chevron-down Created with Sketch Beta.
August 14, 2014

Statutory Damages under Lanham Act Section 35(c) Related to the Use of Counterfeit Marks

Sharmian L. White – October 16, 2014

Section 35 of the Lanham Act, 15 U.S.C. § 1117, provides monetary remedies for trademark infringement, unfair competition, and willful trademark dilution. Subsection 1117(a) allows for the recovery of a defendant's profits, any damages sustained by the plaintiff, costs of the action, and, "in exceptional cases," the plaintiff's attorney fees. Subsection 1117(b) applies with respect to violations that involve the intentional use of a known counterfeit mark, and it requires the court to treble the profits or damages referenced in subsection 1117(a) and to award reasonable attorney fees "unless the court finds extenuating circumstances."

A "counterfeit mark" is defined at 15 U.S.C. § 1116(d)(1)(B)(i) as, in relevant part,

a counterfeit of a mark that is registered on the principal register in the United States Patent and Trademark Office for such goods or services sold, offered for sale, or distributed and that is in use, whether or not the person against whom relief is sought knew such mark was so registered.

While recovery under subsections 1117(a) and (b) is focused on a plaintiff's "actual damages," subsection 1117(c) provides an alternative to proving actual damages with respect to violations that involve the use of a counterfeit mark. Subsection 1117(c) allows a plaintiff to seek statutory damages instead of actual damages. The option to recover statutory damages was provided in light of Congress's recognition that counterfeiters' records are frequently "nonexistent, inadequate, or deceptively kept[,] . . . making proving actual damages in these cases extremely difficult if not impossible." S. Rep. No. 104-177, at 10 (1995). The ability to elect statutory damages can provide a powerful incentive for a trademark holder to pursue infringement litigation that might otherwise not be undertaken because of the inability to obtain information to support recovery.

A plaintiff may elect to recover statutory damages "at any time before final judgment is rendered by the trial court." 15 U.S.C. § 1117(c). Under the statute, statutory damages for counterfeiting are to amount to not less than $1,000 or more than $200,000 per counterfeit mark, per type of goods or services sold, offered for sale, or distributed, "as the court considers just." If the court finds that the use of the counterfeit mark was willful, then the damages ceiling is raised to $2,000,000 per counterfeit mark per type of goods or services sold, offered for sale, or distributed.

Interaction with 15 U.S.C. § 1111
Section 29 of the Lanham Act, 15 U.S.C. § 1111, provides that

a registrant of a mark registered in the Patent Office, may give notice that his mark is registered by displaying with the mark the words "Registered in U. S. Patent and Trademark Office" or "Reg. U.S. Pat. & Tm. Off." or the letter R enclosed within a circle, thus ®; and in any suit for infringement under this Act by such a registrant failing to give such notice of registration, no profits and no damages shall be recovered under the provisions of this Act unless the defendant had actual notice of the registration.

(Emphasis added.)

Those courts that have considered whether this provision has an impact on a plaintiff's ability to recover statutory damages when actual notice of registration of the marks has not been given to the defendant have concluded that it does not. In Playboy Enterprises v. Universal Tel-A-Talk, No. CIV. A. 96-6961, 1999 U.S. Dist. LEXIS 6124 (E.D. Pa. Apr. 26, 1999), the U.S. District Court for the Eastern District of Pennsylvania noted that a "counterfeit mark" is defined such that it is counterfeit "whether or not the person against whom relief is sought knew such mark was so registered." 15 U.S.C. § 1116(d)(B)(i). Therefore, the court reasoned that to read the remedy of subsection 1117(c) into the notice requirements of 15 U.S.C. § 1111 "would render 1116(d)(1(B)(i) superfluous and would be contrary to proper statutory construction." The court concluded that "Congress intended to recognize that counterfeiting, while a subsection of infringement, represents a greater evil than ordinary infringement, and thus allowed an alternative route to damages and a lesser degree of required notice." 1999 U.S. Dist. LEXIS 6124, at *6. The U.S. District Court for the Eastern District of Virginia, Alexandria Division, agreed with that analysis in Diane von Furstenberg Studio v. Snyder, No. 1:06cv1356-JCC, 2007 U.S. Dist. LEXIS 45941 (E.D. Va. June 25, 2007).

This issue is important because effectively combating counterfeiting may not allow for advance notice of registration to be given to the counterfeiter. Consider the scenario of a regularly occurring major event, where it is known that counterfeiters will appear to peddle their illegal wares but it is not known who those counterfeiters will be. A trademark holder seeking to obtain an ex parte seizure order to seize counterfeit merchandise from unnamed individuals anticipated to set up shop at the event will not have an opportunity to provide advance notice of registration before serving them with a copy of a summons, complaint, and seizure order, and seizing counterfeit merchandise. Yet, the trademark owner should be able to seek compensation for the unauthorized advertisement and sale of goods or services using its marks. Because counterfeiting involves the use of a substantially identical mark to that of a registered mark, it is not very likely that the activity is the result of mistake or inadvertence such that lack of notice of registration works an inequity against the counterfeiter. Counterfeiters are typically well aware that the marks they use are owned by someone else and that they are not authorized to use them; the success of their operations generally depends on trading off of the reputation and goodwill established by the mark owner.

How Do Courts Determine Appropriate Statutory Damage Awards?
The Lanham Act provides courts with no guidance as to how they should arrive at an appropriate figure within the wide ranges for awards provided in the statute, other than that the award may be determined "as the court considers just." How does a judge decide whether to award $1,000 per mark per type of goods advertised or sold, rather than $2,000,000 per mark, per type of goods? In the absence of guidance, many courts consider the factors that courts have considered in determining appropriate statutory damages awards for copyrightinfringement under the Copyright Act, 17 U.S.C. § 504(c), namely:

  1. expenses saved and profits reaped by the defendant;
  2. revenue lost by the plaintiff;
  3. the value of the trademark;
  4. the deterrent effect on others besides the defendant;
  5. whether the defendant's conduct was innocent or willful;
  6. whether the defendant cooperated in providing records from which to assess the value of the infringing product; and
  7. the potential for discouraging the defendant.

However, applying these factors can prove challenging in that it is not clear how the factors should be weighed or how a consideration of some factors should translate into any particular monetary figure. Moreover, in many instances, information necessary to apply some of the factors is missing. After all, one of the main reasons a plaintiff may elect statutory damages is that information about expenses saved and profits reaped by the defendant is not available.

Subsection 1117(c) authorizes higher awards for willful infringement using counterfeit marks, yet the statute does not define "willful." The case law indicates that willfulness in this context involves knowledge that one is using a counterfeit mark. "Willful blindness" or reckless disregard for a trademark holder's interest can also satisfy the willfulness requirement and justify a higher award under subsection 1117(c). See, e.g., Phillip Morris USA v. Liu, 489 F. Supp. 2d. 1119, 1123 (C.D. Cal. 2007). Willfulness may be inferred by many circumstances, such as a defendant's continued marketing of counterfeit marked merchandise despite receiving a cease-and-desist letter or a sophisticated operation and familiarity with the industry such that the defendant must have known the merchandise at issue to bear counterfeit marks. Courts also have held that willfulness may be inferred when a defendant defaults in litigation in which the plaintiff pled willfulness. See, e.g., Phillip Morris USA, Inc. v. Castworld Prods., Inc., 219 F.R.D. 494, 500 (C.D. Cal. 2003) (holding that defendant willfully infringed plaintiff's trademark on plaintiff's allegations of willful infringement and defendant's failure to participate in any way in the litigation); Tiffany, Inc. v. Luban, 282 F. Supp. 2d 123, 124 (S.D.N.Y. 2003) ("By virtue of the default, the [defaulting party's] infringement is deemed willful.").

Statutory damages are intended to compensate and to deter future violations, so the nature and extent of a defendant's activities tend to have weight in most statutory damages award determinations. While there is a higher damages range for willfulness, as a practical matter, it is not unusual for courts to come to a "baseline" per mark value and then to enhance it by trebling it or trebling and then doubling it upon a finding of willfulness and in the interest of deterrence. See, e.g., Lifted Research Group v. Behdad, No. 08-390 (CKK), 2010 U.S. Dist. LEXIS 64670 (D.D.C. June 30, 2010) (trebling and then doubling a "baseline award" for willfulness and in the interest of deterrence in determining statutory damages). Subsection 1117(c) allows for all manner of award configurations and rationales, as long as the result is within the applicable range.

As a general matter, courts appear most likely to award at the top of the applicable range when there is evidence of a large and sophisticated counterfeiting operation that has infringed marks that are nationally well known or that are associated with "luxury brands." However, that is not to say that entities with less-recognized marks are routinely awarded low statutory damages. As may be expected in light of damages ranges so broad, the lack of statutory guidance regarding how to determine awards, and the ability of a court to devise an award it considers just, statutory damages may differ greatly with respect to different cases with facts that seem similar.

Because subsection 1117(c) ultimately allows the court to award what it "considers just," a plaintiff should garner as much relevant information as possible to help a judge feel comfortable that a proposed award would be fair. Even though statutory damages were intended to help plaintiffs who may not have information about defendants' sales and profits, courts tend to rely heavily on such information in considering statutory damages when it is available, and plaintiffs need to justify their proposals with any available facts, credible theories or methodologies, analogous case law, or a combination of these when information about a defendant's activities is not available.

Are Attorney Fees Available When a Plaintiff Elects Statutory Damages?
Subsection 1117(c) does not mention attorney fees at all, unlike subsections 1117(a) and (b). Subsection 1117(a)(3) provides that "[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party." Those who recover treble damages under 1117(b) have an automatic right to recover attorney fees "unless the court finds extenuating circumstances." But what about a plaintiff who recovers statutory damages under subsection 1117(c)? Most courts now find that the election of statutory damages does not automatically preclude the recovery of attorney fees, but the road to the current state of affairs has been a bit rocky.

In K and N Engineering, Inc. v. Bulat, 510 F. 3d 1079 (9th Cir. 2007), the Ninth Circuit held that attorney fees under subsection 1117(b) are not available when a plaintiff elects to recover statutory damages under subsection 1117(c), finding that "section 1117(b)'s attorney's fees provision applies only in cases with actual damages under section 1117(a)." Id. at 1082. However, the Ninth Circuit expressly declined to reach the issue of whether an election to receive statutory damages under subsection 1117(c) precludes an award of attorney fees for "exceptional cases" under subsection 1117(a). Id. at 1082 n.5.

In Louis Vuitton Malletier S.A. v. Ly, 676 F. 3d 83, 109 (2d Cir. 2012), the Second Circuit addressed that issue and found that an award of attorney fees may accompany an award of statutory damages pursuant to subsection 1117(c). In essence, the court decided that the statutory damages provisions were intended to supplant only that part of subsection 1117(a) that provides the method for ascertaining the amount of damages for a plaintiff electing statutory damages, and not the last sentence of subsection 1117(a), which allows for the recovery of attorney fees in "exceptional cases." In addition to interpreting the text of the statute, the Second Circuit reviewed the legislative history associated with the passage of the Anticounterfeiting Consumer Protection Act, which was passed in 1996 and amended section 1117 to add subsection (c). The court found that Congress sought to ensure that plaintiffs would be able to receive more than de minimis compensation for injuries caused by counterfeiting if they were unable to prove actual damages and that the act was therefore designed to provide an alternative to the type of recovery provided in subsection 1117(a), not to all of the remedies provided for in that subsection. The court noted that "[t]he Act was meant to expand the range of remedies available to a trademark plaintiff, not restrict them." 676 F.3d at 110.

Post-K & N and pre-Louis Vuitton opinions by district courts in the Ninth Circuit varied on the issue of whether a plaintiff electing statutory damages could recover attorney fees, with some allowing attorney fees and some not. In one 2008 opinion, a district court noted the varying opinions and sidestepped the issue, asserting the ability to award attorney fees as a matter of equity as a part of the statutory damages award under subsection 1117(c). Chanel v Tshimanga, No. C-07-3592 EMC, 2008 U.S. Dist. LEXIS 118783, at *45 (N.D. Cal. July 15, 2008) (noting that the court "need not address the legal issue of whether attorney's fees are available pursuant to § 1117(a) when a prevailing plaintiff elects statutory damages under § 1117(c)" and that attorney fees "could be appropriately awarded as part of an award of statutory damages"). Some recent opinions have expressly fallen in line with the Second Circuit's in Louis Vuitton. See, e.g., Chloe SAS v. Sawabeh Info. Servs. Co., No. CV 11-04147 GAF, 2014 U.S. Dist. LEXIS 60188, at *30–31 (C.D. Cal. Mar. 18, 2014) (noting consistency of Louis Vuitton decision with K & N decision and awarding plaintiffs recovering statutory damages under subsection 1117(c) and attorney fees under subsection 1117(a) as well).

There is also a recent opinion on the issue from within the Seventh Circuit. The U.S. District Court for the Northern District of Indiana agreed with the Second Circuit and awarded the plaintiff attorney fees in addition to statutory damages in Coach v. Treasure Box, Inc., No. 3:11CV468-PPS, 2014 U.S. Dist. LEXIS 28713 (N.D. Ind. Mar. 6, 2014).

So what makes for an "exceptional case" under subsection 1117(a)? For years, most courts have interpreted an "exceptional case" as one in which the defendant acted maliciously, deliberately, willfully, or in bad faith. See, e.g., Louis Vuitton, 676 F.3d at 109(a prerequisite to finding a case to be sufficiently "exceptional" to warrant an award of attorney fees is that the infringement was willful or in bad faith); Lindy Pen Co., Inc. v. Bic Pen Corp., 982 F.2d 1400, 1409 (9th Cir. 1993) ("[A] trademark case is exceptional . . . when the infringement is malicious, fraudulent, deliberate or willful."); AARP v. Sycle, No. 13-0608 (CKK), 2014 U.S. Dist. LEXIS 6001, at *18 (D.D.C. Jan. 17, 2014) (noting that the court has defined "exceptional cases" as those "involving willful or bad-faith conduct."). Some courts are now pointedly reassessing the issue of when a case is "exceptional" in light of the Supreme Court's recent opinion in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014). In that case, the Supreme Court interpreted section 285 of the Patent Act, 35 U.S.C. § 285—a fee-shifting provision that contains language the Court noted is "identical" to that in 15 U.S.C. § 1117(a)—and held that an "exceptional case" for purposes of the Patent Act is "simply one that stands out from others with respect to the substantive strength of a party's litigating position or the unreasonable manner in which the case was litigated." 134 S. Ct. at 1756. The Supreme Court stated that "[d]istrict courts may determine whether a case is 'exceptional' in the case-by-case exercise of their discretion, considering the totality of the circumstances."

A few courts have since discussed the applicability of the Octane Fitness holding to trademark infringement cases, with quite differing conclusions regarding the impact of the decision. See, e.g., Apple, Inc. v. Samsung Elecs. Co., Ltd., 2014 U.S. Dist. LEXIS 117494, at *53 n.1 (N.D. Cal. Aug. 20, 2014) (opining that the Ninth Circuit's way of determining what constitutes an "exceptional case" under the Lanham Act continues to apply after Octane Fitness); Romag Fasteners, Inc. v. Fossil, Inc., 2014 U.S. Dist. LEXIS 113061, at *15 (D. Conn. Aug. 14, 2014) (declining to apply Octane Fitness to award attorney fees with respect to trademark infringement claims in a case that involved both patent and trademark infringement, despite finding the case was "exceptional" under the "more lenient" Patent Act standard announced in Octane Fitness); BMW of N. Am. v. Cuhadar, 2014 U.S. Dist. LEXIS 112365, at *11 (M.D. Fla. 2014), adopted by 2014 U.S. Dist. LEXIS 112369 (M.D. Fla. July 10, 2014) (finding that the Octane Fitness standard differs from the willful/fraudulent standard and denying plaintiffs' request for attorney fees despite finding of willful infringement when case did not "stand out from others sufficient to find it to be 'uncommon' and thus exceptional").

Subsection 1117(c) of title 15 of the United States Code may provide a much-needed avenue for trademark holders to receive compensation for the unauthorized use of their registered marks, given that the nature of counterfeiting activity may undermine a plaintiff's ability to discover a counterfeiter's sales and profits and determine actual damages. While not all circuits have opined on the issue, within those that have, most courts now allow recovery of attorney fees under subsection 1117(a) along with statutory damages under subsection 1117(c). There is also some precedent for the award of attorney fees as a matter of equity under subsection 1117(c) alone.

Keywords: litigation, intellectual property, counterfeit, Lanham Act, statutory damages, trademark

Sharmian L. White – October 16, 2014