This week, the Supreme Court ruled that the profits of a defendant's affiliates cannot be considered in the calculation of “defendant's profits” in a trademark infringement case.  In Dewberry Group, Inc. v. Dewberry Engineers Inc., available here, the Court found that under the plain language of the Lanham Act, it was not proper for the District Court to consider the profits of separately incorporated affiliates in determining that the defendant was liable for $43 million total profits deriving from trademark infringement.

By way of background, the case involved a long-standing dispute between two entities that used the mark “Dewberry” in connection with real estate services in the southeast.   There had been a settlement agreement between the parties but defendant reneged on the deal.   The trial court found that the defendant's infringing use was “intentional, willful and in bad faith.”    The problem faced in determining the defendant's profits was that the named defendant, Dewberry Group, provided its services to thirty affiliates, each of which owned a piece of commercial property.  The defendant entity, which was the only defendant in the case, operated at a loss, but the affiliated entities, all of which are owned by John Dewberry, the same person who owned the defendant, made millions of dollars.

In calculating the defendant's profits, the district court considered the defendant and its more than thirty affiliates as a single unit.  The court noted that a contrary approach would allow the “entire Dewberry Group enterprise” to evade the financial consequences of its willful infringement.  The Fourth Circuit affirmed the decision and the Supreme Court granted certiorari.

The Supreme Court held, in a unanimous decision penned by Justice Kagan, that there is no support in the text of the Lanham Act, 17 U.S.C. §  1117(a),  to support the approach taken by the lower courts.  The word “defendant”  in the term “defendant’s profits” cannot be read to sweep in the profits of affiliates not named as defendants in the lawsuit.

On first blush, the decision seems to uphold the sanctity of corporate separateness while at the same time serving as a warning to plaintiffs that fail to ascertain and name all of the possible defendants in an infringement case.  But it may be a bit more complicated than that.

The Supreme Court held only that the way profits were calculated was incorrect, but remanded the case for further proceedings.  The Court noted that the Lanham Act permits an adjustment of  amount of recovery based on profits either upwards or downwards if the amount is “either inadequate or excessive” and gives the court discretion to enter judgment for “such sum as the court may find to be just.” 17 U.S.C. §  1117(a).  But in this case, the lower courts had simply lumped together the profits of defendant and its affiliates without any analysis of whether the award was unjust.  Indeed, the district court did not even mention the so-called “just-sum” provision .  The Supreme Court further suggested that the lower court might consider whether defendant's records failed to reflect the defendant's true financial gain.  Finally, the Supreme Court suggested, without offering any opinion, that corporate veil piercing might be an available remedy. 

One further note is that Justice Sotomayor filed a concurring opinion stressing that the principles of corporate separateness should not blind courts to economic realities and that defendants should not be able to avoid accountability for wrongdoing through creative accounting,