'Dewberry' Case May Raise Costs and Liability for US Corporates

Dewberry Group v Dewberry Engineers involves two commercial real estate development companies that share the name Dewberry. In May 2020, Dewberry Engineers filed a complaint against Dewberry Group in the Eastern District of Virginia alleging, among other things, trademark infringement under the Lanham Act.

After granting summary judgment to Dewberry Engineers on all claims, the district court found that Dewberry Engineers was entitled to a $43 million profit disgorgement award under the Lanham Act for Dewberry Group’s willful, bad-faith infringement.

Section 1117(a) of the Lanham Act provides that a prevailing plaintiff “shall be entitled . . . subject to the principles of equity, to recover (1) defendant’s profits” and that “[i]f the court shall find that the among of the recovery based on profits is either inadequate or excessive the court may in its discretion enter judgment for such sum as the court shall find to be just, according to the circumstances of the case.”

Dewberry Group argued before the lower courts that the profit disgorgement award violated principles of corporate separateness because the district court tied the award to profits enjoyed only by Dewberry Group’s legally separate, non-party corporate affiliates.

According to Dewberry Group’s tax returns, it generated zero profits as a result of its infringing activities. Dewberry Group claimed that it provided infringing branding to its affiliate companies who in turn, paid Dewberry Group a fee for internal services and used the branding to lease commercial property and generate profits that never passed to Dewberry Group.

The district court and a split Fourth Circuit panel rejected Dewberry Group’s argument. The lower courts held that the Lanham Act’s language permitting disgorgement of profits “subject to the principles of equity” warranted the award to Dewberry Engineers for revenues generated by Dewberry Group and its affiliates use of the infringing marks.

The district court found, and the split Fourth Circuit panel agreed, that Dewberry Group’s lack of profits did not reflect “economic reality” because its affiliates did not perform the revenue-generating services on their own and that Dewberry Group, not its affiliates, was the entity responsible for promoting, managing, and operating its properties.

According to the lower courts, it was thus proper to treat Dewberry Group and its affiliates as a single entity for purposes of calculating profits. The split Fourth Circuit panel concluded that “[a]dmonishing courts for using their discretion in this fashion risk handing potential trademark infringers the blueprint for using corporate formalities to insulate their infringement from financial consequence.”

Dissenting Circuit Judge Marvin Quattlebaum Jr. stated that he was unaware of any law permitting use of revenues from a separate, non-party entity to evaluate a defendant’s profits. He wrote that Dewberry Engineers could have sued the affiliates or pierced the corporate veil to eliminate corporate separateness but pursued neither option.

The Supreme Court granted Dewberry Group’s petition for certiorari and will now consider the breadth of a court’s discretion in crafting equitable profit disgorgement remedies under the Lanham Act and whether such discretion extends to including profits obtained by non-party, corporate affiliates.

Takeaways from SCOTUS’ decision to review

SCOTUS has shown a recent interest in reviewing cases involving the interpretation of the Lanham Act. For example, in 2019, the court granted a petition to review an issue involving interpretation of the same section of the Lanham Act at issue in Dewberry.

In Romag Fasteners v Fossil, the Supreme Court, relying on strict adherence to language of the Lanham Act, rejected a categorical rule requiring proof of willfulness to recover an infringer’s profits, opening the door for increased damages in trademark infringement cases.

The court likely views Dewberry as another opportunity to weigh in the Lanham Act’s provision providing for disgorgement of an infringer’s profits.

Further, SCOTUS likely decided to review this case because of the implications it may have on other areas of law, as many other statutes use “principles of equity” to guide a court’s discretion in determining remedies.

Finally, the court’s conservative majority likely views this case as an opportunity to reinforce traditional principles of corporate separateness.

What are the implications for the Lanham Act?

The outcome of this case will either chill or empower a court’s equitable discretion that can be exercised when crafting an award for disgorgement of an infringer’s profits.

To the extent SCOTUS endorses the Fourth Circuit’s holding, courts will have discretion to increase profit awards by considering revenues enjoyed by an infringer’s related entities irrespective of whether those related entities are parties to the suit or whether the corporate veil is pierced.

Authorising such discretion, on the heels of the Romag decision, could further increase the potential damages available to trademark holders in infringement cases and at the same time, reduce the ability of corporations to shelter assets from liability through the use of shell companies.