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April 18, 2012 Articles

Willfulness and the Current State of Trademark Damages Law

It is time for appellate courts to weigh in and determine whether willfulness is a requirement for the recovery of a defendant's profits.

By Jonathan A. Menkes

In a trademark infringement lawsuit, a determination that a defendant intentionally violated the trademark holder's rights, or engaged in other forms of culpable conduct, can greatly influence the amount and type of damages that a court awards. For instance, where the infringement is willful, a court may award enhanced damages, attorney fees, and prejudgment interest. Because some circuits require willfulness as a predicate to recovering certain kinds of monetary relief, while others instead view it as a factor that a court must weigh, there is little consistency (or clarity) in how courts assess monetary damages.

Trademark Damages Generally
The Trademark Act of 1946 (the Lanham Act) protects against a number of trademark-related violations, including trademark and trade dress infringement, false advertising, dilution, and cyber-squatting. See 15 U.S.C. § 1114 (registered trademarks and trade dress); 15 U.S.C. § 1125 (unregistered trademarks and trade dress); § 1125(a)(1)(b) (false advertising); § 1125(c) (dilution); § 1125(d) (cyber-squatting). Once a plaintiff establishes liability for one or more of these causes of action, section 1117(a) allows a plaintiff to recover actual damages, defendant's profits, and the costs of bringing the action. 15 U.S.C. § 1117(a) (2006). For a dilution claim, however, a plaintiff cannot recover monetary damages unless the violation (a likelihood of dilution) is willful. Id.

The statute grants courts considerable discretion in awarding damages under section 1117(a). Burger King Corp. v. Mason,855 F.2d 779, 780–81 (11th Cir. 1988). Nonetheless, this discretion must be consistent with principles of equity. See 15 U.S.C. § 1117(a). A court has far less discretion where the suit involves use of a counterfeit mark and intentional infringement. 15 U.S.C. § 1117(b). Regardless of the type of damage award, courts must ensure that it constitutes "compensation, and not a penalty." 15 U.S.C. § 1117(a)(3). Although punitive damages are not recoverable under the Lanham Act, they may be recovered under state law unfair competition claims. See, e.g., Duncan v. Stuetzle, 76 F.3d 1480, 1490 (9th Cir. 1996). In short, "[t]he goal of section 1117 is to achieve equity between or among parties. . . . Defendant may not retain the fruits, if any, of unauthorized trademark use or continue that use; plaintiff is not, on the other hand, entitled to a windfall." Bandag, Inc. v. Al Bolser's Tire Stores, Inc., 750 F.2d 903, 917–18 (9th Cir. 1984).

Types of Monetary Awards
Even if a plaintiff establishes liability, a court will not automatically grant relief. See, e.g., Lindy Pen Co. v. Bic Pen Corp., 982 F.2d 1400, 1405 (9th Cir. 1993). Instead, a plaintiff must show that the infringement proximately caused some type of injury. See Ramada Inns, Inc. v. Gadsden Motel Co., 804 F.2d 1562, 1564 (11th Cir. 1986). This requirement makes sense given that the standard of proof and measure of damages in a trademark infringement lawsuit are the same as those in other tort actions. See, e.g., Broan Mfg. Co. v. Associated Distribs., Inc.,923 F.2d 1232, 1235 (6th Cir. 1991); see also 5 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 30:72 (4th ed. 2011) ("Plaintiff's damages should be measured by the tort standard under which the infringer-tortfeasor is liable for all injuries caused to plaintiff by the wrongful act. . . .").

Assuming a violation gives rise to a remedy under section 1117(a), a plaintiff may recover the costs of bringing the action, the damages suffered as a result of the infringement, and an accounting of the defendant's profits. Confusion and disagreement arise in the latter two types of awards, which are discussed in turn below.

Actual Damages
To prove actual damages, a plaintiff must give the fact finder sufficient evidence to calculate damages to a "reasonable certainty." Ware v. Rodale Press, Inc., 322 F.3d 218, 226 (3rd Cir. 2003). The corollary of the "reasonable certainty" requirement is that the damages award cannot be too speculative or remote. Broan, 923 F.2d at 1235. Despite this requirement, a court will not deny damages merely because the exact amount of damages cannot be ascertained with precision. WMS Gaming, Inc. v. WPC Prods. Ltd., 542 F.3d 601, 608 (7th Cir. 2008). Once the plaintiff proves damages, a court may award "any sum above the amount found as actual damages," though the statute prohibits an award of greater than three times this amount. 15 U.S.C. § 1117(a)(3). Because marketplace damages can be difficult to prove, most circuits require the plaintiff to provide evidence of actual consumer confusion because such evidence tends to show that the plaintiff actually suffered some type of damage. See 2–7 Anne Gilson LaLonde, Gilson on Trademarks § 7.02 (2011).

One measure of actual damages is the profits that the plaintiff lost due to the infringement. This is not to be confused with a disgorgement of defendant's profits that the defendant obtained from using the infringing mark, as discussed below. In Intel Corp. v. Terabyte Int'l, Inc., 6 F.3d 614, 621 (9th Cir. 1993), the district court calculated the plaintiff's lost profits by multiplying the number of infringing items the defendant sold (computer chips) by the profit margin the plaintiff lost due to the defendant's sale of the infringing items. The Ninth Circuit affirmed the award and noted that although the district court's method for determining an award of profits was "somewhat crude," it was justified in part because the defendant failed to come forward with any evidence that the award was erroneous. Id.

Corrective advertising is another means by which a plaintiff can recover actual damages. The goal of a corrective advertising award is to make the plaintiff whole by allowing the plaintiff to recover the cost of advertising undertaken to restore the actual or estimated value of the trademark that was lost because of the infringement. Adray v. Adry-Mart, Inc., 76 F.3d 984, 988 (9th Cir. 1995). Such costs may include future (prospective) corrective advertising. Binder v. Disability Group, Inc., 772 F. Supp. 2d 1172, 1178–79 (C.D. Cal. 2011). As with other forms of compensatory damages, this award is meant to place the plaintiff in the position that they would have occupied had the infringement not occurred. 5 McCarthy, supra, § 30:81. A plaintiff that engages in its own corrective advertising may also need to show that such expenditures were reasonable under the circumstances and proportionate to the damage due to the infringement. See, e.g., Balance Dynamics Corp. v. Schmitt Indus., Inc., 204 F.3d 683, 692–93 (6th Cir. 2000).

A reasonable royalty rate is yet another measure of plaintiff's actual damages. See, e.g., Trovan, Ltd. v. Pfizer, Inc., 2000 U.S. Dist. Lexis 7522, at *51–52 (C.D. Cal. 2000) (citing cases). This calculation is common when a plaintiff previously licensed its mark to a defendant. For example, in Boston Professional Hockey Ass'n v. Dallas Cap & Emblem Manufacturing, Inc., 597 F.2d 71, 76 (5th Cir. 1979), the Fifth Circuit held that where the defendant offered to pay $15,000 for a three-year nonexclusive license to manufacture and sell the emblems of various National Hockey League teams, an award of $20,000 was appropriate because this was the prorated value of such a royalty over a four-year period (the length of the defendant's infringement). However, where a plaintiff has not yet licensed its mark to the defendant or a third party, a court is less likely to grant a reasonable royalty, especially if there were no licensing negotiations or other present plans to license the trademark. Trovan, 2000 U.S. Dist. Lexis 7522, at *58. Courts should remain hesitant to award a reasonable royalty rate in such circumstances because the award is untethered to the "reasonable certainty" requirement discussed above.

Defendant's Profits
Typically, a plaintiff may recover lost profit damages by showing the profits that the plaintiff would have earned but for the infringement. See, e.g., Lindy Pen, 982 F.2d at 1407. Unlike actual damages, which caps the award at treble the amount that a plaintiff proves, the statute does not explicitly provide for an upper limit on profit awards. 15 U.S.C. § 1117(a).

Because it is often difficult (and expensive) for a plaintiff to prove that sales were actually diverted to the defendant, a plaintiff may prefer to seek an accounting of the defendant's profits because the plaintiff only has to prove the defendant's sales, while the defendant bears the burden of proving any deductions or other costs to reduce the award. 15 U.S.C. § 1117(a)(3). For example, in Venture Tape Corp v. McGills Glass Warehouse, 540 F.3d 56, 64 (1st Cir. 2008), the First Circuit held that once a plaintiff establishes infringement and direct competition with a defendant, the statute places the burden on the defendant to show that its sales were "unrelated to and unaided by [defendants'] illicit use of [plaintiff's] marks." An accounting award is more appropriate where the parties are in competition because the plaintiff's loses are more likely to correspond to the defendant's gains. See Polo Fashions, Inc. v. Craftex, Inc., 816 F.2d 145, 149 (4th Cir. 1987) (noting that an award of defendant's profits are "a rough measure of the plaintiff's damages [and indeed] are probably the best possible measure of damages available."). As with actual damages, an accounting of profits does not follow automatically upon a showing of infringement. See Lindy Pen, 982 F.2d at1405.

Courts have advanced three justifications for an award of defendant's profits: (1) approximating the measure of the plaintiff's harm; (2) preventing the defendant's unjust enrichment; and (3) deterring a willful infringer from future infringement. See Tamko Roofing Prods., Inc. v. Ideal Roofing Co, Ltd., 282 F.3d 23, 36 (1st Cir. 2002). Courts usually disgorge profits when there is evidence of deliberate infringement by the defendant and where the defendant's profits exceed the amount by which the plaintiff "suffered" damages. When the situation involves noncompeting parties, courts are split on whether "avoiding unjust enrichment" or "deterring further infringement" are sufficient justifications for an accounting of profits. 5 McCarthy, supra, § 30:59. In addition, some courts will not award an accounting of the defendant's profits unless the plaintiff produces evidence of actual confusion.

The Source of Confusion
In 1999, Congress amended section 35 of the Lanham Act to allow recovery for claims of willful dilution. Pub. L. 106-43, 113 Stat. 218 (1999) (providing for remedies for "a violation under section 1125(a) or (d) of this title, or a willful violation under section 1125(c) of this title") (emphasis added). Since this amendment, a number of circuits wrestled with whether willfulness, or other misconduct, is required to recover defendant's profits. See, e.g., GMA Accessories, Inc. v. BOP, LLC, 765 F. Supp. 2d 457, 469 (S.D.N.Y. 2011) (discussing the effect of the 1999 amendment and noting the intra-district split regarding the impact of the amendment). The uncertainty arose because, prior to the 1999 amendments, some circuits would not award defendant's profits unless the plaintiff also showed that the defendant acted in bad faith. See, e.g., Int'l Star Class Yacht Racing Assoc. v. Tommy Hilfiger, U.S.A., Inc., 80 F.3d 749 (2d Cir. 1996). While the 1999 amendment included the word "willful" in reference to a violation under section 1125(c), which defines a claim for relief for the dilution of a famous mark, it did not alter the wording that refers to violations of section 1125(a), which governs false advertising and trademark and trade dress infringement claims. Therefore, Congress's decision to leave section 1125(a) unaltered led some courts to conclude that the amendments changed (or did not change) the established common-law precedent in their circuit regarding the requirement of willfulness as a prerequisite for disgorgement of a defendant's profits.

By 2005, most circuits required that a plaintiff show some type of willfulness to recover defendant's profits, though several courts instead held that willfulness is merely one factor to consider for such an award. 5 McCarthy, supra, § 30:62. Today, a majority of courts hold that an accounting of profits is not available without a showing that the defendant acted willfully. However, because many of these decisions rely on precedent decided before the Lanham Act's 1999 amendment, the precedent's vitality is questionable. See 3–11 Gilson, supra, § 14.03.

The Current State of Damages
The First Circuit has not yet explicitly decided whether willfulness is a predicate for an award of defendant's profits under the Lanham Act. In Tamko, 282 F.3d at 36 (1st Cir. 2002), the court of appeals stated that because the jury found willfulness, it need not decide the issue of whether willfulness is a precondition for an accounting of defendant's profits. However, in a footnote, the court acknowledged that willfulness is required where "the rationale for an award of defendant's profits is to deter some egregious conduct . . ." Id. at 36 n.11 (emphasis added). More recently, in the context of a default judgment, a district court acknowledged that the First Circuit has not decided the issue and passed on the question because the complaint established willfulness. N.E. Lumber Mfrs. Ass'n v. N. States Pallet Co., Inc., No. 09-290 (D.N.H. Jan. 31, 2011).

District courts within the Second Circuit remain split over whether actual damages or profits under section 1117(a) require a showing of willfulness, bad faith, or actual confusion. For example, in Chanel, Inc. v. Veronique Idea Corp., No. 10-2587 (S.D.N.Y. June 27, 2011), the court found that a plaintiff may recover damages for violations of section 1125(a) without showing willfulness. By contrast, in GMA Accessories, the court found that a plaintiff must establish actual confusion, or at least bad faith, to receive an award of either profits or damages under section 1117(a). 765 F. Supp. 2d at 469.

In Banjo Buddies, Inc. v. Renosky, 399 F.3d 168, 175 (3rd Cir. 2005), the Third Circuit advised that when deciding to award defendant's profits (disgorgement of defendant's unjust enrichment), district courts should consider the following factors: (1) whether the defendant had the intent to confuse or deceive; (2) whether the defendant diverted sales; (3) the adequacy of other remedies; (4) the plaintiff's unreasonable delay, if any, in asserting its rights; (5) the public interest in making the misconduct unprofitable; and (6) whether it is a case of palming off. Then again, in Sabinsa Corp. v. Creative Compounds, LLC, No. 04-4239 (D.N.J. July 27, 2011), the court, citing Banjo Buddies, found that actual confusion and/or willfulness were not required to disgorge the infringer's profits. Similarly, in Members 1st Federal Credit Union v. Metro Bank, No. 09-1171 (M.D. Pa. Jan. 21, 2011), the court found that willful conduct is not a prerequisite for disgorgement of profits, though it was an equitable factor that a court should consider. In Zurco, Inc. v. Sloan Valve Co., No. 08-185 (W.D. Pa. Mar. 31, 2011), the court clarified that while actual confusion is a requirement for an award of actual damages under section 1117(a)(2), it was not necessary to recover defendant's profits under section 1117(a)(1).

Courts in the Fourth, Fifth, and Sixth Circuits also consider the six factors discussed in Banjo Buddies when deciding whether to award an accounting of defendant's profits. The factors considered by the Fourth, Fifth, and Sixth Circuits are substantially identical. See, e.g., Synergistic Int'l, LLC v. Korman, 470 F.3d 162, 174–75 (4th Cir. 2006); Rolex Watch USA, Inc. v. Meece, 158 F.3d 816, 823 (5th Cir. 1998); La Quinta Corp. v. Heartland Prop. LLC, 603 F.3d 327, 343 (6th Cir. 2010).

The Seventh Circuit, in Roulo v. Russ Berrie & Co., Inc., 886 F.2d 931, 941 (7th Cir. 1989), held that "there is no express requirement . . . that the parties be in direct competition or that the infringer willfully infringe the trade dress to justify an award of profits."

The Eighth Circuit recently held that actual confusion need not be shown to recover the infringer's profits. Masters v. UHS Del., Inc., 631 F.3d 464, 474 (8th Cir. 2011), cert. denied, 131 S. Ct. 2920 (2011). In Masters, the Eighth Circuit stated that a requirement of actual confusion would be especially inequitable given the facts of the underlying case. Id. There, the defendants breached a licensing agreement by exceeding its scope; thus, evidence of direct testimony or consumer surveys (i.e., actual confusion) would not demonstrate whether the parties remained faithful to the terms of the license agreement. Id. With regard to willfulness, however, Judge Wollman acknowledged the circuit split and held that "[f]or purposes of adjudicating this appeal, we assume, without deciding, that willful infringement is a prerequisite of monetary relief." Id. at 472 n.2.

The Ninth Circuit does not appear to require a showing of actual consumer confusion for recovering an accounting of defendant's profits, though it is evidence of the likelihood of confusion, and a likelihood of confusion is necessary to establish liability. Gracie v. Gracie, 217 F.3d 1060, 1068 (9th Cir. 2000) ("[A] showing of actual confusion is not necessary to obtain a recovery of profits."). However, when a plaintiff seeks defendant's profits under an unjust enrichment theory, a plaintiff may have to show willful infringement. See Adray, 76 F.3d 984, 988 (9th Cir. 1995).

To receive an award of defendant's profits in the Tenth Circuit, a court must find that the defendant's actions were willful or in bad faith, and where this is shown, the court must weigh the equities to tailor the remedy to the specific facts of the case. W. Diversified v. Hyundai Motor Am., 427 F.3d 1269, 1273 (10th Cir. 2005). Such equitable considerations include whether the plaintiff lost sales due to the infringement, whether the defendant profited from the goodwill associated with the plaintiff's mark, and whether the infringement gave rise to actual consumer confusion or deception. Id.

In the Eleventh Circuit, a plaintiff must show actual confusion to recover actual damages; however, an award of defendant's profits is not conditioned on a showing of actual confusion. Keg Techs., Inc. v. Laimer, 436 F. Supp. 2d 1364, 1373 (N.D. Ga. 2006).

In the D.C. Circuit, evidence of bad faith or willfulness is a prerequisite to an award of an infringer's profits. Reader's Digest Ass'n v. Conservative Digest, 821 F.2d 800, 807 (D.C. Cir. 1987) (finding that "a district court generally may award profits under the Lanham Act only when a defendant's infringement was "willful" or in "bad faith").

As Professor McCarthy notes, the case law regarding trademark damages is a "confusing mélange of common law and equity principles, sometimes guided (and misguided) by analogies to patent and copyright law, and finding little statutory guidance in the Lanham Act." 5 McCarthy, supra, § 30:57. Although the confusion and inconsistency stem from a variety of sources, including the amendments to the Lanham Act and judicial interpretation of those amendments, it is time for appellate courts to weigh in and determine whether willfulness is a requirement for recovery of a defendant's profits, as this is the only hope of adding clarity to this bewildering area of law.

Keywords: litigation, intellectual property, trademark damages, monetary awards, Lanham Act

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