U.S.: Lanham Act Disgorgement Can Reach Only Named Defendant, Not Corporate Affiliates

A Fourth Circuit decision that affirmed a $43 million award in a trademark dispute between two real estate services was vacated because the Supreme Court of the United States (SCOTUS) deemed that the lower courts erroneously regarded the defendant and its nonparty affiliates as a single corporate entity.

In a unanimous decision, SCOTUS withdrew and remanded a decision of the U.S. Court of Appeals in Richmond in a trademark dispute between Dewberry Engineers Inc. and Dewberry Group, Inc. over the use of the word “Dewberry” in their respective business names. The Fourth Circuit affirmed the profits disgorgement award that looked to the revenues of the defendant’s affiliates, based on the theory that the defendant and the affiliates work as a single corporate entity. SCOTUS found that this approach went against longstanding principles regarding corporate separateness.

Finnegan partner Mark Sommers told IP Law Daily that, “The questions left open by the Court are more interesting than the Court’s holding, including the applicability of the “just-sum” provision of Section 35(a) of the Lanham Act. While the ‘just-sum’ argument was briefed on appeal and before the Supreme Court, neither the trial court’s award of profits nor the Fourth Circuit’s opinion affirming the same was based on or applied the ‘just-sum’ provision.”

 “While the existing evidentiary record will come into play, Justice Sotomayor’s concurring opinion notes that ‘principles of corporate separateness do not blind courts to economic realities’ or force them to ‘accept clever accounting, including efforts to obscure a defendant’s true financial gain through arrangements with affiliates,’” Mark noted.

“Further still, Justice Sotomayor provided several fact examples pointing to a lack of corporate separateness between a defendant and its affiliate bearing on the defendant’s profits (e.g., a company charging below-market rates to its affiliate for infringing services) and where a court could exercise its equitable powers to hold that an affiliate’s revenues properly within the defendant’s profits.”

Regarding the broader impact of the case, Mark said, “One thing is clear: the Dewberry decision is not an invitation for infringers to engage in shell games to avoid liability. And Justice Sotomayor’s admonition was likewise clear on that point—‘principles of corporate separateness do not force courts to close their eyes to practical realities in calculating a ‘defendant’s profits.’”

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