Dewberry Group, Inc. v. Dewberry Engineers, Inc.

LII note: The U.S Supreme Court has now decided Dewberry Group, Inc. v. Dewberry Engineers, Inc.

Issues

Can a judge include the profits of corporate affiliates who are not named as defendants in a trademark infringement case when calculating damages under the Lanham Act?

Oral argument:
December 11, 2024
Court below:
United States Court of Appeals for the Fourth Circuit

This case asks the Supreme Court if a judge can include profits of corporate affiliates, not named as defendants in a trademark infringement case when calculating how much to award in damages. Dewberry Group argues that under the Lanham Act, only the profits of the named defendant can be used in this calculation. Dewberry Group further argues that if the non-party affiliates’ profits were to be used, there should be an opportunity to litigate the matter of corporate separateness. Dewberry Engineers, on the other hand, counters that the Lanham Act consists of a two-step process where the second step allows the judge to award a “just sum” that may include the non-party affiliates’ profits. Additionally, Dewberry Engineers contends that there is no need for a separate legal analysis to disregard corporate separateness because the Lanham Act allows a judge to consider all relevant evidence including the non-party affiliates’ profits. The Supreme Court’s decision in this case will impact future trademark infringement cases, particularly how the corporate form will be considered in awarding damages under the Lanham Act.

Questions as Framed for the Court by the Parties

Whether an award of the “defendant’s profits” under the Lanham Act can include an order for the defendant to disgorge the distinct profits of legally separate non-party corporate affiliates.

Facts

The Lanham Act protects trademark holders against other individuals and corporations from reproducing, counterfeiting, copying, or imitating their registered trademark by allowing the registrants to file a lawsuit against infringers . Trademark law prevents consumer confusion by helping consumers identify the origin of goods or services and distinguish competitors. If a plaintiff is successful in showing trademark infringement, they may receive a disgorgement of profits from the defendant. A district court’s grant of profit disgorgement is “subject to the principles of equity ” and is at the court’s discretion.

Dewberry Engineers and Dewberry Group (formerly Dewberry Capital) are two businesses in the commercial real estate development industry. Dewberry Engineers held a federal trademark for the name “Dewberry.” Although there was an initial trademark lawsuit in 2006, it was eventually settled in 2007 with a confidential settlement agreement (“CSA”). The CSA allowed Dewberry Engineers to use its registered marks freely, and Dewberry Group was not allowed to challenge the registrations. On the other hand, the CSA limited Dewberry Group’s usage of “Dewberry” and required Dewberry Group to abandon pending applications for their own “Dewberry Capital” trademark.

In 2017, Dewberry Group submitted trademark registration applications for “Dewberry Group” and several “Dewberry” sub-brands with the U.S. Patent and Trademark Office (“USPTO”) for real estate-related services. Dewberry Engineers sent cease-and-desist letters to Dewberry Group, citing their CSA. The USPTO also rejected the applications due to a “ likelihood of confusion ” with the Dewberry Engineers’ existing trademarks. Dewberry Group refused to abandon its trademark applications.

Dewberry Engineers filed this lawsuit in May of 2020, claiming breach of contract and trademark infringement under the Lanham Act. The United States District Court for the Eastern District of Virginia ruled in Dewberry Engineers’ favor on both claims noting that there was a “likelihood of confusion” entitling Dewberry Engineers to profit-disgorgement damages. To calculate profit disgorgement, the district court looked at Dewberry Group’s profits from using the infringing mark. Dewberry Group claimed that it had zero profits because its tax returns showed losses, although it was managing the cash of its affiliates. However, the district court determined that Dewberry Group’s tax information did not show the actual economic relationship between itself and its affiliates and ordered Dewberry Group to pay almost $43 million in disgorged profits. The Fourth Circuit affirmed, holding that the district court did not pierce the corporate veil , but rather considered the revenues of the affiliates of Dewberry Group when calculating that business’s profits from its trademark infringement. The United States Court of Appeals for the Fourth Circuit noted that while Dewberry Group did not receive profits from its infringing behavior directly, it benefited from its relationship with its affiliates and so it was proper for the district court, in its discretion, to consider the affiliates’ revenue when calculating the “just sum” of damages . Finally, the Fourth Circuit noted that Dewberry Group did not offer any calculations of its own that could be used for the profit disgorgement remedy and affirmed the district court’s remedy calculations.

Dewberry Group petitioned the Supreme Court of the United States to hear this case. The Supreme Court granted certiorari on June 24, 2024.

Analysis

INTERPRETING THE LANHAM ACT (“DEFENDANT’S PROFITS”)

Dewberry Group (“Group”) argues that the Lanham Act’s plain language only allows a court to order the defendant to give up its own profits, not the profits of others. Specifically, Group argues that the remedy for recovering “defendant’s profits” does not allow the plaintiff to recover profits earned by affiliates who were not part of the lawsuit and whose liability was not determined. Group contends that Congress intended to limit disgorgement to the profits of the specific defendant named in the lawsuit. Further, Group notes that because Group was the sole named defendant, while the non-party affiliates of Group are legally separate entities, profits earned by the affiliates are not “defendant’s profits” and Group cannot be ordered to repay them. Group argues that the “just sum” provision is based on the court’s traditional adjustment of profit-disgorgement awards to account for the difficulty in determining exact profits. Thus, Group contends that the second step of awarding additional damages when defendant’s profits are deemed “inadequate” only applies when there are such difficulties in establishing the evidence to properly determine an approximation of the defendant’s profits. Thus, Group maintains that the “just sum” provision was intended to allow the court to adjust the calculation of the initial disgorgement award to better reflect any doubts or concerns the court might have about the accuracy of the calculation.

Dewberry Engineers (“Engineers”) responds that the Lanham Act describes a two-step process for calculating profits-based awards, which must be taken sequentially. Engineers argue that if the first step’s assessment of “defendant’s profits” is inadequate, district courts have discretion at the second step to award a “just sum” that represents the defendant’s actual financial gain instead of simply the “defendant’s profits.” Engineers note that Congress limited courts to assessing a “just sum” when it believes that the sum from the first step, which is the defendant’s profits as calculated by the defendant’s sales, is inadequate. Specifically, Engineers argue that a sum is “inadequate” when it does not reflect the defendant’s actual financial gain from the infringement, such as unrecorded profits or intangible benefits not reflected in the defendant’s books and records. Thus, Engineers assert that their interpretation of a “just sum” provision is not excessively broad because the court may only reach the “just sum” decision when an award based solely on step one, the defendant’s sales analysis, would be inadequate. As a result, Engineers maintain that an actual “just sum” as the Lanham Act provides is a fact-specific finding that accounts for the defendant’s actual financial gain from their infringing acts, which may include the profits of non-party affiliates.

DEFENDANT AND NON-PARTY AFFILIATES: CORPORATE SEPARATENESS

Group argues that the Lanham Act was never intended to allow courts to ignore the legally separate identities of different businesses. Group notes that they suffered net losses, and the non-party affiliate profits never reached Group. Further, Group contends that because the Engineers never attempted to pierce the corporate veil, it remains intact; so, the affiliates’ profits cannot be attributed to Group for purposes of calculating remedies. Group also points to the United States v. Bestfoods rule where federal statutes like the Lanham Act are presumed to respect corporate separateness unless Congress directly stated otherwise in the statute. Group argues that nothing in the Lanham Act directly overturns the Bestfoods presumption of respecting corporate separateness, meaning that the foundational principle of corporate separateness constrains the courts from imposing liability or calculating remedies based on an affiliate’s acts. Thus, Group maintains that if Congress intended to allow courts unrestricted discretion to consider third-party profits, Congress would not have required the court to assess a defendant’s profits by evaluating the sales subject to principles of equity.

Engineers counter that the legally separate identities of the different businesses are not being ignored because there are facts beyond the corporate relationship (or lack thereof) which show that the affiliate’s finances are relevant to assessing the defendant’s actual financial gain. Engineers argue that a court disregards corporate separateness when there is an assumption of corporate interest being shared between two legally distinct entities simply because there is a parent-subsidiary relationship or affiliation between the two corporations. Engineers note that here, the corporate separateness between Group and its non-party affiliates is not challenged, as the district court neither assumed to hold Group’s non-party affiliates liable for infringement nor ordered them to pay. Instead, Engineers contend that under the Federal Rules of Civil Procedure , all relevant evidence to the case should be admissible unless explicitly restricted by the Lanham Act, which contains no such restrictions. Engineers also argue that while the result may be similar, their argument differs from the theory of piercing the corporate veil, focusing instead on the Group’s actual financial gains using all relevant evidence, with different requirements and evidentiary burdens from the Bestfoods theory. Thus, Engineers maintain that a categorical rejection of the consideration of affiliates’ finances is unnecessary because courts have been given the power to award a “just sum” to a plaintiff as an explicit remedy under the Lanham Act.

PRINCIPLES OF EQUITIES AND PENALTIES

Group argues that principles of equity constrain disgorgement to traditional equitable limits so that a defendant can only be ordered to disgorge the net profits they received. Group contends that requiring a defendant to disgorge profits accrued by the affiliates should be considered a penalty, rather than an equitable remedy. Group points to language in the Lanham Act to demonstrate that Congress expressly intended for the just-sum provision to “constitute compensation and not a penalty.” Thus, Group maintains that jumping from the $0 in Group’s profits to the nearly $43 million in their affiliates’ net profits transformed the “compensation” that the Lanham Act allows for through the just sum provision into a penalty.

Engineers counter that Congress has expressly authorized enhanced awards as compensation for the plaintiff rather than a penalty for the defendant; thus, allowing courts to overcome traditional equitable prohibitions on penalties. Engineers argue that the clause cited by the Group is a declaration that enhanced awards are “not a penalty” as a matter of law, like other federal statutes that use the phrase “shall constitute” to declare a legal fact. Engineers contend that this interpretation prevents a contradiction between the principles of equity and the express permission of treble damages and increased rewards when the defendant’s profits are deemed inadequate to compensate the plaintiffs. Thus, Engineers maintain that because Group generated the revenue but redirected it to affiliates to report $0 profit for tax purposes, that affiliate’s revenue reflects Group’s actual financial gain and thus including this revenue in assessing Group’s economic reality is not a penalty.

Discussion

IMPACT ON TRADEMARK INFRINGEMENT

The Washington Legal Foundation (“WLF”), in support of Group, argues that requiring trademark holders to sue all infringing parties rather than just one corporation will incentivize trademark holders to bring lawsuits and deter future infringement. WLF contends that since trademark holders can sue corporate affiliates and be entitled to disgorge their profits, Engineers “should not be rewarded for taking this shortcut” of only suing one infringing party. Further, WLF argues that suing corporate affiliates will not be cost-prohibitive because trademark holders can recover higher attorney’s fees for the extra time spent preparing papers against the affiliates. Therefore, WLF asserts that going after all infringing parties at the beginning of the lawsuit will heighten deterrence against infringement.

Three intellectual property scholars, Suneal Bedi, Mike Schuster, and Jake Linford (the “IP Scholars”), in support of Engineers, argue that trademark holders must be permitted to recover the profits by non-party corporate affiliates to avoid incentivizing future infringement. Further, the IP Professors highlight how trademarks almost always benefit corporate affiliates because they extend the corporation’s reputation and profits into other areas. If courts do not consider affiliates’ profits, the IP Professors assert that Congress’s goal of maximizing protections for trademark holders would be undermined and the economic incentive for trademark infringement would remain.

IMPACT ON CORPORATE FORMALITIES

WLF argues in support of Group that undermining corporate separateness by permitting the recovery of profits by non-party corporate affiliates would harm the economy. WLF asserts that the primary purpose of forming corporations is to limit the potential liability of investors. WLF highlights that holding investors liable for an affiliate’s wrongful actions would limit future investments by increasing investors’ risk of liability. Thus, to maintain proper investor incentives, WLF contends that courts should not disgorge the profits of non-party corporate affiliates.

Professors Samuel L. Bray and Paul B. Miller (“the Equity Professors”), in support of Group, argue that disregarding corporate separateness, which plays a critical role in the operation of American businesses, would undermine the “stability and predictably” of equitable remedies that Congress intended. Further, the Equity Professors highlight that a case-by-case weighing of equities could undermine the stability and predictability of federal statutes that reference equitable remedies. The American Intellectual Property Law Association (“AIPLA”), in support of neither party, explains that there are legal alternatives, such as piercing the corporate veil, showing contributory infringement , or compulsory joinder , which might permit trademark holders to disgorge the profits of associates without blurring corporate boundaries.

Conversely, the IP Professors, in support of Engineers, argue that there is no reason to force a trademark holder to prove a corporate affiliate infringed because affiliates almost always benefit from the infringing conduct of parent companies. Specifically, the IP Professors assert that a parent company attaching their brand to multiple related products for increased consumer goodwill from spillover, should not set the boundaries for Lanham Act remedies. Further, the IP Professors argue that considering a “just” sum remedy respects the corporate form because courts “consider affiliate profits as evidence of an infringer’s own gain.” Additionally, the IP Professors note that affiliates located outside the infringer’s jurisdiction cannot be joined as co-defendants.

The United States (“US”), in support of neither party, asserts that courts should assess an infringing corporation’s profits by considering all the funds that reflect the infringer’s actual financial gains. Otherwise, the US contends that infringers would use the formal structures of corporations to insulate their infringing conduct from financial consequences, which is impermissible under equitable principles. Further, the US argues that courts should not require a trademark holder to prove joint liability or veil piercing when an infringer claims no profits because this could prevent the recovery of funds generated by infringing conduct, which is inconsistent with the Lanham Act’s purpose.

Conclusion

Written by:

Esther In and Alexandra “Lexie” Kapilian

Edited by:

Jae Choi

Acknowledgments

The authors would like to thank Professors Oskar Liivak and Charles K. Whitehead for their insights into this case.

Additional Resources