart of the most recent spat is the claim by Dewberry Engineers that Dewberry Group used new insignias in its real estate activities infringing marks associated with Dewberry Engineers’ trademarked branding. This is the most recent lawsuit over the “Dewberry” mark since the saga began in 2006 over common law versus registered trademark rights. Dewberry Group is a corporate entity that provides shared services to its affiliated companies. The affiliates are owned by one individual, John Dewberry, and each affiliate then leases commercial property to tenants. The Group argued that it did not directly profit from the infringing activities because the revenues were recorded only on the books of its affiliates. The group contended that because the affiliates were separate corporate entities, their revenues could not be attributed to Dewberry Group for the purpose of calculating disgorgement under the Lanham Act.
The 4th Circuit, agreeing with the district court upheld a $43 million disgorgement award. It treated Dewberry Group and its affiliates as a “single corporate entity” for the purposes of calculating the infringing revenues. The appellate court relied upon expert testimony of Rodney Bosco, that Dewberry Group promoted and managed properties owned by the affiliates using the infringing marks. Dewberry Group’s Executive Vice President of Finance also confirmed that all the revenues related to these activities appeared on the affiliates’ books, and Dewberry Group was responsible for providing the infringing branding.
Piercing the Corporate Veil: A Workaround?
A key issue in the case was whether the court’s decision effectively pierced the corporate veil. Typically, piercing the corporate veil is a legal remedy that holds shareholders or related entities accountable for corporate debts or liabilities when there is abuse of the corporate form, such as fraud or undercapitalization. Alternatively, the corporate veil acts as a shield for well-meaning individuals to prevent personal or subsidiary liability for corporate actions. Here, Dewberry Group argued that the court, by consolidating the revenues of Dewberry Group and its affiliates, had blurred the distinction between legally separate entities without adhering to the strict legal standards required to pierce the corporate veil. Furthermore, Dewberry Group argued that Dewberry Engineers could have named the affiliates as defendants but never did.
The 4th Circuit rejected Dewberry Group’s argument, affirming the district court’s approach. Rather than piercing the corporate veil, the court reasoned that it was necessary to consider the revenues of Dewberry Group’s affiliates to determine Dewberry Group’s “true financial gain” from the infringing activities. The district court cited the Fifth Circuit’s decision in American Rice, Inc. v. Producers Rice Mill, Inc., which held that a defendant’s tax treatment or business structure is irrelevant when determining profit disgorgement under the Lanham Act. In both cases, the courts emphasized that the purpose of the Lanham Act’s disgorgement remedy is to remove the economic incentive for trademark infringement.
The Dissent and Concerns About Corporate Separateness
In his dissent, Justice Quattlebaum expressed concern about the majority’s treatment of the affiliated companies’ revenues, arguing that it was improper to treat Dewberry Group and its affiliates as a single entity. He emphasized that the Lanham Act only permits the disgorgement of profits earned by the infringing party, not by third parties. The dissent pointed out that, Dewberry Engineers should have either sued the affiliates directly or sought to pierce the corporate veil. Instead, by attributing the affiliates’ revenues to Dewberry Group, the court effectively disregarded corporate formalities without a proper legal basis.
Justice Quattlebaum also found the court’s reliance on American Rice misplaced. In American Rice, the defendant, a cooperative, passed its infringing profits to its members. Though, the profits were still considered the cooperative’s profits for purposes of the Lanham Act as member distributions are income and are not a deductible cost. In contrast, in Dewberry Engineers, the revenues were never realized by Dewberry Group; they were held by legally distinct affiliates. For Quattlebaum, this distinction was crucial. The Lanham Act allows for the recovery of an infringer’s profits, not the profits of separate entities.
Criticism of the Fourth Circuit’s Decision
Corporate groups such as the Washington Legal Foundation, the American Intellectual Property Law Association (AIPLA), and the International Trademark Association (INTA) raised alarms about the broader implications of the ruling. These amici argue that the decision creates uncertainty for corporations and could lead to a “slippery slope” of expansive litigation, where courts may calculate disgorgement awards based on the revenues of affiliates not directly implicated in the suit. The Washington Legal Foundation argued that the decision undermines corporate protections and opens the door for courts to disregard corporate structures in the name of equity. The AIPLA warned that the decision leaves ambiguity regarding the limits of a district court’s equitable discretion and could encourage forum shopping, where plaintiffs strategically file lawsuits in courts more likely to aggregate affiliate profits. The ruling could force corporations to reconsider their structures, as it expands the potential for liability beyond the corporate entities directly involved in infringing activities. A major concern is that this approach to liability could bankrupt corporations by “holding them accountable” for the profits of affiliates that have not been sued or otherwise proven to infringe.
Balancing Equity and Corporate Formalities
Despite these concerns, the 4th Circuit’s decision reflects the flexibility of the Lanham Act’s equitable remedies. The Act provides that disgorgement of profits is “subject to the principles of equity,” allowing courts significant discretion in crafting remedies that address the specific facts of each case. In Dewberry Engineers, the district court and the 4th Circuit believed that failing to consider the revenues of Dewberry Group’s affiliates would undermine the purpose of the Lanham Act by allowing Dewberry Group to shield itself from liability through its corporate structure.
Ultimately, the Supreme Court will review a decision that highlights the tension between respecting corporate separateness and ensuring that trademark infringement does not go unpunished. By consolidating Dewberry Group and its affiliates for purposes of disgorgement, the district court sought to prevent Dewberry Group from insulating itself from financial consequences through its corporate formalities. This approach aligns with a broader goal of the Lanham Act, which is to provide trademark holders with robust protection and to remove the economic incentive for infringement. Although the 4th Circuit dissent and amici argue that the ruling undermines corporate formalities, the appellate court’s majority viewed it as necessary to prevent Dewberry Group from avoiding liability for its infringing activities. The justices surely will have to balance a court’s discretion in ensuring trademark protections are not eroded by corporate structure.
