Supreme Court to Decide Whether Willfulness is Required for Trademark Infringement Damages
This summer, the U.S. Supreme Court granted certiorari in Romag Fasteners, Inc. v. Fossil, Inc., et al., a trademark infringement matter from the U.S. District Court of Connecticut in the Second Circuit. On September 13, 2019 the Petitioner filed its opening brief. With the potential for significant commercial implications nation-wide, the Court will address whether a finding of willfulness is required to recover the defendant’s profits as damages. The circuit courts are split six to six, making this a compelling issue for the Supreme Court to address.
Under the Lanham Act, 15 U.S.C. § 1117(a), a trademark holder that has proved infringement may recover damages in three ways: (1) defendant’s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action. Plaintiff’s actual damages due to trademark infringement (i.e., sales lost to the defendant) can be difficult or costly to measure. Because of this difficulty, plaintiffs may seek defendant’s profits.
Some Circuits, like the 9th, require willfulness in order to award defendant’s profits, while in others it is only one factor considered. In some instances, defendant’s profits may be recovered regardless of willfulness when the parties are direct competitors. Defendant’s profits may be seen as a surrogate for the plaintiff’s losses. The matter before the Court concerns non-competing parties.
Romag alleged Fossil infringed its trademarks by using counterfeit magnetic snap fasteners on fashion accessories. The jury at the District court level found in favor of Romag, but also concluded that Fossil’s infringement was not willful. Romag did not offer evidence of its actual damages. Rather, it offered evidence of defendant’s profits. The district court struck a $6.8 million jury verdict disgorging Fossil’s profits because willfulness is required in the Second Circuit. The Federal Circuit, applying Second Circuit trademark law, affirmed District’s ruling. The Court will now decide whether willfulness is required.
The calculation of damages based on defendant’s profits includes two essential steps: (1) plaintiff’s estimation of defendant’s revenues earned from sales of the infringing product, and (2) defendant’s identification of costs and deductions associated with the manufacture and sale of the infringing product.
1. Estimating Defendant’s Revenues
The plaintiff in a trademark matter bears the burden only to prove the amount of revenue the defendant earned from infringing activity. Using a defendant’s transactional data or other financial statements, a plaintiff’s expert tabulates sales for the good in question in the relevant geographic area during the period of infringement.
2. Identifying Costs and Deductions
It is the defendant’s burden to prove elements that should be deducted from the plaintiff’s revenue estimate. This has two parts: (1) identification of sales not due to infringement and (2) costs which should be deducted from revenue to calculate profits.
Infringing revenue is not the total sales of a product which infringed a plaintiff’s trademark. Rather, it is the share of that revenue attributable to infringement. Many factors influence what products consumers choose to purchase. Therefore, a defendant in a trademark infringement matter may hire an expert to perform analysis which distinguishes between sales earned during the ordinary course of business and sales earned because of the infringement.
Alternatively, a defendant may hire a survey expert to measure the extent to which infringement led consumers to buy its product. When measuring consumer perceptions, experts typically follow the guidelines and standards employed in the field of survey research, such as the criteria set forth in the Reference Guide on Survey Research (3rd Ed) published by the Federal Judicial Center.
Identification of Costs
The key here is to identify and deduct cost elements that vary with the quantity of sales. Examples of costs deducted from revenue include payroll/benefits, input materials/supplies, entertainment, computers/computer software, and rentals.
If the defendant provides no evidence of costs or other deductions, the court may award the plaintiff its estimate of defendant’s revenues. However, it also may fall on the plaintiff to apportion the revenue, especially when the infringing activity is found to be narrow. If a plaintiff fails to offer proof that a defendant’s infringement led to sales, it may fail to recover defendant’s profits.
A Supreme Court ruling on willfulness in awarding defendant’s profits as a remedy for trademark infringement will resolve an ongoing inconsistency within the courts. As discussed above, half of the U.S. Circuits currently require willfulness and half do not. This will have significant commercial implications—either some plaintiffs will lose the ability to seek defendant’s profits or others will gain the right to do so. For damages experts, this could mean turning their attention towards methods for measuring plaintiffs’ actual damages if willfulness is required. If willfulness is not required, but only a factor, expert testimony pertaining to defendant’s profits will likely occur more frequently.
Leslie Schafer, Ph.D., is a Managing Director at Econ One Research, Inc. in Los Angeles, CA.
Supreme Court of the United States. No. 18-1233, Proceedings and Orders. Available: https://www.supremecourt.gov/search.aspx?filename=/docket/docketfiles/html/public/18-1233.html [Accessed November 11, 2019].
The question presented to the Court was “Whether, under section 35 of the Lanham Act, 15 U.S.C. § 1117(a), willful infringement is a prerequisite for an award of an infringer’s profits for a violation of section 43(a), id. § 1125(a).” (Romag Fasteners, Inc. v. Fossil, Inc., No. 8-1233, Petition for a Writ of Certiorari (“Romag Petition”) at p. I). Available: https://www.supremecourt.gov/DocketPDF/18/18-1233/92520/20190320121338357_Romag%20Cert%20Petition.pdf [Accessed November 11, 2019].
Romag Petition at p. 3 (“The Third, Fourth, Fifth, Sixth, Seventh, and Eleventh Circuits make an infringer’s profits available under section 35 without requiring a threshold showing of willfulness; the infringer’s intent is merely one factor among many in fashioning an equitable remedy.”).
See, e.g., Tamko Roofing Products, Inc. v. Ideal Roofing Co., 282 F.3d 23 (1st Cir. 2002). See also, Lindy Pen Co., Inc. v. Bic Pen Corp., 982 F2d 1400,1407,1408 (9th Cir. 1993); Levy, Marc C. 2017. “Defendant’s Profits.” In Trademark Infringement Remedies, Third Edition, edited by Steve Meleen, 429-431. Chicago, IL. American Bar Association.
In 2010, Romag discovered counterfeit ROMAG fasteners in certain of the Respondent’s products (Romag Petition at p. 7).
The Federal Circuit had jurisdiction for this case because it also included patent infringement.
15 US Code §1117(a) (“In assessing profits the plaintiff shall be required to prove defendant’s sales only; defendant must prove all elements of cost or deduction claimed.”).
Supra, note 8. See, e.g., Lindy Pen Co., Inc. v. Bic Pen Corp., 982 F2d 1400,1407,1408 (9th Cir. 1993).
Supra, note 8.
Diamond, Shari Seidman. 2011. “Reference Guide on Survey Research.” In National Research Council. 2011. Reference Manual on Scientific Evidence: Third Edition. Washington, DC: The National Academies Press. Available at: https://www.fjc.gov/content/reference-guide-survey-research-2 [Accessed November 11, 2019].