Collecting trademark infringement judgements takes care

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The United States Supreme Court has spoken on another trademark case. This one has tragic financial results for the plaintiff and it’s lawyers who could not hold onto a $43 million infringement judgment.

When trademark infringement is established, the federal Lanham Act permits a plaintiff to recover the defendant’s profits resulting from the infringement. These profits can be quite large in the right case as they were here.

However, lawyers must take excruciating care to assure that they have not only sued the right defendant, but that they have also sued all other responsible defendants who are engaged in the infringing activity, even if they are all affiliates by interlocking, or common ownership. They must be individually named as defendants as this case points out.

All of this was set forth in detail last year when the United States Supreme Court heard and ruled on Dewberry Group, Inc. v. Dewberry Engineers, Inc.

Engineers had successfully sued Group for trademark infringement. Group provides all the services that are needed to generate rental income from real estate owned by separate, but affiliated by ownership, entities. All of these entities were owned by one individual. The affiliated entities kept millions of dollars in rental income and they paid to Group a minor management fee for its activities. The affliliates have no employees, only interests in commercial real estate.

These management fees are below market and Group habitually operates at a loss, requiring periodic capital contributions from the wealthy individual who owns Group and all of the affiliates.

The trial court, to reflect what it referred to as the “economic reality” of all of these affiliates being under common ownership and control, and operating in bad faith, treated Group and the affiliates as one entity for purposes of calculating the $43 million award of profits that were derived by all of the affiliated entities from the trademark infringement.

A divided U.S. Court of Appeals for the 4th Circuit affirmed the award. The Supreme Court granted cert and reversed and remanded the award for a new calculation based on its decision.

The Court concluded that in awarding “defendant’s profits” under Lanham Act section 1117 (a), a court can award only those profits that are attributable to the “defendant’s” infringement. The defendant, the Court concluded, is defined as the party against whom relief or recovery is sought; in other words, the party or parties that are named as defendant or defendants.

In Dewberry, the only party named by Engineers as a defendant was Group, and recovery of profits was limited to Group which operated at a loss. That was quite unfortunate for Engineers because Group had no profits to recover and was judgment proof, having no assets to speak of.

Because Engineers made the decision not to name any of the affiliate entities as defendants, and they did not, they could not recover profits from anyone other than Group. It simply followed in the Court’s view that these affiliates were not defendants and their profits, not being defendants, were not subject to disgorgement.

Engineers attempted to argue that black letter corporate law allows recovery from members of an affiliated group but this argument failed. That was because corporate law, contrary to the arguments, recognizes that each of the affiliates and Group are separate corporate entities. And separately created entities are recognized as having a distinct legal existence. However, that assumes that all the I’s are dotted, and the T’s are crossed, meaning that the entities have observed the proper corporate formalities, preventing a party from piercing corporate veils.

Attempting a Hail Mary play Engineers attempted to convince the Court that the language of section 1177 (a) allows a court to increase the amount of judgment if it finds that recovery of profits is inadequate; it asserted that the rule should have been applied in this case. This effort failed, though, because it was not the approach taken by the trial court. Instead, the trial court wrongly consolidated all affiliates for purposes of calculating profits and the appellate court approved of the approach.

Hindsight, as they say, comes with 20/20 vision, and it is not clear from this decision whether the affiliates engaged in direct infringement of the mark. Perhaps, though, they contributed to the infringement. Surely they benefited and perhaps they might have been named, if not in the Lanham Act action, as defendants in a common law unfair competition claim. But I suppose you had to be there to judge.

It is the $43 million judgment that got away. And this is a lesson to be remembered.

Jim Astrachan is a counsel to Corey Tepe LLC and has taught intellectual property law in the two Maryland law schools since 1999.