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A New Dilemma for Plaintiffs in Counterfeiting Actions: Statutory Damages vs. Attorney Fees

IP Litigator
May/June 2008

Sommers, Mark , Kilaru, Naresh

Article

Authored by Naresh Kilaru and Mark Sommers

Section 35(c) of the Lanham Act allows prevailing plaintiffs in trademark counterfeiting actions to choose statutory damages in lieu of actual damages or profits. In enacting Section 35(c), Congress recognized that "counterfeiters' records frequently are nonexistent, inadequate, or deceptively kept…, making proving actual damages in these cases extremely difficult if not impossible." [S. Rep. No. 104-177, at 10 (1995).] The availability of statutory damages under Section 35(c) was intended to "strengthen the hand" of trademark owners by allowing them to obtain monetary recovery in counterfeiting actions without having to rely on the often questionable and elusive nature of a counterfeiter's financial records. 

But does a plaintiff’s election of statutory damages under Section 35(c) preclude an award of attorney fees? According to the Ninth Circuit's recent decision in K&N Engineering v. Bulat, [510 F.3d 1079 (9th Cir. 2007)] the answer to this question is yes. It is an arcane issue of statutory interpretation most courts have never stopped to consider: attorney fees are specifically allowed under Sections 35(a) and (b) when a plaintiff recovers actual damages and/or profits, but Section 35(c) is silent regarding the availability of attorney fees when statutory damages are elected. Until the Ninth Circuit’s decision in K&N Engineering, no court of appeals squarely addressed this apparent discrepancy, and the assumption of most district courts was that attorney fees are available regardless of a plaintiff’s election of statutory damages. A close reading of Section 35, however, reveals ambiguity on this issue.

Section 35 of the Lanham Act

Section 35 of the Lanham Act contains three relevant subparts dealing with monetary recovery in trademark infringement actions. Section 35(a) allows prevailing plaintiffs to recover actual damages, the defendant's profits, and costs. The last sentence of Section 35(a) provides that the court "in exceptional cases may award reasonable attorney fees to the prevailing party." If a counterfeit mark is involved, Section 35(b) requires a court to award three times the amount of profits or damages calculated under subsection (a), "together with a reasonable attorney's fee." Under Section 35(c), a plaintiff in a counterfeiting action may elect to recover an award of statutory damages "instead of actual damages and profits under subsection (a)." Unlike subsections (a) and (b), subsection (c) contains no mention of attorney fees.

The Ninth Circuit’s Rationale in K&N Engineering

The plaintiff in K&N Engineering elected to recover statutory damages on its counterfeiting claim under Section 35(c) in lieu of actual damages and profits, and also sought attorney fees under Section 35(b). The district court granted summary judgment for plaintiff on all claims and awarded $20,000 in statutory damages and $100,000 in attorney fees. On appeal, the Ninth Circuit affirmed the district court’s grant of summary judgment and its award of statutory damages, but reversed the award of attorney fees.

The Ninth Circuit reasoned that because Section 35(c) contains no mention of attorney fees when a plaintiff elects to recover statutory damages, and because the attorney fee provision of Section 35(b) applies only when actual damages or profits are awarded under Section 35(a), no statutory basis for awarding attorney fees existed. In other words, the plaintiff’s election of statutory damages under Section 35(c) foreclosed any possibility of recovering attorney fees.

Lanham Act Section 35 As Interpreted by Other Courts

To the authors' knowledge, no other reported decision has interpreted Section 35 as squarely precluding an award of attorney fees when statutory damages are elected. The closest a court has come to reaching the same conclusion as K&N Engineering is perhaps Gucci America v. Duty Free Apparel [315 F. Supp. 2d 511 (S.D.N.Y. 2004)]. As in K&N Engineering, the plaintiff sought to recover statutory damages under Section 35(c) for its trademark counterfeiting claim and attorney fees under Section 35(b). The court held that the "presumption" of attorney fees under Section 35(b), which makes an award of attorney fees mandatory in counterfeiting cases absent "extenuating circumstances," did not apply given the plaintiff's election of statutory damages "except to the extent that actual damages are a persuasive measure towards determining statutory damages." In other words, according to the Gucci court, while attorney fees are technically not available under Section 35(b) for plaintiffs electing statutory damages, the court is free to take into account a plaintiff's attorney fees when determining the amount of statutory damages. The Gucci court ultimately declined to award attorney fees because it concluded that its award of $2 million in statutory damages "more than sufficiently advance[d] the goals of deterrence and compensation in this case."

Other decisions have noted the ambiguity in Section 35(c) regarding the availability of attorney fees when statutory damages are elected. For instance, in Rolex Watch USA v. Brown [2002 U.S. Dist. LEXIS 10054 (S.D.N.Y. June 5, 2002)], the court raised the possibility there are two equally plausible interpretations of Section 35 on this issue: (1) Congress could have intended Section 35(c) to replace only the damages available under Section 35(a) while leaving the attorney fee provision of Section 35(a) intact, or alternatively (2) because of the enhanced amount of statutory damages available under Section 35(c), attorney fees are not available when statutory damages are elected. The court decided it did not need to resolve this issue because, in addition to the counterfeiting claim under Section 32 for which the plaintiff had elected statutory damages, the plaintiff had asserted a separate unfair competition claim under Section 43(a). In the court's view, the separate unfair competition claim allowed an award of attorney fees under Section 35(a)'s provision allowing for attorney fees in "exceptional cases." Other courts have similarly sidestepped the ambiguity of Section 35 by finding that, regardless of a plaintiff's election of statutory damages for its counterfeiting claim, attorney fees may still be awarded under Section 35(a)'s "exceptional case" provision for separately pleaded unfair competition claims. [See, e.g. Rodgers v. Anderson, 2005 U.S. Dist. LEXIS 7054 (S.D.N.Y. Apr. 26, 2005); Silhouette Int’l Schmied AG v. Chakhbazian, 2004 U.S. Dist. LEXIS 19787 (S.D.N.Y. Oct. 4, 2004).]

The vast majority of cases, however, do not even discuss this issue and award attorney fees under Section 35(a) and/or Section 35(b) even when a plaintiff has elected statutory damages under Section 35(c). [See, e.g. Chanel, Inc. v. French, 2006 U.S. Dist. LEXIS 93297 (S.D. Fla. Dec. 22, 2006) (awarding attorney fees under Section 35(b) when plaintiff elected statutory damages); Tiffany, Inc. v. Luban, 282 F. Supp. 2d 123 (S.D.N.Y. 2003) (same); Rolex Watch USA, Inc. v. Jones, 2002 U.S. Dist. LEXIS 6657 (S.D.N.Y. Apr. 17, 2002) (same); Lorillard Tobacco Co. v. S&M Central Service Corp., 2004 U.S. Dist. LEXIS 22563 (N.D. Ill. Nov. 5, 2004) (same); Ford Motor Co. v. Cross, 441 F. Supp. 2d 837 (E.D. Mich. 2006) (awarding attorney fees under Section 35(a) when plaintiff elected statutory damages); Philip Morris USA, Inc. v. Banh, 2005 U.S. Dist. LEXIS 43113 (C.D. Cal. Jan. 14, 2005) (same); Tony Jones Apparel, Inc. v. Indigo USA LLC, 2005 U.S. Dist. LEXIS 14649 (N.D. Ill. July 11, 2005) (awarding attorney fees under both Sections 35(a) and 35(b) when plaintiff elected statutory damages); Sara Lee Corp. v. Bags of New York, Inc., 36 F. Supp. 2d 161 (S.D.N.Y. 1999) (same).]

Conclusion

It remains to be seen whether other appeals courts will follow the Ninth Circuit’s decision in K&N Engineering. In the meantime, trademark owners bringing counterfeiting actions will have to carefully weigh the benefits of electing statutory damages under Section 35(c) against the potential inability to recover attorney fees, as defendants in counterfeiting actions will no doubt try and persuade other courts to adopt the same rationale as the Ninth Circuit. At the very least, the savvy practitioner will plead trademark infringement counts under both Sections 32(1) and 43(a) and move for attorney fees as an independent claim under the "exceptional case" provision of Section 35(a).

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