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April 18, 2012 Articles

Showing a Disgorgement of Profits under the Lanham Act

Some circuits require evidence of willful infringement as a prerequisite to an award of profits, while others have decided that it is only one of many factors to be considered.

By Oliver Alan Ruiz

The 1999 amendments to the Lanham Act, 15 U.S.C. § 1051 et seq., and, in particular, the revision to section 1117(a) of the act, have spurred dissension among federal circuit courts regarding the evidentiary showing necessary to support a disgorgement of lost profits as an equitable remedy under the revised statute.

Some circuits continue to require evidence of willful infringement as a prerequisite to an award of profits, while other circuits have decided that willfulness is only a factor to be considered in connection with the propriety of an award of a defendant’s profits under the Lanham Act, pointing to the plain language of the revised statute.

Generally, prior to the 1999 amendments to the Lanham Act, federal courts employed a bright-line rule and required evidence of willful infringement to justify the equitable remedy of a disgorgement of profits under the statute. However, with the revision of the statute, and specifically, the inclusion of the word “willful” only with respect to claims under section 43(c) (concerning trademark dilution), some circuits have seized upon the plain language of the amended statute and have relegated the consideration of willful infringement to be only a factor to be considered when deciding on an award of profits under the statute.

As amended, the statute states, in pertinent part, as follows:

When a violation of any right of the registrant of a mark registered in the Patent and Trademark Office, a violation under section 43(a) or (d) [15 USCS § 1125(a) or (d)], or a willful violation under section 43(c) [15 USCS § 1125(c)], shall have been established in any civil action arising under this Act, the plaintiff shall be entitled, subject to the provisions of sections 29 and 32 [15 USCS §§ 1111, 1114], and subject to the principles of equity, to recover (1) defendant’s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.

15 U.S.C. § 1117(a) (emphasis added).

Despite the foregoing revision, some circuits have not read out of the statute the showing of willful infringement as a condition to an award of profits in claims involving infringement of registered marks, or violations of 43(a) or (d), as discussed below.

Circuits That Require a Showing of Willful Infringement as a Prerequisite
The majority view continues to be that the Lanham Act requires a showing of willfulness to support a disgorgement of a defendant’s profits, but the number of circuits that require a showing of willfulness has diminished, with only the First, Second, Eighth, Ninth, Tenth, Eleventh, and D.C. Circuits continuing to require such a showing. Furthermore, in some circuits, which have not visited the specific issue since 1999, district courts have begun to call into question whether a departure from precedent is warranted. In addition, the First and Eleventh Circuits employ a disjunctive test that, while typically requiring a showing of willfulness, leaves room for awards of profits when unjust enrichment is proven.

Second Circuit
Prior to the 1999 amendment, the law of the Second Circuit required a plaintiff to prove that an infringer acted in bad faith (meaning intentional deception or willfulness) to recover an accounting of an infringer’s profits. See Int’l Star Class Yacht Racing Ass’n v. Tommy Hilfiger, U.S.A., Inc., 80 F.3d 749, 753 (2d Cir. 1996). The Second Circuit has not revisited the issue since the amendment, which has resulted in a split among the district courts, as recognized in a decision from the Southern District of New York:

In Cartier v. Aaron Faber Inc., this Court held that, under a plain reading of the statute, the willfulness requirement did not survive the 1999 Amendment. . . . [S]ee also Nike, Inc. v. Top Brand Co. (holding that willfulness is not a prerequisite for an award of damages under § 1125(a)). However, other courts in this District have found that willful deception or bad faith continues to be a requirement to an award of profits or damages even after the 1999 Amendment. See, e.g., GMA Accessories; Mr. Water Heater Enter., Inc. v. 1-800-Hot Water Heater, LLC; and Life Servs. Supplements, Inc. v. Natural Organics, Inc.

Chanel, Inc. v. Veronique Idea Corp., 795 F. Supp. 2d 262, 268–69 (S.D.N.Y. 2011) (internal citations omitted).

Accordingly, it remains to be seen whether the Second Circuit will affirm its prior precedent and resolve the split among its district courts.

Eighth Circuit
The Eighth Circuit most recently dealt with this issue in January 2011. In Masters v. UHS of Delaware, Inc., 631 F.3d 464 (8th Cir 2011), the court acknowledged the circuit split on the issue of whether "a Lanham Act plaintiff must prove willful infringement, rather than mere infringement, to be eligible for monetary damages under 15 U.S.C. § 1125(a)," but it assumed, without deciding, that willful infringement is a prerequisite of monetary relief. Perhaps tellingly, in its acknowledgement of the circuit split, the court cited to 5 J. McCarthy, McCarthy on Trademarks and Unfair Competition § 30:62 (4th ed. 2010), and noted that the treatise "criticiz[ed] circuit courts that have removed the willfulness requirement from § 1125(a) on the basis of the 1999 amendments. . . ." Masters, 631 F.3d at 472.

Ninth Circuit
The Ninth Circuit has historically required a showing of willful infringement as a prerequisite to recovery of an infringer's profits. See Lindy Pen Co. v. Bic Pen Corp., 982 F.2d 1400, 1406 (9th Cir. 1993). This position was reaffirmed in an unpublished opinion subsequent to the 1999 amendment. See Contessa Food Prods. v. Lockpur Fish Processing Co., 123 F. App'x 747, 751 (9th Cir. 2005) ("[W]e deny Contessa's request for disgorgement of profits because of an absence of any evidence supporting a reasonable inference that any of the Defendants willfully infringed its alleged trademark."). However, a subsequent decision by a district court in the Ninth Circuit seemingly departed from this precedent and held that "[t]he plain language of [the 1999] amendment indicates that Congress intended to condition monetary awards for Section 43(c) violations on a finding of willfulness, but not Section 43(a) violations." R&R Partners, Inc. v. Tovar, 2007 U.S. Dist. LEXIS 29819, *4–5 (D. Nev. Apr. 23, 2007).

Tenth Circuit
In Western Diversified Services, Inc. v. Hyundai Motor America, Inc., 427 F.3d 1269 (10th Cir. 2005), the Tenth Circuit held that "to support an award of profits under the Lanham Act in the absence of actual damages, a plaintiff must ordinarily show that the defendant intended to benefit from the goodwill or reputation of the trademark holder." Id. at 1274. But in Western Diversified, thecourt acknowledged a division of courts with respect to the state of mind that is necessary to show willful infringement, varying from deliberate and knowing to willful and fraudulent.

D.C. Circuit
To recover a defendant's profits under the Lanham Act, the D.C. Circuit has ruled that a plaintiff must show the defendant acted willfully or in bad faith. Foxtrap, Inc. v. Foxtrap, Inc., 671 F.2d 636, 641, 217 U.S. App. D.C. 130 (D.C. Cir. 1982). This issue has rarely been ruled upon in the D.C. Circuit, but the most recent post-1999 district court decision followed the Foxtrap rule, albeit in the context of a default judgment. Breaking the Chain Found., Inc. v. Capitol Educ. Support, Inc., 625 F. Supp. 2d 1, 2 (D.D.C. 2009).

Circuits That Employ Disjunctive Tests for Awarding Profits
First Circuit
In a decision after the 1999 amendment of the Lanham Act, the First Circuit held that "when the rationale for an award of defendant's profits is to deter some egregious conduct, willfulness is required." Tamko Roofing Prods., Inc. v. Ideal Roofing Co., Ltd., 282 F.3d 23, 36 (1st Cir. 2002). A subsequent district court decision acknowledged that "the evolving case law in this circuit is that a plaintiff must prove willfulness," but recognized that the viability of such a holding had been "called into question" by the Third and Fifth Circuits. Hipsaver Co. v. J.T. Posey Co., 497 F. Supp. 2d 96, 107 (D. Mass. 2007). Consequently, and despite the foregoing recognition, the First Circuit continues to require a showing of willfulness.

Eleventh Circuit
The Eleventh Circuit has held that an accounting of a defendant's profits under the Lanham Act is appropriate where (1) the defendant's conduct was willful and deliberate, (2) the defendant was unjustly enriched, or (3) it is necessary to deter future conduct. See Howard Johnson Co., Inc. v. Khimani, 892 F.2d 1512, 1521 (11th Cir. 1990). For the first and third factors, the Eleventh Circuit continues to require a showing of willfulness on the part of the defendant. Optimum Techs., Inc. v. Home Depot U.S.A., Inc., 217 F. App'x 899, 902–3 (11th Cir. 2007). With regard to unjust enrichment, courts in the Eleventh Circuit will require evidence that infringers have "enriched themselves by tapping the reputation and good will of [the infringed]." Id., quoting Khimani, 892 F.2d at 1521 n.9.

Circuits That Consider Willfulness as a Factor, and Not a Prerequisite
Third Circuit
Until 2005, precedent in the Third Circuit dictated that willful infringement was required in order to award an infringer's profits. See SecuraComm Consulting v. Securacom Inc., 166 F.3d 182 (3rd Cir. 1999). Upon revisiting the issue after the 1999 amendment, the Third Circuit "conclude[d] that SecuraComm's bright-line willfulness requirement has been superseded by statute." Banjo Buddies, Inc. v. Renosky, 399 F.3d 168, 174 (3d Cir. 2005). In its place, the Third Circuit adopted a factor-based approach previously elaborated in Fifth Circuit cases, which held that that an infringer's intent was "an important—but not indispensable—factor in evaluating whether equity supports disgorging the infringer's profits,"  noting the following as some of the factors to be considered:

(1) whether the defendant had the intent to confuse or deceive, (2) whether sales have been diverted, (3) the adequacy of other remedies, (4) any unreasonable delay by the plaintiff in asserting his rights, (5) the public interest in making the misconduct unprofitable, and (6) whether it is a case of palming off.

Id. at 175.

Fourth Circuit
In its 2006 decision in Synergistic International, LLC v. Korman, the Fourth Circuit aligned itself with the Third and Fifth Circuits and held that the determination of profit disgorgement damages is guided by the six factors identified by the Third Circuit in Banjo Buddies. In so doing, the Fourth Circuit pointed to the 1999 amendment as the basis for its rationale and stated that willfulness remained "a highly pertinent factor" in the analysis but that it was "not an essential prerequisite for a damages award." Id. at 175 n.13.

Fifth Circuit
Unlike the other circuits, the Fifth Circuit had adopted the multi-factor analysis prior to the 1999 amendment of the Lanham Act, when determining whether an award of profits is appropriate in trademark infringement cases. See Pebble Beach Co. v. Tour 18 Ltd., 155 F.3d 526 (5th Cir. 1998). The Fifth Circuit revisited the issue again on separate occasions, most notably in 2002, when it declined "to adopt a bright-line rule in which a showing of willful infringement is a prerequisite to an accounting of profits," in light of its own precedent and the plain language of section 1117(a). Quick Techs. v. Sage Group Plc, 313 F.3d 338, 349 (5th Cir. 2002). However, like the Third and Fourth Circuits, the Fifth Circuit deemed willful infringement to be "an important factor which must be considered when determining whether an accounting of profits is appropriate." Id.

Sixth Circuit
As noted in an unpublished opinion issued in 2006, in the Sixth Circuit, an award of profits may be warranted under various rationales, such as unjust enrichment, deterrence, and compensation. Laukus v. Rio Brands, Inc., 391 F. App'x 416, 424 (6th Cir. 2010). That decision also affirmed that, although "a showing willfulness is not required, willfulness is one element that courts may consider in weighing the equities." Id. Finally, the Laukus court decided that district courts in the Sixth Circuit should evaluate the six factors identified by the Fifth Circuit in Quick Technologies, when determining the propriety of a profits award under the Lanham Act.

Seventh Circuit
When faced with the issue of whether the Seventh Circuit requires a showing of willfulness in connection with a disgorgement of profits under the Lanham Act, a district court surveyed the law in the circuit and determined that the Seventh Circuit "considers willfulness or bad faith as a factor in deciding whether to award damages or profits, but it does not require such as a condition precedent to an award of damages based on disgorgement of profits." ISP.NET.LLC v. Qwest Commc'ns Int'l, Inc., 2004 U.S. Dist. LEXIS 20237, *11–12 (S.D. Ind. Sept. 24, 2004). In so doing, the district court acknowledged that this approach contrasts sharply with the bright-line employed by other circuits.

As shown above, the majority view continues to be that the Lanham Act requires a showing of willfulness to support a disgorgement of a defendant's profits, but the number of circuits that continue to require such a showing has diminished. Trademark litigators will no doubt continue to monitor decisions to assess, for example, whether the Second Circuit resolves its intra-circuit conflict and whether the United States Supreme Court visits (or perhaps, in the case of Congress, revisits) the impact of the 1999 Trademark Amendment.

Until then, one thing is clear: Willfulness will continue to be an important factor in determining whether an award of profits is appropriate in federal trademark infringement actions, either as a factor in the analysis or as a bright-line rule.

Keywords: litigation, intellectual property, disgorgement of profits, Lanham Act, willful infringement

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