‘Defendant’ Means Defendant – SCOTUS Reverses District Court’s $43M Award of Affiliates’ Profits for Trademark Infringement

In a unanimous decision, the Supreme Court held that a district court erred when it included profits of the defendant’s non-party affiliates in its calculation of “defendant’s profits” under the Lanham Act.

Background

Dewberry Engineers (“the Engineers”), a civil engineering and surveying firm in the real estate sector sued real estate developer Dewberry Group (“the Group”) for trademark infringement (among other claims) of the mark DEWBERRY. The Engineers prevailed, and the district court granted them a disgorgement of profits on the order of $43 million, based on a finding that the Group’s infringement was willful. Critically, however, the evidence showed that the Group itself (the only named defendant in the case) had earned zero profits from its infringing activities. The district court therefore relied on “principles of equity” to include profits attributable to the Group’s affiliates—who were not named parties—in the disgorgement award.  The Group appealed the judgment to the Fourth Circuit.

A split Fourth Circuit affirmed the district court’s award of profits, concluding that “[a]dmonishing courts for using their discretion in this fashion risk[s] handing potential trademark infringers the blueprint for using corporate formalities to insulate their infringement from financial consequence.”  The Group appealed the case to the Supreme Court.  The Court reversed, vacated the judgment, and remanded the case for further findings consistent with its opinion.

SCOTUS Decision

Writing for the majority, Justice Kagan focused narrowly on a single question—whether the district court erred in treating the profits of the defendant’s affiliates as “defendant’s profits” within the meaning of Section 1117(a) of the Lanham Act.  SCOTUS concluded that it was improper to treat the Group and its affiliates as a single entity for disgorgement purposes based on two key rules: (1) the word “defendant” is not a defined term in the Lanham Act and must therefore be given its usual legal meaning, i.e., the party against whom relief is sought and (2) the common-law principle of corporate separateness—construed as a backdrop to the Lanham Act—which requires that the Group and its non-party affiliates be treated as separate legal entities or persons when they are separately incorporated and organized.

By cabining its opinion to this issue, the Supreme Court left several issues open for the district court to determine on remand.  Notably, SCOTUS declined to consider whether the district court, in its equitable discretion, could include the affiliates’ profits in the disgorgement calculations under the “just sum” provision of Section 1117(a).  The Supreme Court also declined to make any determination as to whether the Engineers could “pierce the corporate veil” (treat the Group and its affiliates as “alter egos” for disgorgement purposes) given that the Engineers made no such argument at trial or an appeal. The case now heads back to the district court for a new determination of an award.