Legal and Equitable Profit Disgorgement in a Trademark Case

28 June 2018 IP Litigation Current Blog
Author(s): William J. Robinson

In many instances, trademark and trade dress cases are directed to injunctive relief, with damages being almost an afterthought.  Not sharply focusing in damages from the outset of a case may be a mistake, particularly given what may be recovered as legal and equitable damages and the ability to disgorge an infringer’s profits as a proxy for the trademark owner’s lost sales.

15 U.S.C. § 1117(a) provides as follows:

(a) Profits; damages and costs; attorney fees

When a violation of any right of the registrant of a mark registered in the Patent and Trademark Office, a violation under section 1125(a) or (d) of this title, or a willful violation under section 1125(c) of this title, shall have been established in any civil action arising under this chapter, the plaintiff shall be entitled, subject to the provisions of sections 1111 and 1114 of this title, and subject to the principles of equity, to recover (1) defendant’s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.

In many instances, trademark and trade dress cases are directed to injunctive relief, with damages being almost an afterthought. Not sharply focusing in damages from the outset of a case may be a mistake, particularly given what may be recovered as legal and equitable damages and the ability to disgorge an infringer’s profits as a proxy for the trademark owner’s lost sales.

Legal Damages: Disgorgement as Lost Sales Proxy

It is well-established that a jury can award a trademark owner its lost sales.  In an infringement action, “[d]amages are typically measured by any direct injury which a plaintiff can prove, as well as any lost profits which the plaintiff would have earned but for the infringement.”  Lindy Pen Co. v. Bic Pen Corp., 982 F.2d 1400, 1407 (9th Cir. 1993) abrogated on other grounds by SunEarth, Inc. v. Sun Earth Solar Power Co., 839 F.3d 1179 (9th Cir. 2016).  Because proof of actual damage is often difficult, however, disgorgement of the defendant’s profits may be used by the jury as a proxy for lost sales in making a damages award.

The “proxy theory of profits is based on the idea that the defendant diverted sales that would have gone to the plaintiff but for the infringement.  This theory is designed to ‘compensate the plaintiff for sales which he has lost as a result of his customers being diverted to the infringer.’”  SpinMaster, Ltd. v. Zobmondo Entm’t, LLC, 944 F. Supp. 2d 830, 840 (C.D. Cal. 2012)(citation omitted).  To recover under this theory, the plaintiff and the infringer must be direct competitors; “if there is no competition, there can be no diversion of customers.”  Id. (citing Maier Brewing Co. v. Fleischmann Distilling Corp., 390 F.2d 117, 121 (9th Cir. 1968)).  When a plaintiff seeks the defendant’s profits as a measure of his own damages, willful infringement is not a prerequisite.  Adray v. Adry–Mart, Inc., 76 F.3d 984, 988 (9th Cir. 1995), as amended on denial of reh’g (Feb. 15, 1996); see also Paramount Farms Int’l LLC v. Keenan Farms Inc., No. 2:12-CV-01463-SVW-E, 2012 WL 12892420, at *2–3 (C.D. Cal. Dec. 6, 2012) (“[W]here, as here, a plaintiff relies on the defendant’s profits to establish its actual damages under a ‘proxy theory of lost profits,’ the plaintiff need not show that the infringement was willful.”).  See also Ninth Circuit Model Civil Jury Instruction No. 15.26 “Trademark Damages – Defendant’s Profits.”

While § 1117(a) uses the phrase “subject to the principles of equity,” any discretion of the court in fashioning damages applies only to equitable remedies like unjust enrichment (discussed infra), enhanced damages, and attorneys’ fees, and not to legal damages awarded as compensation by a jury.  For example, while cases such as Taco Cabana Int’l, Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1127 (5th Cir. 1991) state that “Section 35 of the Lanham Act endows district courts ‘with considerable discretion in fashioning an appropriate remedy for infringement,’” such discretion is with respect to determining equitable enhancement of legal damages by the district court or allowing unjust enrichment damages, but does not limit the damages awardable by a jury.

One interesting use of disgorgement of profits theory in a related context is in a trademark or trade dress contempt proceeding.   “[D]isgorgement of profits is a traditional trademark remedy and the district court’s use of profits as a measure for the contempt sanction is hardly a novel proposition.” Jerry’s Famous Deli, Inc. v. Papanicolaou, 383 F.3d 998, 1004 (9th Cir. 2004); see Leman v. Krentler-Arnold Hinge Last Co., 284 U.S. 448, 456 (1932) (“In a suit in equity against an infringer, profits are recoverable not by way of punishment but to insure full compensation to the party injured”).  Such an approach was recently used in Toyo Tire & Rubber Co. v. H.K. Tri-Ace Tire Co., 2017 U.S. Dist. LEXIS 214878 (C.D. Cal. November 27, 2017) to fashion a significant sanctions award.

Equitable Damages: Disgorgement for Unjust Enrichment

A district court is separately empowered to order disgorgement of a  defendant’s profits as an equitable remedy under 15 U.S.C. § 1117(a) under an unjust enrichment theory.  To obtain disgorgement of profits under an unjust enrichment theory, the plaintiff must prove that infringement was committed willfully. Stone Creek, Inc. v. Omnia Italian Design, Inc., 875 F.3d 426, 441 (9th Cir. 2017), cert. denied, No. 17-731, 2018 WL 2186227 (May 14, 2018); Spin Master, 944 F. Supp. 2d at 839 (no willfulness test applied to “profits-as-proxy” theory, but willfulness was applied for equitable disgorgement).  “To demonstrate willful infringement, a party only needs to show “a connection between a defendant’s awareness of its competitors and its actions at those competitors’ expense.” Fifty-Six Hope Road, 778 F.3d at 1074; see also D.C. Comics v. Towle, 802 F.3d 1012, 1026 (9th Cir. 2015) (“Willful trademark infringement occurs when the defendant’s actions are ‘willfully calculated to exploit the advantage of an established mark.’”).

Such disgorgement might be done either as part of a bench proceeding or at the request of the plaintiff to supplement a jury award that was deemed insufficient.  Such disgorgement is different from the use of disgorgement as a proxy for legal damages. See, e.g., Paramount Farms, 2012 U.S. Dist. LEXIS 196005, at *13 (equitable disgorgement theory allowed in the alternative to proxy theory disgorgement).

Disgorgement as a lost sales proxy or under an unjust enrichment theory may actually simplify the damages issues.  As such, analysis of it should be a priority in a trademark case.


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